RESPECT
TAXING THE RICH: ECONOMIC JUSTICE FOR SCOTLAND
INDEPENDENCE S0C
IAL
ISM
ENVIR0NMENTALISM
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Summary of Proposals • Raise the rate of income tax on those earning over £150,000 per year the top 1 per cent of Scottish earners - from 45 per cent to 60 per cent. This is likely to generate between £140m and £322m in additional annual revenue for Holyrood. • Create a new income tax band for those earning between £50,000 and £150,000 per year - the top 10 per cent of Scottish earners - levied at 45 per cent. This is likely to generate up to £300m in additional annual revenue. • Use a portion of the revenue generated from this new progressive Scottish Income Tax system to create a specialist team of Revenue Scotland tax inspectors dedicated to enforcing Scottish tax regulation among elite tax avoiders and evaders. • Use a portion of the revenue raised to create an Economic Justice Fund, the purpose of which will be to provide an immediate, unconditional means of support to welfare claimants who have had their benefits payments sanctioned by the Department of Work and Pensions.
RISE: Scotland’s Left Alliance Who We Are We are a pro-independence left-wing alliance launched in 2015. Our name stands for our principles: respect, independence, socialism, and environmentalism. The alliance aims to provide a socialist alternative to neoliberalism in Scotland.
Contact Us You can visit our website - rise.scot - for full information. Press contacts are Jamie Maxwell, who can be reached on 07891 907989, and Craig Paterson, 07508 482085, or email media@rise.scot
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Rates of income and wealth inequality, and levels of elite tax avoidance and evasion, are too high and should be reduced.
TAXING THE RICH: ECONOMIC JUSTICE FOR SCOTLAND | RISE.SCOT
Introduction This report develops the case for a new progressive and redistributive system of Scottish Income Tax based on the Income Tax powers contained in the Scotland Bill 2015-16. It argues both that rates of income and wealth inequality, and levels of elite tax avoidance and evasion, are too high and should be reduced. It sets-out the case for a 60 per cent additional rate of Income Tax and the creation of a new Income Tax band, levied at 45 per cent, for those earning between £50,000 and £150,000 per year. It also argues for the creation of a new Economic Justice Fund to assist those hit by the UK Government’s punitive benefits sanctions regime.
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Austerity This paper outlines a plan to generate significantly higher levels of public revenue in Scotland by using the Income Tax powers set to be devolved to the Scottish Parliament in the near future. For the sake of clarity, this report defines ‘austerity’ as reductions to Scottish public expenditure - specifically, real terms losses to revenue spending for Scottish Government run public services. It accepts that UK Government cuts to reserved government departments in Scotland will continue for as long as a) the UK Government remains committed to a policy of austerity and b) the Scottish Government’s principal source of funding is the UK Treasury. The annual block grant from the UK Government to the Scottish Government is called the Departmental Expenditure Limit. According to the think-tank IPPR Scotland, the revenue spend budget (RDEL) will be cut in cumulative real terms by 4.3 per cent over the course of the next Scottish Parliament, which will run from 2016-17 to 2020-21. (SNP Finance Minister John Swinney identifies the figure as 4.2 per cent.) The deepest cuts will come in the financial years 2017-18 and 2018-19. However, in the interests of simplicity, this paper averages out the cumulative RDEL cut over the next four years at 1.1 per cent per year. Scotland’s 2016-17 RDEL budget is £26.9bn. Therefore, to make up the average shortfall from UK Government austerity cuts each year over the next four years, the Scottish Government will require an additional £296m annually.
