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The anti-poverty case for thinking again about tax in Scotland

Posted by Francis Stuart Research and Policy Adviser for UK Poverty in Oxfam Scotland

7th Dec 2017

Image of Scottish money

The Paradise Papers cast a very welcome, but deeply disturbing, light on how rich and powerful individuals and companies secretly shelter their wealth in tax havens. Tax dodging deprives poor countries of billions of pounds each year which could be used for life-changing education and life-saving healthcare: a horrifying 830 mothers still die every day from preventable causes related to pregnancy and birth.

Action is therefore needed at UK, European and global levels to ensure wealthy individuals and corporations pay their fair share of tax.

But, while closing loopholes is one way to increase the quantity of money available to support public services, the progressivity and overall rates of tax are hugely significant too.

Here in Scotland, there is a live debate about how the Scottish Government might use devolved powers over income tax to protect what it describes as the 'social contract' - such as free school meals for Primary 1 to 3 children - as well as to fund measures like lifting the public sector pay cap in Scotland.

Ahead of the upcoming Scottish budget, the Government has issued a paper outlining the current approach and possible options for change. In doing so, it has set out several tests which it says any changes to income tax should meet - including, significantly, that they should raise additional revenue to protect public services, protect low earners, reduce inequality and support the economy. These tests are welcome, though the absence of any gender analysis is disappointing given the impact on women and men will be different. 

As a former US Supreme Court Judge once said, tax is the price we pay for living in a civilised society. Faced with one in five people in Scotland living in poverty and historically high levels of inequality, forecast to increase in the coming years, it is right to think again about tax. Add to this mix the significant pressures facing the Scottish budget, including demographic change as well as our serious environmental challenges, and it is little wonder that most opposition parties in the Scottish Parliament support raising more in tax.

In deciding any changes, Oxfam recommends three areas are considered: Inequality, Investment and Incentives. 

Inequality

Earlier this year, our report outlined the scale of economic inequality in Scotland. It highlighted how income inequality was relatively low during the post-war period until the late 1970s in part because the income tax system was more redistributive than it is today.

Around the world, Oxfam sees fiscal justice as central to the fight against extreme economic inequality with policies on tax and public spending among the best tools governments have for tackling inequality. Analysis of OECD countries as well as Oxfam's Commitment to Reducing Inequality Index confirms this, highlighting how a number of Government's successfully reduce inequality by using the tax system to help address deep inequalities in pre-tax income.

Against this context, the Scottish Parliament's decision earlier this year not to pass on the UK Government's increase in the threshold for paying the 40p rate of income tax ensured the tax system in Scotland did not become more regressive. While positive, we should be more ambitious and further proactive steps to make the system here more progressive would be welcome.

However, in the coming weeks, we must avoid jumping to the conclusion that a cut in income tax for the lowest earners is the best approach. Many people in poverty do not pay income tax, and the financial boost for the lowest earners may be reduced when the impact of any wider entitlements, including the interaction with Universal Credit, is considered. Evidence shows that those in the top-half of households benefit more from increases to the personal allowance than those at the bottom. Raising the personal allowance is an incredibly expensive way to reduce the taxable income of those on low-incomes (if that is deemed desirable).

We also need to think about how we tax wealth, which is far more unevenly distributed than income. Not all tax powers to address this rest in Scotland, including over inheritance tax. However, encouragingly, the Cabinet Secretary for Finance has tasked the Scottish Land Commission with researching the potential for a land-value tax as an alternative to council tax, while the Scottish Labour leadership election opened up a debate about a wealth tax.

Some of this may sound radical, but it's increasingly mainstream thinking. Organisations like the IMF are now saying that higher taxes can reduce inequality without impeding economic growth.

There is also strong public support in Scotland for measures to reduce economic inequality. Three-quarters of respondents in our poll earlier this year favoured wealth - including incomes, savings, money and assets - being distributed more equally, with 52% supporting a much fairer distribution. Two-thirds of people said politicians in Scotland should do more to address economic inequality. If accurate, new polling also suggests a majority people in Scotland are willing to pay more tax. 

In addition, there is evidence to suggest that those who believe in greater equality should act sooner rather than later, because the measures needed to narrow the gap could become ever more politically challenging over time, in part because of the way inequality skews public perceptions and political decision-making.

Investment

Individuals, communities and businesses depend on good public services such as schools, hospitals, roads - to educate our workforce, keep people healthy and transport goods and services around the country. Contrary to popular wisdom, the 'self-made millionaire' is largely a myth. The success of individuals and companies is in fact built on help from others, including the state.

