Raising top rate of income tax in Scotland 'could bring revenue and policy risk'

Putting income tax for top earners up to 50p in Scotland alone could see the change raise only a few million in extra revenue or even result in a loss of cash for the Scottish Government, a new report has warned.

The Scottish Government's chief economist Gary Gillespie said a significant difference in the tax rate north and south of the border could bring about a `revenue and policy risk'.

Less than 48 hours before Scottish Finance Secretary Derek Mackay publishes his Budget - which is widely expected to contain tax rises for the higher earners - the chief economist published an updated assessment of what could happen if income tax rates for those earning more than £150,000 a year were hiked in Scotland but not in the rest of the UK.

The additional rate, paid by these highest earners, is currently set at 45p, with about 20,000 Scots liable for this charge.

But while they represent less than 1% of adults, they are expected to contribute almost a fifth (19%) of total Scottish income tax liabilities.

A large number of this group work in industries such as professional services, financial services and insurance, with the report saying they `tend to be more mobile and have more opportunities for reducing their tax bill compared to taxpayers on lower incomes'.

The report pointed out: `Many top rate taxpayers may be able to choose their residency, particularly if they are working in companies with locations and activities across the UK. It may also be possible for individuals to live in England but continue to work in Scotland.'

If no top earners made any changes, increasing the top rate of income tax from 45p to 50p in Scotland could net ministers about £145 million in revenue in 2018-19, the report said.

But it added that even if there was a low level of behaviour change after a tax rise, this would be reduced to about £53 million, while a high level of change could `potentially result in a £24 million loss in revenues for the Scottish Government'.

The report said: `Given the findings in the literature, the impact of an increase in the AR to 50p remains uncertain. However, if the behavioural response was around the midpoint of this range, it would suggest that the revenue raised by a 5p increase in the AR would be in the low single millions.

`There is therefore likely to be a revenue and policy risk associated with increases to the AR that result in a substantial divergence with the equivalent rate in the rest of the UK.'

Mr Gillespie said: Earlier this year the First Minister asked the Council of Economic Advisers to advise on the potential impact of increasing the additional rate of income tax in Scotland to 50%. Specifically our advice has considered behavioural impact, and options for mitigating any such behaviour.

`The analysis shows that additional rate taxpayers tend to be more mobile and have more opportunities to reduce their tax bill compared to those on lower incomes. As such, an increase in the additional rate is likely to generate a larger behavioural response than changes to the basic or higher rates.'

The report also suggested a smaller change in the levy would bring about a smaller shift in behaviour from taxpayers.

`Our analysis also notes that a lower increase in the additional rate could mitigate the behavioural response and provide a greater opportunity to raise revenues,' Mr Gillespie said.

`The report concludes that there is likely to be a revenue and policy risk associated with increases to the additional rate that result in a substantial divergence from the rest of the UK but that smaller changes could alleviate the risks identified.'