Ring-fenced NHS budget and Local Government funding While the average annual cut over the next four years to the Scottish Government’s RDEL budget is £296m, the figure is much higher if the ring-fenced NHS budget is accounted for. The Health budget will see a 3.6 per cent real terms increase for 2016-17, amounting to £466m. If this is added on to the average block grant cut, the funding gap for the rest of Scottish Government public services increases to £762m. The income tax policy advocated above would raise at minimum £460m and at most £622m - and therefore would not be enough to end austerity if ring-fenced NHS funding is included. However, RISE has proposed a means by which all Local Government austerity can be ended through a separate tax policy: the Scottish Service Tax (SST), which would replace the Council Tax. The most recent analysis of the impact of this policy found that it would have raised £4.1bn in 2012-13, £2bn more than the Council Tax currently raises. This would more than cover the £604 million drop in Local Government funding in the 5 | RISE.SCOT
The four richest families in Scotland are worth more than the lowest-earning 20 per cent of the country. Four families own a combined wealth of ÂŁ6.1bn while the bottom 20 per cent of Scots own approximately ÂŁ5.1bn.
TAXING THE RICH: ECONOMIC JUSTICE FOR SCOTLAND | RISE.SCOT
RDEL budget for 2016-17. Therefore, if revenue raised from the the SST is accounted for alongside the ring-fenced NHS budget, the combination of RISE tax proposals would raise enough to ensure that cuts are not necessary.
Devolution of Income Tax Negotiations between the UK and Scottish Governments over the Scotland Bill 201516 are due to conclude on 12 February. Disagreement between the two parties centres around the controversial ‘fiscal framework’ - a prospective fiscal settlement covering all devolved administrations in the UK. There is a strong likelihood that a deal will not be reached and that the Scotland Bill will not pass. However, for the purposes of this report, we assume a deal will eventually be agreed and that the Scotland Bill reforms will be implemented in full. We also assume that the fiscal agreement will be ‘revenue neutral,’ meaning that the rest of the UK will not face any financial disadvantage as a result of tax and spend decisions made by the Scottish Parliament (and vice versa). The key proposal contained in the Scotland Bill is the devolution of income tax powers to Holyrood. This will allow Holyrood to set a Scottish Rate of Income Tax (SRIT), vary existing bands (with the exception of the Personal Allowance), and create new bands of Scottish Income Tax. The Scotland Act 2012 devolved to Holyrood the ability to raise or lower all bands of income tax by 10p in the pound. While the Scotland Act 2012 gave Holyrood the ability to raise or lower the amount that could be raised from Scottish taxpayers as a whole, it did not allow the Scottish Government to change the rates of individual bands or introduce new bands for specific income groups. So far, SNP Finance Minister John Swinney has decided to keep the SRIT in line with UK Income Tax rates. The proposal contained in the Scotland Act 2015 is significant because it would allow the Scottish Parliament to design a fairer and more progressive income tax system that more closely reflects the wide ranging income spread in Scotland.
Income Inequality According to a recent report by Oxfam, the four richest families in Scotland are worth more than the lowest-earning 20 per cent of the country. Four families own a combined wealth of £6.1bn while the bottom 20 per cent of Scots own approximately £5.1bn. Between 1997 and 2009, the richest 1 per cent of people in Scotland increased their share of pre-tax income from 6.3 per cent to 9.4 per cent. Meanwhile, in 2014-15, there was a near doubling of Scots using food-banks, up to 117,000 from 71,000 in previous years.
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This Scottish Government graph (above) on income inequality shows the distribution of household income in Scotland in 2013-14. The blue bars represent the bottom 40 per cent who earn 20 per cent of total Scottish household income. The black bars represent the middle 50 per cent who earn had just over half of all income. The orange bars represent the top 10 per cent who own 25 per cent of all household income. The top 2 per cent account for nearly 10 per cent of the income in Scotland.
This graph (above) shows the share of total income in Scotland from 1997-98 to 20108 | RISE.SCOT
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11. It illustrates how inequality has increased over time. The red bars represent the bottom 80 per cent of the population. They have seen their share of total income decline while the top 20 per cent have seen their share of income rise substantially. Meanwhile, average incomes in Scotland dipped after the 2008 financial crisis and are yet to recover to pre-crisis levels. Income inequality in Scotland is high and rising. Tax policy is one crucial lever the Scottish Government has to re-dress the balance.
