The report published
today by the Wales
Centre for Public Policy neatly and effectively debunks many of the
over-simplistic arguments about the possibilities for increasing revenue in
Wales following the devolution of power over part of income tax. On the one hand, the proposal which the
Tories have put forward, of reducing the higher rates of tax in order to
attract high earners to come to Wales and start businesses here, would have an impact
only if significant numbers of people moved, and on the other hand, the number
of high rate taxpayers in Wales is so low that an increase in the tax rate is
unlikely to generate a lot of revenue either.
Of course, it is
true that, as the report states, “Were
the Welsh Government to change income tax rates in Wales, there would likely be
some behavioural response from Welsh taxpayers”, but what is unclear is how
much behavioural response to how great a stimulus. I have long been highly sceptical about the
idea that comparatively small changes to a single tax rate will provoke a
widespread change in behaviour, but some politicians with an axe to grind attempt
to argue either that a penny on the rate of tax would lead to a mass exodus or
that a penny off would lead to a mass inflow.
Or even both.
I simply don’t
find that credible; the financial situation of individuals is obviously
affected by income tax rates, but it is also affected by a range of other
factors, including the services which they get in exchange for paying taxes, and questions such as house prices, and that is without even mentioning the wide range of intangible
factors such as closeness of family and friends, and other attachments to a
particular area. Within the likely range
of any changes to tax rates, I think we can largely disregard any impact on
terms of population flows. What we do
need to recognise is that tinkering within a narrow range isn’t going to
produce much, if anything, by way of additional revenue, and the report delivers a very clear message on that. It might enable the taxes being raised to be
distributed differently amongst the population, and that might well be a reason
for the Welsh government to adjust tax rates – but any expectation of a significant
revenue boost is misplaced.
Where that leaves
us is exactly where many of us have long believed that the devolution of limited
powers over income tax would leave us – in a situation where the apparent ‘power’
is close to meaningless. Real power over
taxation involves the right to vary a range of taxes and includes the ability to
shift taxation from indirect to direct taxation (or indeed the other way). But then, delivering the semblance rather
than the substance of power has been the defining characteristic of devolution
from the outset.
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