RESEACHERS have said they are unable to establish whether higher taxes in Scotland have cut Government revenues.
The Institute for Fiscal Studies (IFS) said that their experts were not able to say whether increasing tax on higher earners has boosted or cut the money brought in by the Scottish Government – but the organisation has called for a “pause” on any future increases.
Researchers analysed research by HMRC focusing on the Scottish Government’s initial major divergences from UK tax policy beginning in 2018.
They found two UK Government studies on the 2018-19 tax changes, which saw the creation of new tax bands, were inconclusive. The previous financial year, the Scottish Government also brought more people into the higher rate of tax.
Higher taxes may have cost the Scottish Government more than official estimates from the independent Scottish Fiscal Commission, the researchers said.
But in the first study, the IFS said the estimates on the greater than anticipated cost to the Scottish Government of increasing taxes on higher earners contained “wide” margins of errors and meant the SFC had “chosen not to update its assumptions”.
And the other HMRC study the IFS examined showed that while the costs were higher than assumed by the SFC there remained “wide margins of error”.
The think tank also noted that the changes, measured in 2018-19 had happened “surprisingly” rapidly before failing to make any impact the next year. Researchers said meant that “raises the possibility that estimates for both years are picking up some other factor as opposed to the tax changes in Scotland”.
The think tank said that the overall evidence pointed to costs “potentially a bit larger than assumed” by the SFC and that the studies suggested “that previous increases in Scotland’s top rate of income tax will have slightly reduced revenues rather than slightly increased them as the SFC’s assumptions imply”.
The IFS study also noted a more recent HMRC study which found that internal migration from the rest of the UK to Scotland had increased in the period where taxes were higher north of the Border.
The report noted: “Wales has seen a similar trend and internal migration statistics suggest that more rural and more affordable areas of England have also seen an inflow of taxpayers and taxable income. So this is not a Scotland-specific trend. But these data do suggest that any migration response to Scotland’s higher taxes was not big enough to offset fully other factors driving inflow of taxpayers – at least up to around two and a half years ago.”
International evidence, of better quality, suggests that people will move to lower-tax parts of countries, such as Switzerland, the USA and Spain.
David Phillips, an associate director at IFS and head of devolved and local government finance, said both domestic and international research showed that tax rates affected behaviour like how much money people earn, whether they chose to migrate, and whether they chose to evade or avoid tax.
He added: “These responses are most significant for the highest-income individuals who, while few in number, contribute a large share of overall tax revenue. As a result, increases in the top rate of tax are unlikely to raise much – with evidence from the first of Scotland’s reforms in 2018–19 suggesting they may even reduce revenue.
“There is still considerable uncertainty about this though. The bigger changes to income tax seen over the last two years – which have yet to be analysed – will provide a useful opportunity to learn more about taxpayers’ behaviour.
“In the meantime, the evidence currently available suggests that if the aim is to raise revenue, the Scottish Government should at least pause any plans for further increases in Scotland’s tax rates on higher incomes.”
Finance Secretary Shona Robison said the Scottish Government's tax policies were "grounded in evidence".
She said: "The SFC has estimated that our income tax policy choices since devolution will raise an additional £1.5 billion in 2024-25, compared to if we had matched UK Government policy.
“Our tax base continues to grow strongly, with data showing that Scotland experienced faster earnings and tax per head growth than the rest of the UK in both 2022-23 and 2023-24.
"HMRC research also shows that across all tax bands and almost all age ranges in 2021-22, more taxpayers chose Scotland as their home than left – offering yet more proof that Scotland is an attractive place for people to live and work, while our progressive approach to income tax asks those who earn more to contribute some more.”
