Our next item of business is evidence for our inquiry into proposals for further fiscal devolution. I welcome to the meeting Professor Iain McLean. Members have copies of Professor McLean’s written submission. We will go straight to questions from the committee. As is the fashion on this committee, I will start off and, once I have asked some opening questions, I will open up the session to colleagues around the table.
Your paper is a short but interesting one, Professor McLean. I am sure that it has given members of the committee plenty of food for thought. You list what, in your view, should and should not be devolved, but there are one or two areas in which you have caveats, and I want to explore them with you. For example, you say:
“The rest of income tax could be devolved”.
Should it be devolved?
I think that the issue makes less difference than most of the parties in the debate, on both sides, do.
As I say in my paper, what is really important is the marginal taxation principle that, at the margin, you and your colleagues have to decide between taxing and spending. You already have that ability under Calman—under the Scotland Act 2012—and it is not clear to me how much extra you would get by having the whole of income tax devolved.
Nevertheless, it would be possible to devolve the whole of income tax, although it would need to be made clear what was meant by “devolve”. If it meant devolving the right to set the bands and even who was required to pay income tax, devolving the whole of income tax would be a big deal. However, if the bands, exemptions and so on remained uniform at a UK level, it would not be a big deal.
Do you believe that Scotland should control the size of bands, who qualifies and so on?
I can see arguments both ways. Given the way the referendum vote went, Scotland remains in the UK. That means that, although having the power to set rates and bands would give this Parliament a lot more autonomy and responsibility, there would be pretty heavy transaction costs, beginning with defining not only people but sources of income as either Scottish or non-Scottish. I am perhaps torn at this point between head and heart—I am not sure which is which. At any rate, the principle of maximum autonomy means devolving control over rates and bands, but practical considerations suggest that that would be really quite difficult.
Your view differs from that of the former Prime Minister, Gordon Brown, in terms of the impact that it would have on MPs in the UK. Your submission says:
“MPs would remain responsible for the overall UK tax structure and for macroeconomic management”.
Is that the case?
Former Prime Minister Brown will have to speak for himself. As I set out in my note, my view is that, since the Westminster Parliament would remain responsible for, at an absolute minimum, the rates and bands in the rest of the UK and for those taxes that cannot be devolved, there would seem to be a role for Scottish MPs in Westminster in all circumstances, even if the whole of income tax in Scotland were to be devolved.
You have said that North Sea oil
“should be the first candidate for further tax devolution.”
Could you expand on your rationale for that? You also say that you do not think that corporation tax should be devolved. Do you think that the revenue that is raised from corporation tax vis-à-vis North Sea oil should be?
There are three issues here. The first concerns what economists call the economic rent that is derived from North Sea oil, which is possibly captured by taxes other than corporation tax. Secondly, there is corporation tax on North Sea oil. Thirdly, there is the rest of corporation tax.
From my note, members will have noticed that I am an avid disciple of Adam Smith, and I am honoured to be speaking a quarter of a mile from Panmure house, where he wrote “The Wealth of Nations”. I am pleased that the Cabinet Secretary for Finance, Employment and Sustainable Growth feels that it is right to start from Adam Smith’s principles. Smith argues that rents are the most appropriate subject for taxation—in a modern context, I would say taxation at a devolved level. The pure principle of tax policy, as laid out by Adam Smith and his successors, especially David Ricardo, leads me to suggest that rents from the North Sea should be the next tax base that the Parliament should control.
There are three easy reasons why I say that, within a continuing union, corporation tax should not be devolved: Amazon, Starbucks and Google. All members will have seen the performance of representatives of those companies before the Westminster Public Accounts Committee. Given an opportunity to avoid tax, multinational corporations will do so. Given that that is the case, if a Parliament such as this one—I know that Northern Ireland is asking for the same power—were to take control of corporation tax levels, there might be some gain in terms of the revenue that is received by this Parliament but, as sure as eggs are eggs, there would be a loss to the revenue that is received from corporation tax in the UK. As my note says, I therefore do not think that, within a continuing union, corporation tax should in general be devolved.