Taxing the 1 per cent: a 60p top rate The first income tax rate reform that RISE proposes is to raise the top or ‘additional’ rate of income tax on those earning over £150,000 per year from 45p in the pound to 60p - a 15 per cent increase.
As the graph above shows, the current top rate of tax is low by historical standards. The top rate was 60 per cent in 1985 before Conservative Prime Minister Margaret Thatcher lowered it to 40p per cent. Labour Prime Minister Tony Blair kept it at 40 per cent for over a decade before his successor Gordon Brown raised it to 50 per cent. It was then cut back to 45 per cent by the current Prime Minister David Cameron. This report’s proposal for a 60 per cent top rate is therefore relatively modest. Between 1974 and 1978, the additional rate stood at 98 per cent. Those earning over £150,000 represent the top 0.7 per cent of earners in Scotland. The richest 1 per cent have seen their share of total income rise exponentially over the past 20 years. According to the research by the Scottish Parliament Information Centre (SPICe), without significant tax evasion and avoidance - or with strong new regulations aimed at limiting tax evasion and avoidance - a 60 per cent top rate could raise an additional £360m in revenue for the Scottish Parliament. 9 | RISE.SCOT
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However, when Gordon Brown introduced the 50 per cent top rate, the drop in registered income from UK Income Tax was 38.9 per cent. If we use this as an estimate for the effects of a 60 per cent top rate in Scotland, the total revenue increase would fall from £360m to £220m. If we assumed a 50 per cent drop in registered income, the total revenue increase would be £180m.
Taxing the top 10 per cent: a new 45p rate The current income tax system includes a 40 per cent band for people who earn between £32,000 and £150,000 per year. RISE believes that this band spans too large an income group: £32,800 is the Scottish median household income for a couple with children. We believe a band for the top 10 per cent of earners, levied at 45p in the pound (an increase of 5p), is fair for those earning comfortably above the median household income. We therefore propose a new band covering those earning between £50,000 and £150,000 per year, levied at 45 per cent. According to SPICe, this new upper rate could raise upto an additional £300m in Scottish revenue. Those earning between £50,000 and £150,000 per year represent the top 10 per cent of earners in Scotland and are worth almost as much as the bottom 50 per cent of Scottish earners combined. SPICe estimates that the amount lost through tax avoidance and evasion by those earning below the top rate would be negligible.
Making the rich pay their share RISE believes that the Scottish Government cannot and must not allow the wealthy to avoid paying their fair share of tax. The UK Government’s definition of a ‘Scottish tax payer’ is as follows: “Scotland must be the part of the UK with which they have the closest connection during [the financial] year. The number of days they spend in Scotland in that year [must be] equal [to] or above the number of days they spend elsewhere in the UK.” In line with this definition, Scottish top rate taxpayers cannot simply cite a place of residence in the rest of UK and subsequently avoid paying tax in Scotland. If an individual works in Scotland and lives in Scotland, he or she is liable to pay tax in Scotland. The number of people who claim to live and work on different sides of the border is small. SPICe estimates that less than 1 per cent of taxpayers fall into this bracket and that it is “unlikely” that many of these people are top rate taxpayers. There are of course other ways wealthy people can hide the extent of their income and wealth. So, in an effort to limit opportunities for elite tax avoidance and evasion, RISE
