The Smith Commission appointed in the aftermath of the Scottish independence referenced presented its report last week, representing an agreement, of sorts, between the major political parties in Scotland. Public expenditure in Scotland is about £65bn, of which the Scottish government itself spends about £37bn, mostly on health and education.  Welfare, defence and debt interest are the largest expenditure items reserved to the UK government.  At present, the Scottish government is almost entirely funded through a block grant from the UK government.         Under the Smith recommendations, nearly half of its expenditure will be raised from Scotland through income tax and an assignment of half of VAT revenues attributable to Scotland.   Even though the Scottish government will have no power to vary the rate of VAT (EU rules prohibit such variation), the revenue from both sources will depend on the performance of the Scottish economy.  Unless this outstrips the rest of the UK, the outcome will be a gradual  reduction in the effective subsidy to Scotland, which at present receives about £5bn in grant more than its population share could justify.

At present, there are three rates of income tax in Britain.  The basic rate, payable on  income above the personal allowance of £10,000:  the higher rate, which applies to income above around £40,000, and the additional rate on income over £150,000.  at present, around 2.1 million Scottish taxpayers pay the basic rate, 370,000 are liable at higher rate, and 18,000 suffer the additional rate. The Scottish government will have power to vary the rates and bands, but not the structure or personal allowance. It has had some such power since 1999;the basic rate of tax can be raised or lowered  by up to three points. The use of this power has never been seriously considered, and the mechanics of implementation were allowed to fall into disuse. 

But now the pressure to do something will be hard to resist.  You cannot have a long campaign for more devolution and then maintain policies identical to the rest of the country. Do something – but what? Lower tax rates in Scotland than the UK would call Scotland’s generous funding formula into question and  almost  every discussion of possible policy changes in Scotland, refers to social justice and involves more spending not less. The objective must be to obtain a bit more revenue and create at least the appearance of greater progressivity.

That puts the spotlight on the 18000 people who pay additional rate tax at 45%. But although for most people there is no difficulty in identifying whether or not they live and work in Scotland, there is ambiguity for some – and these people are heavily represented among the 18,000.  If only 1000 of these were to succeed in establishing that they were resident outside Scotland for tax purposes, the loss of tax base would offset any gain from a higher additional tax rate: if 2000 could do so, the move would actually cost revenue.

Raising the 40% higher rate is more rewarding. An increase to 45% might bring in £500 m or so:  enough to cover the promised reduction in air passenger duty (welcomed by the 18000, many of whom are found daily in the business lounge at Edinburgh Airport) and the end of the ‘bedroom tax’ (the cut in housing benefits for those deemed to have more accommodation than they need), But even a single point reduction in the basic rate would cost the full £500m, and the agreement precludes any increase in the personal allowance for the low paid.

There is only one way in  which the Scottish government’s new freedom to vary income tax can be exercised and that is to raise it. That will not be what the supporters of more  devolution had in mind when they asked for more powers.