Self-inflicted problems

Tweet Another aspect of the debate on devolving income tax powers to Wales was the concern expressed by both the Shadow Secretary of State and the Lib Dems that it would lead to “tax competition”.

I’m aware that the Tories genuinely seem to believe that reducing income tax by a few pennies in the pound would somehow attract hundreds or thousands of entrepreneurs to live in Wales and to set up their businesses here, although I’m not aware of any serious evidence which supports what looks like an axiomatic belief in the virtue of low taxation rather than a coherent economic policy.  And I’m aware that many business supporters of devolving various taxes to Wales support it not out of any commitment to devolution, but because they have a rather touching – and I suspect misplaced – faith that the Welsh Government would respond by cutting all these taxes.

But that is all just rhetoric.  Any government which wants to make significant cuts in some taxes would ultimately have to do one of two things – either cut expenditure or else raise other taxes to compensate.  And it is the latter of the two which exposes the real problem in any Welsh Government being able to make any creative use of the proposed powers.

‘Proper’ governments – those which really have true responsibility for raising as well as spending money – have a wide range of taxation weapons in their armoury.  They can cut some taxes and raise others – or even abolish some and invent new ones – in order to change the balance between the different types of taxation in use.  The extent to which taxation changes actually affect economic behaviour is an open question, but assuming for a moment that they do, it is precisely the ability to tailor the overall tax regime to different or changing circumstances which enables governments to influence economic policy.

The problem with all the proposals and debate currently is that only a very narrow range of taxes is proposed to be devolved; and there is only one really significant tax included in the proposal.  It is hard to see how devolving the power to vary the rate of income tax without being able to amend other taxes correspondingly can do other than create a degree of tax competition between the countries of these islands – which is part of what makes the power difficult to use.

Ultimately, it seems to me that those complaining about the dangers of tax competition are really complaining about the limitations of their own policy.