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proposes establishing a special tax avoidance team, working as part of Revenue Scotland, to specifically target additional rate earners who seek to avoid, evade, or manipulate the Scottish tax system. For the first year after Gordon Brown introduced the 50p top rate, the taxable income of the top one per cent fell by 24 per cent in Scotland. This decline was the result of wealthy tax payers using tax lawyers to help shift their income paid into previous years. This method of tax avoidance is known as forestalling. However, as SPICe confirms, forestalling “can only be brought forward or delayed once” and so has a “one-off effect.” Taxable Income Elasticity (TIE) is the percentage reduction in taxable income from every percentage increase in the tax rate. TIE tends to exclude forestalling due to the fact that it has a limited one year impact. When Brown introduced a 50p top rate of income tax, the UK Government estimated the TIE rate to be 0.45. In 2012, HMRC estimated the TIE rate from Brown’s policy to have been 0.48. If we operated according to HMRC’s estimated TIE rate for the 60 per cent top rate, there would be a 7.2 per cent fall in taxable income in Scotland following the implementation of RISE’s tax reforms. The increased revenue from a 60 per cent top rate, including a 7.2 percent fall in taxable income, would therefore be £160m. This of course assumes that all tax at the current 45p top rate is being paid, which is highly unlikely. RISE believes that a well funded crackdown on tax avoidance and evasion on additional rate taxpayers is likely to reveal ongoing tax avoidance and evasion measures, as well as potential TIE evasion measures. We therefore believe £160m to be the lowest estimate for revenue raised from the Scottish 60p top rate. As SPICe argues, it is “unlikely” that a TIE response from top rate tax payers would result in “a net reduction” in revenues. Furthermore, it is important not to overstate the willingness of people to move in order to avoid higher taxes. According to one recent report into “millionaire migration after an increase in tax for those earning over $500,000,” conducted in the US state of New Jersey, sudden tax flight in response to higher income tax is uncommon. In the instance cited by the report, fewer than 1 per cent of New Jersey millionaires left the state as a result of the tax increase.
Economic Justice Fund RISE considers it unacceptable that in a society as wealthy as Scotland there are substantial numbers of people who cannot afford to eat. The true extent of hunger affecting Scottish communities is hard to estimate, due to the fact there are many small scale and informal providers of emergency food aid. The largest single organisation operating food banks is the Trussell Trust, who reported that in the financial year 2014-15 they received 117, 689 referrals for three days emergency food aid, of which 36,114 were for children. (Please note this does not equate to 117,689 individuals receiving food aid, as many people will receive more than one referral.) A major driver of increasing food poverty has been the impact of the much harsher regime of sanctions and conditionality introduced by the Conservative UK Government for recipients of Job Seeker’s Allowance and Employment and Support Allowance. Tory
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reforms have seen thousands of people deprived of an income for often trivial and perverse reasons. The lowest level of sanction sees benefits stopped for a month, but the length of time that this punishment is administered for is cumulative, operating on a three strikes system - the highest level sanction can see claimants sanctioned for three years. RISE proposes to use a portion of the revenue generated from the new progressive system of Scottish Income Tax to help Scotland’s poorest cope with the impact of the UK Government’s punitive sanctions regime. Currently the Scottish Government spends around £100 million per year mitigating the cuts to welfare imposed by Westminster, including off-setting the impact of the Bedroom Tax via Discretionary Housing Payments. RISE would increase this sum to £250 million, creating a new Economic Justice Fund (EJF) as an administrative mechanism. The EJF would focus funding on organisations already providing essential advice, advocacy, and support to claimants navigating the UK welfare system, as well as on expanding direct cash grants to those most in need. Its priority would be to fully mitigate the cost of benefit sanctions in Scotland, ensuring that everyone has an immediate, unconditional source of support in the event their benefits are sanctioned. By ensuring that those faced with sanctions on or delays to their benefits payments are able to access direct cash grants, RISE believes that the Scottish Parliament can substantially reduce the need for food banks in Scotland.
