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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The problem lies with the fearful thinking of the SNP leadership and the terrible advice it chooses. Inste#d of developing a vision for the purpose of independence it has bogged itself down with crummy notions of ‘stewardship’ and ‘competency’,never dumping the gradualist devo-max thinking when that route was denied it.
It should be making a case for what kind of country an independent Scotland should be, rather than spewing out silly figures of how much better off people will be and creating heath Robinson policies based around junk ideas of sound finance,currency unions and tax competition.
An independence of mind and purpose is what is needed,the means will follow and be argued over.
However,independence does give you the freedom to change your mind.
The question on the ballot is:
Should Scotland be an independent country?
Nothing about policies,we are not being asked to set our future in stone.
Consistency in politics is rather overrated by the press and public,though not so much by politicians.
You don’t have to publish this.
I sense you missing one important point.
The Union is based historically, legally and constitutionally upon the evolving and flexible union of two crowns, a concept which most economists do not appreciate or have time to consider in their busy microcosms. The notion of Crown sovereignty has developed from the 1600s into a constitutional umbrella covering freedoms which in effect defines the Crown in Parliament, the Crown in the executive and the Crown in judicial matters, with a non Montesquieu approach. Until recently the arrangement relied upn functions such as the Lord Chancellor to take responsibility for the resolution of self destructive internal conflicts which Montesquieu’s system engendered. This model was superficially adopted after the Vienna Congress of 1815, as a model for the re-organisation of Europe after the disastrous republican bloodletting. That incomplete model, owing to its translation, gave Europe a form of peace which, barring Bismark’s need to glue Germany together from John Locke’s pertinent analysis of it, lasted until pressures East of the Rhine in 1914. One century mater those same geopolitical forces are giving rise to similar issues, after the unification of Germany and the economic appropriation of what used to be an area of soviet influence.
I am reading out the history to indicate the manner in which the principle of Crown sovereignty has continued in a manner which transcends the European models, which have reverted to a more centralised, and less democratic social contract principle, involving economically costly tensions between the various actors involved.
The freedom that the arrangement I have just described guarantees liberties and law and process to those under it, rather than removing them.
That issue of the framework for an independent or less independent state of Scotland is being addressed by no-one, and is likely to be used by those seeking to make money out of requiring a written constitution for both countries, which would be a step backwards of about 500 years of relatively peaceful legal and fiscal harmony.
The current questions of the Relationship with Scotland go back to the Normans, and there is an interesting piece by a History professor, Robert Bartlett, who identifies the current economic situation between England, Wales, Ireland and Scotland as not having changed that much since the 1066 invasion. The English have always had to negotiate with the Scots, and that should perhaps give you a point of reference in this area as you are obviously uncomfortable.
Excepting the bloody hiccup of the divine right of Kings – which was rapidly expediated to the Continent from which it owed its papal origins (there was a form of EU under the Pope, as you may have noticed) – that process of quiet evolution has passed unnoticed by those abroad, whose education is directed towards the models within which they navigate.
The Stuarts originated from Dol de Bretagne, in France, where Mary Queen of Scots was born I understand in the present Town Hall on the rue des Stuarts. We all fared better later, including the Scots, as usual in a less uncomfortable arrangement with the Dutch house of Orange. That model was used from the Congress of Vienna, but with unfortunate mutations into non-UK models such as Kaisers and Emperors which did not assist the actual exercise of power and responsibility by the underlying body politic in each country.
There is no point in raising the issues of fiscal policy without an adequate realignment of the balance of constitutional power were the Scots to vote “yes”, which until now has had the strength and foresight to remain unwritten as being part of the British soul and identity. The Scots, and the Irish, tinker with it at the peril of the whole.
Your discussion of these historical matters comes across as being very confused. Robert Bartlett may be a wonderful medievalist but I think it’s a good rule of thumb to be wary of medievalists making links between their period of study and what is going on today. Early modern historians and even those working in the eighteenth century are much more careful about making any links at all.
In strict terms there is no British soul and as for British identity it is far too malleable a concept to be useful for the simple issue of forming a government that actually works for its people. What is the ‘peril of the whole’? If If were to accept that phrase might I question the economic policies of the Westminster govts from 1979 onwards which have caused huge damage to communities in the northern part of these islands (i.e northern England and Scotland but also in Wales when you mention it)?
All good points – given the interdependence of the two economies, the idea of tax competition between an independent Scotland and RUK is absurd.
