Tax Rises May Force Richer Scots to Move to England: Think Tank

The Scottish Saltire flag flies next to the British Union Jack flag with the London Eye wheel seen behind in London, on July 29, 2019. Toby Melville/Reuters

Scotland’s increasingly progressive tax system may force richer residents to move across the border into England, where taxes for higher earners are lower, a think tank has warned.

Under the Scottish government’s draft budget for 2023–24, initially announced in December, taxes on the highest earners in Scotland will increase in response to rising inflation.

Changes announced as part of that budget will see higher rate taxpayers in Scotland earning £43,663 ($53,032) a year or more paying tax at 42 pence instead of 41 pence, while top earners on £125,140 or more will pay income tax at 47 pence, up from 46 pence.

The rises are being introduced as part of an ongoing policy from the ruling Scottish National Party (SNP) that seeks to reduce taxes for the lower paid, while asking wealthier citizens to contribute more to raise additional cash to help fund public services.

But in its latest report published on Feb. 9, the Institute for Fiscal Studies (IFS) think tank said that the amount of money raised will depend on behavioural changes that may result from the tax changes.

IFS research economist Tom Wernham said: “The Scottish government has used devolved income tax and benefit policy to make the system more progressive, as well as to raise more revenue to fund public services. These changes imply big increases in income for poorer households with children. But to fund their policies they are increasingly relying on taxing higher earners.

“With this group in particular, there is a risk that higher taxes will incentivise tax avoidance efforts, such as converting income into dividends—to which Scottish tax rates don’t apply—or even migrating across the border.

“Most of the additional revenue from raising the additional rate to 45p is set to be lost due to responses such as these—suggesting there is a limit to how much further this strategy can be pushed. If the Scottish government does want to raise more revenue from richer households, it may need to turn to other taxes under its control, such as council tax.”

‘A Progressive Path’

Speaking to Scottish lawmakers ahead of the vote on the budget on Feb. 2, Deputy First Minister John Swinney said, “This budget delivers the priorities of a progressive government.”

Swinney also said that, along with the Greens—who entered into an agreement with the SNP that all but guarantees the passage of the budget without the need for opposition votes—“we are working to create a progressive path for Scotland.”

The government said the budget this year focuses on the priorities of eradicating child poverty, delivering a “just transition” to net-zero, and providing sustainable public services.

When the draft budget was announced in December, Swinney insisted it would “raise around £1 billion more next year than if we had followed UK tax decisions.”

But the Scottish Fiscal Commission said that in practice the extra tax revenues are probably only about £300 million, because Scotland’s economic performance has lagged behind the rest of the UK for a long period of time.

Local authorities have hit out at what they say is a lack of funding. In a briefing, council body Cosla said its members are considering up to 7,100 job cuts over the next three years as a result of funding pressures.

The Scottish Conservatives also said the Scottish economy is underperforming compared to the rest of the UK.

The party’s shadow secretary for finance and the economy Liz Smith said that “structural weaknesses” in the Scottish economy are owing to choices made by the SNP rather than the Conservative UK government.

The additional income tax will raise less than 0.2 percent of the Scottish budget, she said, making it “very much a political choice of the SNP, rather than helping the economy.”

‘Driving Away Jobs and Talent’

The Scottish government’s tax raid on richer families has been questioned even by one of its own advisers.

Richard Marsh, who is a member of the Scottish government’s expert advisory group on economic statistics, told the Daily Mail in December that the tax hikes may raise “less revenue than expected” and would encourage more people to move to England.

He said: “People are unlikely to make short-term decisions to relocate themselves, their businesses and possibly their families. But this decision might become more likely if it becomes clearer this is a long-term policy from the Scottish government rather than a short-term fix to fill holes in Scotland’s budget.”

A spokesman for the Scottish Conservatives said: “With John Swinney’s budget increasing taxes for half a million middle-earning Scots, it is inevitable that people will be discouraged from living and working here.

“The SNP government’s own economic expert has recognised this, yet the SNP seems determined to stifle Scotland’s economic growth by driving away jobs and talent.”

But the SNP government’s Public Finance Minister Tom Arthur said, “People base their decisions on where to live and work on a range of factors, including the quality and provision of public services, not just the tax they pay.”

PA Media contributed to this report.