Corporation tax on North Sea operations is a slightly different matter, because North Sea oil is where it is—you cannot pretend that it is in Luxembourg. Therefore, devolving the whole of North Sea tax is perfectly feasible, as well as being desirable on the grounds that Adam Smith set out.
Thank you. I am really impressed by your clear, concise answers. I do like that, I must say. [Laughter.] I do not always agree with them, of course, and I am sure that members will have their own views, too.
Another area where you talk about assignment—I am trying to tease out a direct answer on this one, too—is VAT. You say:
“the proceeds of VAT in Scotland could be assigned”.
Do you believe that VAT revenues should be assigned to Scotland?
I see no reason why they should not be assigned if the result of the Smith commission, which is the context in which we are all talking, were to be some form of devo max. That could involve the assignment of VAT revenues. It would give this Parliament some limited control, but it would only be limited, because you would not control the rate or the base of VAT. You could, say, encourage retail developments in Scotland so that people spent more, if you and colleagues thought that that was the policy desideratum.
However, I think that it is more a matter of giving the Parliament revenue consistent with its spending responsibilities in order to reduce the vertical fiscal imbalance—VFI—that I open my submission by talking about.
Indeed. At the back of your submission, you give us some interesting statistical information on various countries in relation to that.
I have a final question before I open up the discussion to colleagues round the table. In talking about what taxes should be excluded, you mention capital gains tax, income tax on savings and inheritance tax. Will you give us your thoughts on those three taxes?
Yes. The reasons are more practical than principled. Members will know that there has been a lot of discussion particularly within HMRC but also between it and the UK Government and, I am sure, the Scottish Government, and the sheer physical difficulty of identifying a Scottish source of income seems to HMRC to be an insuperable objection to the devolution of income tax from savings and investments. It is not for me to say whether it really is such an objection. I expect that you have it in mind to interview officials of HMRC, and I think that it would be a question to ask them rather than me.
Maybe the cases are different and I should have written more carefully. My reason for not recommending devolution of capital gains tax is that it is a tax on capital, which can move around. As soon as the rate varied, you would see all sorts of schemes whereby companies would incorporate in Scotland and the issue that I raised with corporation tax would come up again. To speak frankly, I think that you would get pretend incorporations in whichever jurisdiction had a lower tax rate.
Given that most of what is caught by inheritance tax is property, which is where it is—it is fixed—there might, on second thoughts, be a case for devolving inheritance tax. Of course, there could be a policy issue. If this Parliament wanted to take a different line from the Parliament at Westminster as to the rate and base of inheritance tax and particularly whether the threshold should be raised, I might say “go for it”—on second thoughts, and contradicting what I say in my submission.
Excellent. I am glad to hear it.
Sorry—I am going to hand over to my colleagues, but I meant to ask for your view on the devolution of air passenger duty, which has been in the news quite a lot in the past 24 hours.
Yes, I am aware of that. For the noise that has been made about what is an extremely small tax—see my table 2—I am surprised that so much fuss is made about it in either direction.
My overriding comment is that APD is so small that people should be rather wary about listening to the vested interests. You and the public have been lobbied by airlines that would like to pay less tax. Well, that is hardly a surprise.
Airports are where they are, and therefore APD comes under the Smithian principle of taxing the least mobile base. Given the configuration of airports in the UK, I do not think that there are any huge policy issues. The Scottish Government has already said—in its white paper, I think—that it would like to reduce the rate of APD that is paid at Highlands and Islands airports, and I can see obvious policy sense in that.
Competition between Scotland and England is not a huge issue. It is 100 miles from Newcastle airport to Edinburgh airport, so it would not be a matter of severe competition between adjacent airports were the rate of APD to differ. Therefore, with all deference to the lobbyists who have been lobbying hard on the issue, I do not think that it is a particularly big issue either way.
11:00
Thank you. Colleagues round the table will now ask questions.
The assignment of VAT and possibly corporation tax would obviously have the advantage of increasing the proportion of our budget that we raise, but would there be any economic or other advantages or disadvantages from assignment?
