Ian Swanson: Welsh tax proposal could help Scots

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WHEN Scots voted back in 1997 to set up a Scottish Parliament, they also voted to give it powers over income tax – but they have never been used.

More tax powers are on their way, due to come into effect in 2016 – but again, many are sceptical about whether anything will change.

However, this week the Westminster coalition unveiled a new package of powers for the Welsh Assembly which go further than anything on offer to Scotland and look as if they could be used to help make a difference in narrowing the gap between rich and poor.

Questions are now being asked of anti-independence politicians on whether their oft-promised “more powers” in the event of a No vote will allow Scotland to catch up with the Welsh plan.

Scotland’s 1997 referendum majority in favour of tax powers – 63.5 per cent to 36.5 per cent – was not quite as big as for the parliament itself – 74.3 per cent to 25.7 per cent – but it was still pretty overwhelming, much to the surprise of some politicians, even from the Yes Yes campaign.

So why have they never been used? The answer lies at least partly in the limited nature of the powers – MSPs can only vary the basic rate of income tax up or down by a maximum of 3p in the pound. They can’t touch the higher rates, introduce new rates or change the thresholds.

In addition, even the full 3p would bring in a relatively small amount and it would cost a lot to collect.

The SNP did campaign on a Penny for Scotland campaign at the first Scottish Parliament elections in 1999, proposing that Scots forego a 1p cut in standard income tax and use the money for public investment instead. But it failed to win the backing of voters and the party soon dropped the idea.

The latest expansion of devolution, contained in the Scotland Act 2012, which grew out of the cross-party Calman Commission, will for the first require Holyrood to set a Scottish rate of income tax, whether it’s the same as the rest of the UK or higher or lower.

This works by each UK rate of income tax being reduced by 10p and the Scottish Government proposing a Scottish income tax rate to replace that – so it could set the same rate by proposing a 10p Scottish rate, giving a total 20p basic rate tax, or set a higher or lower rate.

But it would have to raise or lower all the tax rates by the same amount – there could be no cutting rates for low-income taxpayers and increasing them for the richest. If MSPs voted for the basic rate to go up from 20p to 21p in the pound, the higher rate would go up from 40p to 41p and the top rate from 45p to 46p.

The proposal for Wales, however, is to let the Assembly decide the level of Welsh income tax for each rate 

The UK Government would still set personal allowances and tax thresholds. But the Silk Commission which drew up the package made it clear: “The power to individually vary income tax rates that are applied to each band is essential to the design of the devolved income tax system in Wales.”

The proposed income tax powers for Wales – which will need a referendum before they come into effect – have been presented as handing the Welsh Assembly what is already in the pipeline for Scotland.

But increasing or lowering the rates individually gives much more scope for using the tax system to help people on low incomes – and if Holyrood had such powers, it would surely be more likely to use them.