Monday 2 July 2018

Substance and semblance

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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