Home / Blog

Media enquiries:
07933 827522


A Better State
Tax and Taxed
Wasting Money
This month

Wednesday, November 30, 2016

Responsible for progressive enthusiasm

The Scottish Government is taking formal control of revenues from income tax from today. Soon, it will have full control over thresholds and bands. This adds to its existing responsibility over Land and Buildings Transactions Tax.

What is this responsibility? For SNP politicians it is usually couched in positives – control over economic levers, the chance to create opportunity in Scotland, to enhance fairness and equality. Such sentiments are packaged in the assertion that we have a “progressive” government.

But there is another responsibility here; to preserve faith with Scotland’s people that a dedication to being progressive will be successful. Power over economic levers are negative if they destroy economic activity and curtail the freedom of ordinary voters to spend their incomes in ways they see are productive – the people will respond by kicking “progressives” out of office. That’s accountability through taxation with representation. Democracy operating as it should as a constraining force; not as a state-building mechanism.

As dedicated low tax supporters we are resolute in our view that progressivity in taxation can be a force for bad. Over-enthusiasm for using economic levers to enhance endless promises for re-distributions creates many malign unintended outcomes.

We say “unintended” because too often our politicians fall into the trap of thinking that a small additional tax levy will hardly be seen by taxpayers and as an accumulated whole can do great good. This is precisely wrong. Economists have spent a century and more emphasising that behaviours of the moment by individuals are governed by what they see at any moment. We do not make decisions on abstract averages; we consider our actions based on the changing impacts of today.

So, when politicians decide to raise a higher tax rate, or lower its threshold, the taxpayer’s reactions are taken not on the global rate, but the fact that more pounds are missing from their salary docket. That change is weighed up against what future spending plans are desirable, feasible and affordable now that that money is no longer there. Work and spending patterns then adjust.

Politicians ignore this at their peril. A numeric example relating to housing might help. If you are a higher earner and have a city apartment worth £325,000 in Scotland and are saving, perhaps because you have young children, for a larger family house, you will enter the 10 percent LBTT tax bracket.

Let’s say you are trying to invest another £100,000 of new capital into your new home. To save this from spare income you have been taxed at a 12.8 percent NIC and a 40 percent marginal income tax rate before it enters your savings account, so you have already paid more than £100,000 in marginal tax to save that £100,000.

You then pay £10,000 in 10 percent LBTT, plus nearly £5,850 of lower rate LBTT. Add in moving costs and the fact that you will lose around £3,000 in yield by moving your capital into bricks and mortar (while raising your Council Tax bill, energy bills, maintenance et al in your new home) and you are facing an effective marginal tax rate on your purchase of around 20 percent. Is that a good use of £100,000 that has already cost you the same again in income tax to accrue?

The people are not stupid – they will make decisions on the basis of the change they see happening around them and the benefits to their lives of those decisions. For those “progressives” who believe that the control of economic levers allows them to control the lives of many hard-working middle-earning folk there are many lessons to be learned.

Chief among those is that there are reasons why high tax economies across the Western world are growing very slowly, why young people are feeling disenfranchised, and why the poor are not improving their lives because good jobs are unavailable. The politicians spent all our money, badly, on their Big Government state. That’s not progressive.

Less Spending >> Lower Tax >> Higher Growth >> More Jobs



'Government is the great fiction through which everybody endeavours to live at the expense of everybody else.'
Frederic Bastiat