It is hard to see any real advantages—you just get the revenue. VAT is a really big tax, so the revenue income is important to budgeting. However, do you have the policy tools that would allow you to change people’s behaviour in relation to expenditure? You might want to do that, but I think that you would want to change the coverage and the rates, and that cannot be done within an EU member state, as my written submission says. Therefore, I do not see any huge advantages from assignment, other than the one that I mentioned in my previous answer, which is that it gives you control over a higher proportion of the tax revenue that accrues in Scotland.
My next question follows on from that in a way. One problem with assigning VAT is about what would happen in a recession but, moving on to oil, the problem is not just in a recession. There would be a loss of revenues in a recession, but even under other circumstances the price of oil fluctuates considerably, as has happened this year. How would we deal with that problem? This year is a good example, because I think that oil revenue is a lot lower than the Scottish Government or the OBR anticipated. Obviously, if that was part of our revenue, it would be a significant part of the Scottish budget.
I start with what the people of Scotland want. As my written submission says, it is well established from surveys that the people of Scotland want this Parliament to control all domestic public spending. For the reasons that I set out at the start of my submission on VFI, I do not think that it is responsible for this Parliament to control spending if it does not also control taxing.
That leads me to say, for the reasons that I gave earlier, that North Sea revenues are a suitable subject for devolution and VAT is a suitable subject for assignment. If that brings the set of issues that you raise that North Sea oil is volatile and VAT is volatile in a downturn—it is one of the least volatile taxes, but it is volatile in a downturn—all that I can say is that the Scottish people should beware of what they wish for. They wish for maximum devolution, and that is the consequence of maximum devolution. If they did not want devolution, they could be protected from fluctuations in oil production. However, it seems that they want devo max.
In terms of powers for this Parliament, is it the implication that we would have to have significant borrowing powers to cover such shortfalls, or would that bring economic problems to do with issues such as interest rates or what is feasible for UK macroeconomic management?
When I gave evidence to the committee previously, I recall saying that I am a borrowing powers fundamentalist. I was maybe telling some tales out of school from the Calman independent expert group, of which I was a member and with which members will be familiar.
My view, although it was not the view taken ultimately by the IEG or by Calman, was that market discipline is the control that really works and that this Parliament should have borrowing powers. Of course, borrowing powers to cover fluctuations are one thing; borrowing in order to fund current expenditure is quite another and should not be done. Were this Parliament to do it, the markets would notice very quickly and impose penal rates. However, I am all in favour of borrowing to cover fluctuations.
You have used the term “devo max” quite a lot, and it featured very prominently in our debate yesterday, including in my speech. You obviously want to exclude certain taxes, so what do you mean by devo max?
Sorry—I was just using the popular phrase. It has been very widely undefined, if I may put it that way. Practical devo max for me would be the devolution of the list of taxes that I have set out in my submission, with the possible addition, on second thoughts, of inheritance tax.
So devo max is what you define it as.
No. If a policy maker came to me and said, “I want devo max”, I, as an academic, can only say, “What do you mean by devo max?” Then I would say, “This is a good idea, or a bad idea, or a good idea up to a point, because here is how Adam Smith’s principles of taxation apply to your proposal.”
This is my last question. Because you have given such clear and concise answers, we have a problem in coming back to you because you have already given your view so clearly and concisely.
As you have suggested, perhaps the income tax issue will dominate to an unnecessary or undesirable extent. Gordon Brown has raised the stakes on the issue, and every party seems to have a different view on it. I am probably asking you to repeat yourself, but I am genuinely interested in the issue. Professor Ronald MacDonald will probably have things to say about it next week, although we have not seen his submission.
On what Labour is proposing on income tax, I suppose that Gordon Brown has looked at it in terms of the implications at Westminster. In a way, you have touched on that. Can you think of any other economic reasons why it might be desirable to withhold some parts of income tax? Gavin McCrone suggests in his book that there could be quite good economic reasons for keeping some parts of income tax. I cannot remember his detailed arguments; I think that they were to do with emergencies arising and needing to have some income tax powers at UK level. I may be paraphrasing him wrongly.
