There are approximately 4.6 million adults in Scotland. Of these around 1.9 million or 41% pay no income tax. 48% of us pay between 19 and 21%. While 9.9% pay 41% and 1% pay 46%. Around 60% of revenue raised in Scotland comes from that top 10%. But this means that Scotland has an obvious problem. We are being undercut.
One of the benefits of Brexit was that it gave the UK the chance to undercut the EU. The UK could become a low tax, low regulation offshore competitor attracting business from the Continent. The EU did all it could to prevent this happening and thus far has largely succeeded. Perhaps Truss will be able to do better. But she has just done to Scotland what Brexiteers promised to do to the EU.
If you think this doesn’t work, look at Ireland. Much of Dublin’s income comes from it having a model of very low corporation tax. This means that it is cheaper for many large businesses to be based in Ireland rather than say France or Germany. This is good for Ireland, but bad for everyone else, which is why they want to force Ireland to raise corporation tax. Well Truss has just done to Scotland what Ireland does to Germany and France.
The problem for Scotland is that large numbers of Scots pay no income tax at all. This is partly because the rate at which people begin to pay income tax has been raised by the UK Government. I have always believed this is a long-term mistake. It means that low-income workers have no interest in keeping tax rates low because they don’t share in paying them. If you don’t pay income tax at all you don’t directly benefit from tax cuts.
The SNP could of course argue that the threshold should be lowered in Scotland and I’m sure its wish would be granted, but it won’t because it would upset its core support.
We know that support for Scottish independence correlates with socio-economic status. The low paid and those on benefits are most likely to support Scottish independence, while those who pay the highest levels of tax are least likely to support it. There are exceptions of course. There are millionaires who support the SNP. But generally, it is obvious that poorer Scots hope that Scottish independence will increase the help they get from the state. They want higher taxes and higher public spending, because they know that someone else will pay for it.
But this is why the SNP has a problem now and particularly if it were ever to achieve Scottish independence. The top 10% of tax payers are going to be very much better off if they moved to England tomorrow. Of course, not all of these people can move. Many will have jobs in Scotland or businesses that cannot easily be moved. But if you work in finance in Edinburgh, you could just as easily do your job in London. The same goes for doctors and many other professions that are easily transferable.
It would be difficult for many of us to move. We would need to sell a house, move schools and move from rather empty quiet Scotland to crowded England, but young people starting a career after university will right now be faced with a choice. Get a job in England which will immediately pay more because of lower tax or get the same job in Scotland which will pay less. Scotland not merely faces a brain drain, we face a tax drain too.
So even as part of the UK Scotland is going to lose revenue, but imagine if Pro UK people who undoubtedly pay the vast majority of Scottish taxes are outvoted by those who don’t pay tax at all. This would be perfectly democratic of course. We don’t limit voting rights to those who pay income taxes. But there is nothing to stop Pro UK people voting with their feet. Not unless Sturgeon decides to build a wall.
The majority of Pro UK people would doubtless stay in Scotland after independence. Many of us have jobs we would not want to leave, children we would not want to uproot and we love Scotland just as much as independence supporters. But a proportion of Pro UK people would leave especially if times were tough in the first few years of independence.
Independence supporters usually react to this with a sort of glee. Cheerio. Happy to see you leave etc. But the worst thing that could possibly happen to Scotland is to see part of its population leave.
Scotland has a very low birth rate. It has a low life expectancy. It has poor health and increasingly poor education. The majority of people who choose to move here are from other parts of the UK, which would decline after independence, because they would become foreigners. Few people from elsewhere choose to come to Scotland. Scotland’s population is aging and in decline. Independence supporters should be getting down on their knees and pleading for people to stay rather than telling us to Foxtrot Oscar.
At the moment if some of Scotland’s highest earners and highest tax payers choose to take advantage of lower tax rates in England, Scotland will be compensated by means of the Barnett formula. Scottish tax revenue may fall, but the UK Treasury will redistribute and the level of Scottish public spending will stay the same. Independence supporters will not notice any lowering in their benefit payments. We will still get free prescriptions, free tuition and all the goodies the SNP give us.
But the economic case for independence is gradually going to get worse the longer the tax differential between England and Scotland continues, because those Scots who pay the most tax are going to leave.
Worse if Scotland were to achieve independence it would lose not only the money, we now get from the UK Treasury, we would have to take on a proportion of UK debt, because it is just this debt that pays our pensions and gives us annuities. We would then have to pay for all of the promises that the SNP made to people who don’t pay taxes, from a dwindling pool of tax payers, many of whom could pay less tax in England, most of whom did not want independence in the first place.
Scotland might be able to make up for its loss of population by having an open immigration policy welcoming everyone from everywhere. But even those Scots who pay the lower rates of income tax receive about as much from the state as we pay. To increase tax revenue substantially you will need to import people who will immediately be paying the higher rates of tax.
But where are you going to get them and if you can get them, how are you going to stop them moving to London, where they will earn more and pay less tax? After independence Sturgeon would need a wall.