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References IPPR Scotland (2015). ‘Scottish public services could face billions of pounds of cuts following UK Spending Review’. http://www.ippr.org/news-and-media/press-releases/ scottish-public-services-could-face-billions-of-pounds-of-cuts-following-uk-spendingreview-ippr-scotland BBC News (13 Dec, 2015). ‘John Swinney warns of ‘tough choices’ ahead for Scotland’. http://www.bbc.co.uk/news/uk-scotland-scotland-politics-35083545 Scottish Parliament Information Centre (2015). ‘Financial Scrutiny Unit Briefing: Draft Budget 2016-17’. http://www.scottish.parliament.uk/ResearchBriefingsAndFactsheets/ S4/SB_15-86_Scottish_Government_Draft_Budget_2016-17.pdf Oxfam Scotland (2015). ‘Even It Up: Scotland’s role in tackling poverty by reducing inequality at home and abroad’. http://policy-practice.oxfam.org.uk/publications/ even-it-up-scotlands-role-in-tackling-poverty-by-reducing-inequality-at-home-an579309?utm_source=oxf.am&utm_medium=ZmmX&utm_content=redirect Scottish Government (2015). ‘Economic Inequality Brief – Drivers of Inequality – September 2015’. http://www.gov.scot/Topics/Statistics/Browse/Social-Welfare/ IncomePoverty/incomeinequalitysept2015 Scottish Parliament Information Centre (2014). ‘Financial Scrutiny Unit Briefing: The Scottish rate of income tax and additional rate taxpayers’. http://www.scottish. parliament.uk/ResearchBriefingsAndFactsheets/S4/SB_14-14.pdf Young, C, Varner, C, Lurie, I, Prisinzano, R (2015). ‘Millionaire Migration and the Taxation of the Elite: Evidence from Administrative Data’. http://web.stanford. edu/~cy10/public/Millionaire_Migration.pdf Common Weal (2015 unpublished). ‘Tax Scenarios’. Scottish Parliament Information Centre (2015b). ‘Financial Scrutiny Unit Briefing: Income Tax in Scotland’. http://www.scottish.parliament.uk/ ResearchBriefingsAndFactsheets/S4/SB_15-72_Income_Tax_in_Scotland.pdf Scottish Socialist Party (2015). ‘Scottish Socialist Party submission to the Local Tax Commission 2015’. https://www.scottishsocialistparty.org/wp-content/ uploads/2015/12/SSP-Local-Tax-Commission-submission-on-the-Scottish-Service-Tax. pdf http://www.crimeandjustice.org.uk/resources/benefit-sanctions-britains-secret-penalsystem
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Calculations Raising £323m additional revenue from 60p rate assuming no extra tax avoidance or evasion: The average salary of top rate tax payers in Scotland is £270k (SPICe, 2014). The number of top rate taxpayers in Scotland in 2015-16 was 17,000 (SPICe, 2015b). SPICe (2014) estimate that the number of additional rate taxpayers is going up by 1,000 per year, meaning 18,000 in 2016-17. A 45p rate for 2016/17: 0 on the first £11k, 20p on the next £21k; 40p on the next £118k; 45p on the next £120k = income tax liability of £105,400 per average top rate taxpayer. A 60p rate for 2016-17: 0 on the first £11k; 20p on the next £21k; 40p on the next £118k; and 60p on the next £120k = income tax liability of £123,400 per average top rate taxpayer. Total revenue for 45p and 60p rate: amount of people X average income tax liability 18,000 X £105,400 = 189,7200000 (£1.90bn) total revenue for 45p rate. 18,000 X £123,400 = 222,1200000 (£2.22bn) total revenue for 60p rate. Increased revenue from 60p rate: 60p rate revenue - 45p rate revenue. Increased revenue from 60p rate: £2.22bn - £1.90bn = £322 million.
Raising £160m from tax avoidance and evasion of 7.2 per cent: Percentage tax avoidance/evasion on 60p rate: TIE rate X p increase in income tax rate. Tax avoidance/evasion on 60p rate: 0.48 X 15 = 7.2%. Total revenue after full percentage tax avoidance/evasion included: percentage tax avoidance/evasion of total revenue, then take away that figure from total revenue. Total revenue after full percentage tax avoidance/evasion included: 7.2 per cent of £2.2bn = £158m. Then £2.2bn - £158m = £2.04bn. Increased revenue after full percentage tax avoidance/evasion included: total revenue after full percentage tax avoidance/evasion included – 45p rate total revenue. Increased revenue after full percentage tax avoidance/evasion included: £2.04bn £1.90bn = £140m.
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