Do you think that there are any sound economic arguments for dividing income tax in that way, or do you think that, at the end of the day, it is down to a judgment about the consequences of it for the position of Scottish MPs at Westminster?
I think that it is primarily the latter. I did not dwell on that point because it seemed not to be germane to my evidence to this committee. If asked to give evidence to William Hague’s committee, which I have not been, I would talk about that at considerable length—or at whatever length seemed appropriate.
As to the economic advantages of holding back some proportion of income tax, I confess that I have not read Gavin McCrone’s new book. I should have done and I wish that I had. He is very well able and qualified to speak for himself, and I hope that the committee will consider asking him to give evidence, if it has not done so already. I would guess that the sorts of reasons that he and others who make this point have in mind are reasons to do with sudden shocks. After all, a sudden plunge in the oil price might be the most likely shock that Scotland could be exposed to.
Sudden shocks can be damped within a union by redistribution. Redistribution is difficult if this Parliament controls almost every tax and every tax base. That takes me back to repeating myself that the Scottish people should beware of what they wish for, but we know what the Scottish people wish for. Maybe this Parliament should say, “Careful, people of Scotland, because devolving the maximum amount of tax possible means less room for cushioning shocks.”
To summarise what you were saying on the specific issue of the effect at Westminster of devolving income tax entirely to this Parliament, is it your view that the devolution of income tax would not in itself make any significant difference, whatever the pros and cons of different arguments about the position of Scottish MPs at Westminster?
For sure it will make a difference. It might raise questions about the number of Scottish MPs at Westminster, and that is not a matter for me as a witness to the committee, nor for this Parliament, although I can see that it could be an issue.
The nitty-gritty will be around the question of whether devolution of income tax means devolving control over rates and bases, and that cuts both ways. If the rates and bases are not devolved, there really does have to be a Scottish presence at Westminster, because there are lots of highly political questions about controlling the level of the personal allowance or deciding whether there should be a 50p top rate. If I were living in Scotland, I would want to be represented by an MP who could help to make my views on those matters known.
If, on the other hand, the devolution was so extensive that this Parliament had the power to set different rates and bases to those applying in England, it would bring up a classic West Lothian question about whether Scottish MPs would be allowed or advised to vote on English rates and bases. However, even in that case, if the level of personal allowance was set in England, it would quite severely constrain the freedom of this Parliament to set a different rate of personal allowance, to avoid gaming behaviour. As we all know, in matters of income tax it is the rich who are in the best position to game; people will suddenly turn out to have a house in Scotland if it benefits their tax position, or in England if that works better.
Members will be aware that I am thinking on my feet, but I think that in either case there remains an argument for having Scottish MPs in Westminster.
I return to the issue that the convener raised about the part of Professor McLean’s paper in which he suggests that control of North Sea oil should be the first candidate for further tax devolution. That tallies with evidence given by the Chartered Institute of Taxation and by chartered accountants in England and Wales to the Treasury Select Committee yesterday. My question is not meant facetiously; it is quite genuine. I presume that you do not literally mean the North Sea, but that we should control taxation of resources that are within Scottish jurisdiction.
I did mean that, yes. I apologise for the shorthand.
That is okay, but it does beget a more serious question. Control of tax is all well and good, but should we also control the licensing regime for the extraction of such resources?
It would make sense for the one to go with the other; as part of the overriding picture, tax and spend responsibilities should go together. In practice, it would be hard to unwind any promises given by the UK Government to companies exploring in the North Sea.
Or elsewhere.
I beg your pardon.
Or elsewhere.
Yes, indeed. West of Shetland, or wherever, the same issues apply.
Should this Parliament want to give new incentives to encourage exploration—I do not know whether that was behind the question—I would be fine with that. Of course, new incentives mean less tax receipts, at least in the short run.