The other critical question is what the terms of the tax treaty between Scotland and the RUK would look like.
On your question about treaty succession: it’s clear as a matter of international law that international treaties are only inherited by the successor state. For tax treaties and other bilateral agreements things are relatively straightforward: Scotland can simply agree new treaties with each of the UK’s treaty partners and, in the meantime, agree with each treaty partner country that the old treaties apply to Scotland (this generally happened with the countries that split from the Soviet Union). For multilateral treaties and international organisations it’s more difficult – Scotland would need to go through the OECD accession procedure just like it will have to go through the EU accession procedure (unless Article 48 can be used to shortcut the process).
There is no sign the independence campaign has given any serious thought to these issues.
It is more likely that these issues are being cited as brinkmanship arguments and that everyone will be unpleasantly surprised by a possible “yes” vote. Irrespective of the decision the perennial negotiation process which I mentioned has been in progress for some time.
However, note that Scottish politicians and lawyers are generally very reluctant to talk to a sassenach, including the HMRC about how their legal system actually functions.
Wow. What on earth does that last sentence mean? What is your evidence for making that statement? Discussions between Scottish politicians and the HMRC are surely of a formal nature and governed by civil service regulations and govt protocol..so what are you actually talking about?
Interesting point about treaties: what if the tax havens pull the plug on all the reciprocal tax and information-sharing agreements at midnight om Independence Day?
Eventually, they will all be renegotiated and reinstated. But hplow much could be lost in the meantime?
I guess that question could be reformulated as: “How much are those agreements actually worth? ”
Also: will Scotland be RUK’s ‘Liechtenstein’, or vice versa?
And if Scotland did go for independence and sign up to be a tax haven… tax justice campaigners would not be amused…
No
Of course we wouldn’t
Nor would the people of Scotland, I suspect
I foresee lots of very easy tax plan in for companies if it’s a yes vote (which it won’t be)
Richard,
As to the EU being a thorny issue, it looks entirely likely that this will be dealt in a straightforward process through Article 48 as Professor Sionaidh Douglas-Scott explains here:-
http://www.futureukandscotland.ac.uk/blog/independent-scotland-eu
Clearly, VAT and current exemptions would be negotiated but likely to continue for iScotland and RUK until the next review (2020?).
Since Revenue Scotland was set-up, HMRC appears to have set-up a specific code for Scottish tax-payers. Information here on how to identify a Scottish taxpayer
http://webarchive.nationalarchives.gov.uk/20120530212748/http://www.hmrc.gov.uk/news/technote-scot-taxrate.pdf
Post-independence the decisions about tax levels and VAT would depend on who would be in government and are separate from any decision about independence. A government could choose to follow exactly rates in RUK, if they so desired, or not. I can’t see why a different tax rate in a different country is a problem in the EU.
Given your excellent analysis and criticism of the overcomplicated, inefficient and incredibly expensive to manage UK Tax Law (as incorporated into Scottish law), iScotland has a real opportunity to look at other, more efficient tax laws and systems and improve collection rates, as is mentioned in the White Paper. There are already revenue collections services in Scotland. Where some see problems, others see opportunities.
Best,
Stuart
I have to say the White Paper is grossly simplistic
So too I think are you comments, I am afraid
Tax is not that easy. We may wish to think it should be – but it isn’t and Scotland will have to show a lit more vision on this issue than the white paper implies is available to make any headway on this
I hope this ‘sassenach’ may be permitted a comment. Alistair Darling was right to argue in the first debate with Alex Salmond that a monetary union without a fiscal and political union was an impossibility. I just wish that the politicians and Eurocrats of the EU had sussed that out when they decided to establish the € without a fiscal or political union! A customs union and a banking union simply aren’t good enough, assuming that both of these will happen in this case, as in the European one.
The points you make about tax competition are very valid, Richard. If Scotland had its own currency, it could try competitive devaluation, and we could go back to 1930s economics and beggar-my-neighbour policies. If every country in Europe were to do that, as recommended by the Daily Telegraph, we’d soon have another European war. As it is, it looks like we are going to have war anyway. Oh happy days!
New business for Gretna Green, you will be able to hop over the border and become a non-dom. Perhaps Carlisle will be just as interesting for people north of the border.
The EU isn’t going to view Scotland as a special case any more than they view the Republic of Ireland as one. I am pretty sure that Scotland will look a rather attractive proposition for wealthy people with an English or Welsh domicile (assuming they keep the rule of course).