{"id":7715,"date":"2022-09-26T10:41:50","date_gmt":"2022-09-26T09:41:50","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=7715"},"modified":"2022-09-26T13:06:18","modified_gmt":"2022-09-26T12:06:18","slug":"46p","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2022\/09\/26\/46p\/","title":{"rendered":"Impact on Scotland of the abolition of the 45p additional income tax rate"},"content":{"rendered":"\n<p><em><strong>If the Scottish Government doesn&#8217;t follow the Tories&#8217; abolition of the 45p additional rate, I expect its revenues from Scotland&#8217;s own 46p rate will fall by half.<\/strong> <\/em><strong><em>Here&#8217;s why.<\/em><\/strong><\/p>\n\n\n\n<p>In 2017, the Scottish Government <a rel=\"noreferrer noopener\" href=\"https:\/\/www.theguardian.com\/politics\/2017\/dec\/14\/scotlands-highest-earners-to-pay-extra-164m-in-income-tax\" target=\"_blank\">raised the additional rate<\/a> from 45p to 46p. They called this the &#8220;top rate&#8221;. On paper, the differences between Scottish and rest of UK (rUK) rates should have raised \u00a3378m. A year later, HMRC <a rel=\"noreferrer noopener\" href=\"https:\/\/www.gov.scot\/binaries\/content\/documents\/govscot\/publications\/research-and-analysis\/2021\/12\/scottish-income-tax-2018-19-policy-evaluation\/documents\/scottish-income-tax-2018-19-policy-evaluation\/scottish-income-tax-2018-19-policy-evaluation\/govscot%3Adocument\/scottish-income-tax-2018-19-policy-evaluation.pdf\" target=\"_blank\">estimated<\/a> the actual figure was \u00a3239m. The top rate alone would naively have raised \u00a327m &#8211; the actual figure was \u00a35m.<sup class=\"modern-footnotes-footnote \" data-mfn=\"1\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_7715\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_7715-1\">1<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_7715-1\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"1\">This is a corrected version of my earlier post &#8211; I posted too quickly and made a sloppy mistake &#8211; my apologies, and thanks to those who pointed it out<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-large is-resized is-style-default\"><img fetchpriority=\"high\" decoding=\"async\" src=\"https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/09\/Screenshot-2022-09-26-at-09.41.49-1024x418.png\" alt=\"\" class=\"wp-image-7718\" width=\"715\" height=\"291\" srcset=\"https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/09\/Screenshot-2022-09-26-at-09.41.49-1024x418.png 1024w, https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/09\/Screenshot-2022-09-26-at-09.41.49-768x314.png 768w, https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/09\/Screenshot-2022-09-26-at-09.41.49.png 1434w\" sizes=\"(max-width: 715px) 100vw, 715px\" \/><\/figure>\n\n\n\n<p>Why? &#8220;Behavioural response&#8221;. That could mean a variety of things:<\/p>\n\n\n\n<ul><li>People actually moving house (their place of residence) to escape the Scottish rates. It doesn&#8217;t seem very likely, even at the margins, that high earners would go to that trouble just to save 1%.<\/li><li>Simple tax evasion as people fail to declare revenue. Again doesn&#8217;t seem very likely to me that such small rate differences would make anyone tip into criminality. And, in any event, most high income tax payers are employees, who can&#8217;t realistically evade tax.<\/li><li>People taking the reasonable position that they&#8217;re resident in England, not Scotland, when the facts support that, but they wouldn&#8217;t have bothered before.<sup class=\"modern-footnotes-footnote \" data-mfn=\"2\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_7715\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_7715-2\">2<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_7715-2\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"2\">The rules around allocating taxpayers to Scotland or rUK are <a href=\"https:\/\/www.legislation.gov.uk\/ukpga\/2012\/11\/section\/25#section-25-2\">here<\/a><\/span> Fine!<\/li><li>People taking marginal positions that they&#8217;re (arguably) resident in England, not Scotland. You might call this &#8220;<a rel=\"noreferrer noopener\" href=\"https:\/\/heacham.neidles.com\/2022\/08\/20\/avoidancefaq\/\" target=\"_blank\">avoidance<\/a>&#8220;. But will be hard for HMRC to identify and challenge.<\/li><li>People lying that they&#8217;re resident in England when they&#8217;re actually resident in Scotland. Tax evasion &#8211; but again hard for HMRC to challenge.