Forget the problems of monetary union – it’s tax union that matters with Scotland

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Much of the discussion on  Scottish independence has focused on the future of the pound.  I am not going to decry the importance of money: it is obviously of relevance. However, since as a matter of fact Scotland can, if it wishes, use the pound after it leaves the UK, and as a matter of fact its influence over interest rates and exchange rates,  whether in a monetary union or not, is going to be minimal  there appears to have been undue prominence given to this issue.

In that case is that there is a much more important issue that should be right at the heart of the Scottish independence debate, which has been almost ignored to date. This is the issue of taxation and the union.  Since, as a matter of fact, it is very likely that Scotland will have significantly more control over its taxation affairs in the future,  whether it is independent or not, this appears to be a considerable oversight,  especially as it is a matter of some significance to us all whether we north or south of the border.

Whether or not Scotland votes for independence is yet to be decided. For that reason, right now, I will only consider the situation where Scotland does, in due course, come an independent state. The considerations will be different - and potentially at least as troubling - if devomax follows a No vote, but one blogpost has to limit its  ambitions.

The scale of the tax problem facing a new Scotland, and for that matter, a new Rest of the UK (RUK),  will be enormous in the case of a Yes vote. Some of these will be purely administrative: take for example the fact that quite a lot of tax is administered north of the border  on behalf of taxpayers in RUK and there  is an immediate issue to resolve. I do, however, assume that this will be within the capacity of both governments to solve in due course. Of much greater significance other legal, political and policy issues involved.

No doubt Scotland will, as Ireland did in 1922, inherit existing UK law as its own, with the added advantage in this case that it has already got its own established legal system. However, in quite significant areas the existing UK legal system is dependent upon international agreements. So, for example, will Scotland inherit the benefit of the UK's double tax agreements? If  not, what will happen?  Likewise, will Scotland inherit the benefit of OECD membership?  These are not minor issues:  they control international financial flows and without answers both the taxation integrity of Scotland, and also its ability to provide answers to individuals and companies resident within it as to how their taxation affairs will work is  simply unknown.

Then there is the thorny question of the European Union. In this context is not an issue of whether or not Scotland is, as such, a member, but one of whether or not VAT will apply in Scotland given that this is an EU based tax with  most of the parameters for it established in Brussels.  It is known that EU based VAT can be extended outside the EU:  the UK does this in the case of its customs union with the Isle of Man.  Without, however, such an agreement with the UK, or in turn with the EU, there would, quite suddenly, be significant barriers to trading across the border with Scotland absent Scottish EU membership, which it appears cannot be taken for granted. I remain surprised that this has not come up in debate.

It is of special significance if Scotland does want to establish its own autonomy with regard to VAT rates, and there is no reason why it should not. VAT  is, after all, a major fiscal weapon, as was discovered in both  2008 and 2010. The moment that  happens  real trade barriers between RUK  and Scotland exist.  How will these be managed?  How too will the enormous potential for fraud that might result ( as is seen between Northern Ireland and the Republic) be tackled?

Then there is income tax. Will Scotland want to have different rates?  Much of the debate about autonomy is focused on granting such powers, but how will they be used?  Politically it would seem that the demand for greater equality is higher in Scotland than it is in the rest of the UK. Will the tax system be used to deliver this? If so, what sort of information exchange is going to be required between RUK  and Scotland to ensure that those who are resident in Scotland  pay higher rates of tax there, if due?

And,  just the sake of asking it,  how will residence between the two states be agreed  and will domicile have any role to play  or will this be considered a special case, as it has been in the history of UK and Irish taxation?

All of which still leaves the  thorniest question untouched,  which is corporation tax. We  know that Alex Salmond wants to reduce Scottish corporation tax rates to rival those in Ireland. This is, with all due respect to him,  a vain and wholly unproductive policy.  He has, first of all, to only notice the troubles  within the Irish economy to realise the difficulties that the resulting financialisation caused it.  Being a corporate tax haven  is like  drifting up the creek without a paddle. Once  the route is set there is nothing you can do about it:  you are a captive to its fortunes  and you have, in effect, given up all your options to a corporate sector that has captured significant  control  of your economic policy with any change in the corporate tax rate thereafter being nigh on impossible for fear of being held to ransom by the ever present threat that your oh so friendly tax-driven investors will simply up and leave. Is that what Scotland wants?  Being held captive by the City of London might be bad enough;  being held captive by a range of major investors might be no better.  Being subject to retaliatory  action for such aggressive tax behaviour might be even worse.

The fact is that  we know that tax competition is harmful to the well being of  democracy, effective government and those who are dependent upon the state for some or all of their well-being:  that is precisely why those who oppose the power of the state are so keen to promote it. The risk  is that an independent Scotland may be dragged into tax competition by politicians who know little of tax and who are  already being beguiled by corporate lobbying. Isn't that worthy of discussion?

Scotland will undoubtedly, and necessarily, take control of its own fiscal policy if it is to develop any sense of economic autonomy.  I am the first to say that it should, and would uphold its right to do this,  within and without the union.  Equally, however, if ever there was a case of a country needing to set out a case for taxation cooperation to help achieve its goal then Scotland  should be the prime example. Clarity on precisely where  its fiscal policy might take it is fundamental if there is to be stability during a period of transition to independence.  Right now no such vision  seems to be on offer.  And that really worries me.

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