I was also thinking that there might be areas that the UK Government has decided should not thus far be utilised. The Scottish Government might take the view that they should continue not to be utilised, or it might decide that they should be. I am thinking specifically about the basis on which extraction of resources is currently licensed; perhaps the Scottish Parliament would say that we do not want to decide on those arrangements, or perhaps we would say that we do. Apparently, there are deposits in the Firth of Clyde that have not been utilised. We might decide that that is okay, or we might decide that actually we would like to utilise them.
11:15
I am out of my comfort zone, colleagues, because that gets into the nitty-gritty of oil taxation. Although I do not know the answer, I know a man who does: Professor Kemp of the University of Aberdeen, who is well known to all of you, would be the right person to pose such questions to.
I would be surprised if there is any source in relation to which there has been a policy decision, by any Government, not to exploit, but I am outside my area of knowledge.
Okay—that is fair enough.
I turn to VAT. This might be a moot point but, if there were not a restriction on setting differential VAT rates within an EU member state, would you recommend that that should be devolved?
If there were not a restriction, the issues with VAT would become the same as those with excise tax on tobacco, alcohol, petrol and so on. I do not mention those issues in my submission, although I mention them in other stuff that I have written. Although the issue is mitigated by the thinly populated border between Scotland and England, even if rates vary by only a penny or two, some people will drive 100 miles from Glasgow to Carlisle or 150 miles from Manchester to Gretna to profit from the lower rate.
From one perspective, that is all very fine. If this Parliament is the one to gain the revenue from having a lower excise, say, it might not worry too much about the fact that tax receipts in the UK as a whole have gone down.
I accept that this is about excises more than it is about taxation, but it would be more difficult were the Parliament to levy higher excise on behaviour that it would like to curtail, such as smoking, drinking or driving too much. Instead of there being an enormous hypermarket at Gretna, there would be an enormous hypermarket at Carlisle, and people would drive from Glasgow to take advantage of the lower rates.
Were VAT allowed to vary, the same sort of thing would apply times five or 10, because VAT is five or 10 times bigger than excises.
It is all hypothetical anyway.
On the idea of assignment, I suppose that the rationale is that the Scottish Parliament or the Scottish Government could try to influence behaviour that could increase revenue. How effectively equipped are we to do that?
We have to be very pedantic here. The Parliament may increase rates, which may or may not increase revenue. I am aware of discussion about imposing a minimum unit price on alcohol or other devices to encourage prosocial behaviour. It is a fact about the world that the Parliament’s power to control behaviour by such means is not unlimited, because people will go somewhere where the tax rate is less to get their spirits and cigarettes. That is a fact about the world, which the Parliament cannot really do anything about.
If VAT revenue were assigned, should the Parliament and the Scottish Government have some form of statutory right to be consulted on the rate, albeit that they would not be responsible for setting it?
That might be a sensible thing to ask for, yes.
That was a very concise answer—thank you for it.
Still on the implications of further financial powers and the role of Revenue Scotland, you suggest that it could make sense for other taxes to continue to be collected by HMRC. Is there not a slight concern that HMRC is not within the legislative competence of the Parliament? If we had taxes that we were responsible for legislating for but we could not legislate for HMRC, would there not be a slight concern there, or would you suggest that HMRC should become a shared legislative competence? There might be difficulties there. Would it not be easier to go back to what I think everyone has thought would happen: that the role of Revenue Scotland should be enhanced to deal with the further devolution of taxes?
My answer on that was driven only by what academics call barefoot empiricism—I looked for Revenue Scotland’s website and found that it is not there yet. If it does not even have a website yet and it has a few hundred million pounds of taxes coming its way very soon, I do not think that it is quite ready to deal with £10 billion of income tax receipts. Therefore, my suggestion is a purely practical one.
Agency agreements between HMRC and Revenue Scotland would be very easy to reach. I would not think that they would require parliamentary authority but, if they did, the Sewel motion procedure would be very easy to apply.
As a committee, we have a scrutiny role and we would probably find it easier to scrutinise Revenue Scotland, which, after all, is a creature of statute of the Scottish Parliament, than HMRC, which is not. It is interesting that you could be taken as saying that the answer is that we just need to enhance the responsibility of Revenue Scotland. Is that still a possibility?