<\/li><\/ul>\n\n\n\n<p>But &#8211; whatever the reason &#8211; these are a pretty impressive behavioural responses to a small change. Much more than I would have guessed &#8211; and it surprised HMRC too (the table above shows they anticipated a 20% response). The response to the top rate is extraordinary &#8211; 80% of the income you&#8217;d expect, on paper, to arise, simply disappeared.<\/p>\n\n\n\n<p>So we can expect <em>at least<\/em> a 40% behavioural response to the new gap of 5p between the UK and Scottish rates on high incomes. Possibly 80% or more if the previous history of the top rate is any guide. And we may start seeing a real response (people moving house, rather than just changing where they claim residence). A prudent ballpark estimate would be that Scottish revenues from its 46p top rate will fall by about half; they may disappear entirely (or even become negative).<\/p>\n\n\n\n<p>Of course this doesn&#8217;t mean the Scottish Government will simply fall in line with the rest of the UK, and abolish its top rate. They may well take the view that half the revenues are better than none (particularly if it doesn&#8217;t expect a real response, i.e. an actual economic cost to Scotland of people moving). And the political signalling of the additional\/top rate has always been much more important than the (modest) revenues it collects. \u00a32bn across the whole UK is chicken feed, in the context of about \u00a3200bn from income tax as a whole. \u00a35m across Scotland is less than chicken feed.<\/p>\n\n\n\n<p>The moral of the story &#8211; the interdependence of the Scottish and rUK economies means that differential tax rates are a Really Bad Idea.<sup class=\"modern-footnotes-footnote \" data-mfn=\"3\" data-mfn-post-scope=\"0000000000002f4e0000000000000000_7715\"><a href=\"javascript:void(0)\"  role=\"button\" aria-pressed=\"false\" aria-describedby=\"mfn-content-0000000000002f4e0000000000000000_7715-3\">3<\/a><\/sup><span id=\"mfn-content-0000000000002f4e0000000000000000_7715-3\" role=\"tooltip\" class=\"modern-footnotes-footnote__note\" tabindex=\"0\" data-mfn=\"3\">With the usual exception for stuff that can&#8217;t move, e.g. land.<\/span> An independent Scotland would find its tax policy in practice heavily constrained by the tax policy of rUK.   <\/p>\n\n\n\n<p>Inevitable caveat: I haven&#8217;t covered the effect of the rate changes on the Barnett formula, because I know nothing about it\u2026<\/p>\n\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>Photo thanks to <a href=\"https:\/\/unsplash.com\/es\/@chris_robert?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText\">chris robert<\/a> on <a href=\"https:\/\/unsplash.com\/?utm_source=unsplash&amp;utm_medium=referral&amp;utm_content=creditCopyText\">Unsplash<\/a><\/p>\n\n\n\n<ul class=\"modern-footnotes-list \"><li><span>1<\/span><div>This is a corrected version of my earlier post &#8211; I posted too quickly and made a sloppy mistake &#8211; my apologies, and thanks to those who pointed it out<\/div><\/li><li><span>2<\/span><div>The rules around allocating taxpayers to Scotland or rUK are <a href=\"https:\/\/www.legislation.gov.uk\/ukpga\/2012\/11\/section\/25#section-25-2\">here<\/a><\/div><\/li><li><span>3<\/span><div>With the usual exception for stuff that can&#8217;t move, e.g. land.<\/div><\/li><\/ul>\n","protected":false},"excerpt":{"rendered":"<p>If the Scottish Government doesn&#8217;t follow the Tories&#8217; abolition of the 45p additional rate, I expect its revenues from Scotland&#8217;s own 46p rate will fall by half. Here&#8217;s why. In 2017, the Scottish Government raised the additional rate from 45p to 46p. They called this the &#8220;top rate&#8221;. On paper, the differences between Scottish and [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":7717,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[88],"tags":[136,138,137],"jetpack_featured_media_url":"https:\/\/heacham.neidles.com\/wp-content\/uploads\/2022\/09\/chris-robert-k769otV8ohQ-unsplash-scaled.jpg","_links":{"self":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/7715"}],"collection":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/comments?post=7715"}],"version-history":[{"count":8,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/7715\/revisions"}],"predecessor-version":[{"id":7732,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/posts\/7715\/revisions\/7732"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media\/7717"}],"wp:attachment":[{"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/media?parent=7715"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/categories?post=7715"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/heacham.neidles.com\/wp-json\/wp\/v2\/tags?post=7715"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}