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Paying for the bill

Brian Taylor | 15:10 UK time, Tuesday, 30 November 2010

Quick question for you all to ponder about the Scotland Bill - are the new tax powers an opportunity or a threat?

Supporters of the Bill say they are an opportunity - that they would incentivise Scotland to enhance the income tax take and so bolster the money available to Holyrood.

Detractors - including those of a Nationalist persuasion - find it a threat.

They say that it matches a long-held Treasury aspiration - which is to cut Scotland's cash as currently available via the Barnett Formula.

How so? How to explain the difference?

Consider the basics. Scotland would take charge of half the basic rate tax (10p out of 20p) and a lower proportion of the upper bands. (Still 10p, but out of 40p and 50p.)

During an interim handover period, starting in 2015, there should be minimal potential variation, either way.

The Treasury would calculate a notional tax take from the product of 10p in Scotland.
So if Scotland reinstates the whole 10p then the entirety of the cash would be reinstated too.

The opportunity/threat emerges when the calculation is founded upon actual tax revenues in Scotland. That might be, say, four or five years after 2015 implementation.

Then Scotland receives what Scotland actually earns in income tax. Supporters say that would incentivise Holyrood and the Scottish Government to bolster income tax. Hence, the opportunity.

Detractors say there is a deflationary problem inherent in the system: partly because income tax revenues are currently depressed but, more fundamentally, because Scotland would gain a relatively limited proportion of the upper tax bands where, arguably, growth would be highest.

Further, those detractors say that growth would be hard to sustain without being able to deploy the full range of economic and fiscal levers - including other taxes.


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