The joke's on John Swinney as Laffer Curve sees Scotland raise less money from higher taxes – Brian Monteith
Malcolm Offord was mocked when he advocated tax cuts to reverse Scotland’s economic decline
John Swinney was wrong, and Scottish Reform leader Malcolm Offord was right – but the First Minister need not worry, for every Scottish taxpayer is going to have to pay for his error. I refer to a new report by Tax Policy Associates that shows the SNP’s creation of a top rate of income tax in Scotland at 48 per cent may have cost Scotland around £22 million in lost revenues in its first year.
The reason is simple, higher taxes do not always result in higher revenues, because taxpayers change their behaviour to avoid paying more tax; they work shorter hours, they find more efficient ways to manage their tax liabilities (such as investing more in their pensions) – and some even move out of their Scottish tax residency to England or abroad. The result is that although the tax rate may be higher, there can be fewer taxpayers than there would otherwise have been or a smaller total taxable income liability.
We, therefore, are living through a real-time example of the Laffer Curve, in which raising taxes has led to a fall in revenues but cutting taxes would change behaviour so that the revenues would increase. This is exactly the point Offord was making during the run-up to the Holyrood elections held back in May.
Scotland’s complicated tax code
Oh, how the other political leaders laughed and ridiculed Offord as if he was some naïve innocent out of his depth – and no one laughed louder than Swinney who had, in the past, been in charge of Scotland’s finances and supposedly knew all there was to know. Well, they are not laughing now – for the ramifications are not just expensive but profound – and Offord would be entitled to laugh at them.
His idea was on point. Cutting taxes can generate greater revenues than increasing them because lower taxes encourage greater economic activity while higher taxes depress it – and so the revenues can go above what a higher tax might have brought it. It’s named the Laffer Curve after US economist Dr Arthur Laffer, who first observed it.
The SNP first created a top rate of income tax of 46 per cent – one percentage point above the UK’s rate of 45 per cent – back in 2017. It then raised the rate to 47 per cent in 2023 and 48 per cent in 2024.
As if the UK tax code is not complicated enough, the SNP has made Scotland’s even more complex with the highest income tax rates in the UK and six income tax bands rather than the three in England.
In the grand scheme of things, it’s arguable that £22m is not a huge amount in a total tax revenue of around £19 billion or spending of £52bn. Unfortunately, the ramifications of the SNP’s tax policy go further.
Discouraging immigration
For a start, the report only covers the probable impact of Scotland’s top rate of 48 per cent against England’s higher rate of 45 per cent. It does not establish the data for the impact of Scotland’s own higher rate of 42 per cent kicking in earlier in Scotland at £43,633 – against England’s 40 per cent at £50,271. Nor does it consider Scotland’s unique ‘advanced rate’ of 45 per cent starting at £75,001 before the 48 per cent rate starts at £125,401.
The impact is likely to be similarly damaging to Scotland’s dynamic and highly productive tax-creating workers, be they the self-employed, entrepreneurs or highly skilled professionals management.
Nor does the report capture the wider cost of discouraging inward migration of talented people our businesses can’t source domestically. Then there’s the encouragement to move income into legitimate tax shelters (such as pensions) or the reduced entrepreneurial activity that pays better elsewhere.
One doesn’t have to be a millionaire before thinking of changing one’s tax exposure by abandoning Scotland for warmer climes. I know of teachers who have already left Scotland to work in English-speaking schools in the likes of Dubai, South Korea or communist China.
The job security is better, the discipline is safer and the teaching is more rewarding, while the salaries are higher as well as the taxes being lower. Scottish politicians really need to get out more, not just beyond Holyrood and into the private sector, but also to experience how different life can be in lands where faster growing economies exist.
And it doesn’t have to be Asian countries or high-tech hotspots; living standards and real disposable income have grown almost twice as much in the US as in the EU since 2000.
The wider cost to the economy
We know people are leaving Scotland but the impact is not just on tax revenues, these people still buy new cars, they still renovate properties to their taste – they just don’t go to a Scottish car dealership or engage Scottish trades to revamp a hidden gem of a property.
Instead they do it in another tax jurisdiction where jobs are made and taxes are paid. We also know that previous Scottish tax divergence has reduced net migration into Scotland among higher earners, with larger responses in the highest incomes.
The report cannot quantify these losses but they mean we are all the poorer. The bill for lost revenues will be far, far larger than £22m once the other tax bands are included – and greater still when the indirect impacts on the economy are considered. Swinney’s lost tax revenues have to be found somewhere and it inevitably means we all pay more.
Malcolm Offord knew this, which is why he advocated tax cuts to begin to reverse the economic decline the country is suffering under this SNP administration.
Brian Monteith is a former member of the Scottish and European parliaments and senior advisor to the Tax Reform Council
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