That is up to this Parliament. The normal presumption would be that the Parliament that levies a tax also collects it, but—I say this without taking any position on the union—there are economies of scale in tax collection, most especially for the big ones: income tax, national insurance and VAT.
I wonder whether you could help me to get a better understanding of the technicalities of the block grant adjustment. Under the Calman proposals and the Scotland Act 2012, two taxes have come to Scotland. That has been very uncontroversial, because the taxes in question are not very big and are limited in scope. However, the devil has been in the detail. It has been extremely difficult to get the block grant adjustment agreed, and the Cabinet Secretary for Finance, Employment and Sustainable Growth has made us aware of his frustration about that.
If responsibility for more taxes were to come to Scotland, which would involve more adjustments, how much more technical would the process become? How problematic would that be? Would we have to have a standard adjustment for all the taxes, or would each tax that was transferred to Scotland require a different set of adjustments?
That speaks to one of the frustrations that I know that many people have, which is that, currently, how the Barnett formula works is entirely in the hands of HM Treasury; it is not a statutory matter. If the Scottish Parliament or the Scottish Government does not like what HM Treasury is doing, there are—to my knowledge—no mechanisms to pursue that, except perhaps the joint ministerial committee.
Therefore, I would prefer there to be some neutral ring holder. I have written about that elsewhere, and I commend to the committee the example of the Commonwealth Grants Commission in Australia, which is not controlled by what is called the Commonwealth Government or by the states, although it is licensed by all nine of those bodies to make allocations. If the future of the block grant remains in question, it would be desirable for it to be controlled by a public body of some sort that was not an agency of one of the parties to the argument—in other words, a body that was brought under the joint control of, say, the Scottish, Northern Irish, Welsh and UK Parliaments. I can foresee that very quickly the question would emerge whether each of the Parliaments would have an equal number of votes or whether the UK Parliament would have more votes than the others, and I do not have an immediate answer to that question.
We have considered the Welsh Assembly’s perspective on Barnett. Do you have sympathy with its position?
I have sympathy with its position as regards Wales, which is very clear. Its position is that Wales does disproportionately badly out of Barnett, given how poor Wales is. The Welsh Assembly has made it quite clear that it would prefer a needs-based assessment.
As members will know, that issue was aired during the Calman process. The Commission on Scottish Devolution and the independent expert group that advised it did not say that they wanted a needs-based assessment to replace Barnett. As everyone in the room knows, on the basis of a plausible needs-based assessment, Scotland’s block grant would be less than it is under the present arrangement.
Do you think that if we continue down this road it is still conceivable for Barnett to remain unchanged? Can people who argue for devo max also, with any justification, ring alarm bells about its implications for Barnett?
There are two almost balanced fallacies on opposite sides. First, there is the fallacy made by people who—and I am not going to be partisan here—appear in Scotland very shortly before a referendum to make a vow that contains two inconsistent promises: first, that this Parliament’s fiscal autonomy will be increased; and secondly, that Barnett will be protected. At some level, those promises are incompatible, and you would need to interrogate the people who made that vow to find out which one they really meant. On the other hand, and to be fair in my condemnation all round, I think that it is inconsistent to demand maximum possible devolution of taxation, including taxation of, for instance, North Sea oil receipts, while asking for protection from the consequences of that devolution by having Barnett-type transfers.
That is a fair answer. Thank you very much.
I want to pursue something that I do not think has been mentioned so far. In a bullet point in the executive summary to your submission, you refer to “unfavourable demographics” in the event of Scotland wanting to have full control over social protection. What do you mean by that phrase?
I mean the unfavourable post-65 demographics that have been much discussed over the past six months. The pension-age population as a proportion of the overall population is somewhat higher in Scotland, and the projections are somewhat less favourable for Scotland than for the UK as a whole. I also note that morbidity and chronic disease are worse in Scotland. They are similar policy issues; however, you can do something about disease in Scotland, but you cannot do anything—at least in the short term—about the age structure of the Scottish population. If you take on responsibility for social protection, you take on at the margin the responsibility for finding the money to pay for it. That is a policy choice, and it is not for the likes of me to say whether the Parliament should make it.