To fund these services we must think about the overall tax take as well as the progressivity of the tax schedule.

The Nordic countries - often viewed as a beacon of progressiveness - actually have relatively regressive tax systems (at least when defined as the extent to which direct and indirect tax rates increase as people's income rises). In contrast,  analysis shows the USA has a fairly progressive tax system; though recent tax cuts will have reduced this.

The main difference is that in the Nordic countries high taxes across the board fund high-quality public services. So, while they have a less progressive tax system, when the impact of public services is considered they have a far more redistributive system overall.

Oxfam has tried to analyse some of this complexity through our Commitment to Reducing Inequality Index - an international comparison which looks at the progressivity of the tax structure; the impact of tax on limiting market inequality; actual levels of tax collection; and social spending as a percentage of GDP.

The key point in the Scottish context is that while the progressiveness of the tax system must be considered, so too must be the overall tax take, the public services it funds and the level of redistribution achieved by these two elements combined.

This suggests that as well as using tax revenue to fund more adequate direct transfers of cash through social security (something we know is much needed through our work to reduce food insecurity in Scotland within the partnership project, Menu for Change), free and high-quality public services, like healthcare and education, can be a significant equaliser by putting 'virtual income' into people's pockets.

Focusing on this wider tax and spend calculation will also take us beyond gender-blind measures of income inequality to acknowledge the crucial role of public services in reducing gender inequalities. For example, public investment in child and social care can help redistribute the unpaid care work which is disproportionately done by women, as well as reducing barriers to entering the labour market.

There is also an argument to be made that a wide and high tax base can lead to more responsive government with citizens who are paying significant amount of tax more willing to hold their government to account - thereby leading to better public services. By paying tax (and even non-earners pay tax through VAT and other such taxes), we have a right to have a say in fiscal decisions.

In the Scottish context, it will be important for taxpayers to understand what difference any increase in income tax will make - for example, through better public services - if support for a different approach to the rest of the UK is to be sustained over time. This is particularly the case given the overall size of the Scottish budget may still fall, even if tax revenues in Scotland are increased, due to the UK Government's continued austerity and the complexity of the 'fiscal framework' between the Scottish Parliament and Westminster. Good quality communications around the impact of any tax changes, will be vital.

Incentives 

In the coming weeks, lots of attention will be paid to the potential behavioural response of higher earners in Scotland to any tax increase. The Government's paper accepts that 'some people do change their behaviour in response to a tax change', for example, the hours they work or indeed where they choose to live; though just how much this will impact on tax revenues is uncertain.

But while the behaviour of individuals needs to be considered, we should also consider another aspect of behaviour change: how we might use the Scottish Parliament's new tax powers to shape the kind of society we want by targeting tax towards socially and environmentally harmful activities.

At a recent Friends of the Earth Scotland and STUC event, the economist Mariana Mazzucato, a member of the Scottish Government's Council of Economic Advisers, argued there is very little evidence to suggest that providing different types of tax incentives gets businesses to invest more. Oxfam analysis also shows threats of capital flight in response to changes in tax are also of questionable credibility. Importantly however, Mazzucato argued that consumers do tend to be quite sensitive to taxation policy in terms of the choices they make. 

The Scottish Government should therefore look at new, creative, ways to increase tax on social and environmental 'bads' to drive behaviour change and raise new funds to pay for high quality public services.

For example, the plastic bag charge has successfully reduced plastic bag use in Scotland. In contrast, the Scottish Government's planned cut to Airport Departure Tax - though currently in a holding pattern - risks cutting tax on an activity which fuels environmental damage. This is surely the wrong direction of travel given our goal of reducing climate change.

Summary

This debate on tax in Scotland is both important and welcome. It has the potential to create substantial change for people in poverty, for whom well-funded public services are particularly critical. Amid budget pressures, the time is right for this debate to happen.

We must use this opportunity to think about how we use tax to: reduce inequality; raise investment to fund high-quality public services and provide more dignified social protection; while also incentivising the type of society we want to see. If successful, Scotland could lead the way in developing a better, fairer tax system.

So, amid the much-needed global focus on the Paradise Papers, we cannot miss this wider opportunity in Scotland to use tax as a crucial tool in the fight against poverty and inequality.

Blog post written by Francis Stuart

Research and Policy Adviser for UK Poverty in Oxfam Scotland

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