So are we saying that at the moment Scotland spends proportionately less on social protection than the rest of the UK but that in future there is a risk of that switching?
No, I am not saying that exactly. As you all know, social protection is predominantly reserved, which means that the risk—or, if you will, the shock—of Scotland’s having an older population and a population in worse health is absorbed at UK level. If the function is devolved, Scotland will have to meet all of that out of its own resources.
Presumably, though, it could work both ways. Generally our people are dying earlier—certainly my constituents are—and there is a risk that if they lived longer it would cost us more. On the other hand, there is also extreme ill health, and there is the opportunity to improve that situation and benefit from that. Can arguments not be made on both sides?
Oh, yes. I do not think that any politician is going to say, “Come to Scotland and die earlier,” but I realise that that is not the point that you are making.
You have only to travel on a railway line through Glasgow and you die earlier.
You are in favour of devolving control of North Sea oil, because it is linked to the issue of rent, which I will come back to in a moment. The usual argument against that is volatility, but I presume, again, that volatility can work both ways. If the projections for future oil revenues are lower, we might gain more from having the revenues, but if the agreed projections were higher, there is a risk that we would lose out. Again, it could work either way and it would really depend on how the adjustment was made.
11:30
It certainly could work either way. If North Sea oil receipts were devolved and went up, this Parliament and the people of Scotland would be in a good place. I do not think that there would be any question of adjustment, but we would have to see what formula succeeded Barnett. If any such formula were based on needs, an upsurge in oil revenue would be, on the face of it, irrelevant. Also, formula funding would become a very small part of the finance available to this Parliament were there to be any form of devo max—as defined not by me but by the politicians who agreed what it meant, perhaps at the end of the Smith process.
I am interested in your argument, based on Adam Smith, that the rent side is the one that we should emphasise. In this paper and elsewhere, we have tended to look at existing taxes and who controls them. We have perhaps not looked so much at possible new taxes.
First, would you argue that we should move all taxes towards the rent end? Something like land value tax has been suggested over the years. Is that something that we could or should be able to introduce in Scotland rather than just moving around existing taxes?
I am laughing slightly because to be in favour of land value tax is taken as a sign of madness in some quarters. In fact, the arguments for land value tax are perfectly sane and were made by Adam Smith and by David Ricardo. Land value tax has been taken over by some people who might be regarded as rather cranky but the underlying arguments are good.
Were this Parliament to move towards a land value tax, I assume that it would be substituting that for council tax and business rates, which are the existing taxes on land and property. Speaking only as somebody who is interested in tax structure, I would be delighted if this Parliament did that because I think that the underlying economic arguments for a land value tax are sound. The Parliament has already come under immense pressure from interests and lobbyists in this area but I am a huge fan of the work of Andy Wightman in this area, which will be known to all of you. I suggest that you ask him about that matter.
You have given us a lot of suggestions for future witnesses, I have to say.
You said that if there is more devolution, there is less room for cushioning the shocks. I guess that that would be true if the shock was external to the UK but if it was an internal shock coming from Westminster, presumably more devolution would give more room for cushioning?
You are thinking of tax policies?
Welfare reform—cuts to welfare.
Okay—so you are thinking about the currently controversial bedroom tax and so on. It is true that there would be more room for cushioning if this Parliament decided that it did not want to implement a welfare tax that it did not like. Of course, if that resulted in less revenue, it would have to find the revenue somewhere else or adjust spending policies. However, that is the whole point of being a fiscally responsible Parliament, which is what underlies all my remarks.
Finally, HMRC and Revenue Scotland have already been mentioned. When we put out the bids for the previous taxes, it seemed that we could do it more cheaply than HMRC could. That makes me wonder whether there would be an option to simplify the tax system, although you said that there are economies of scale. If we could have control of all income tax and national insurance, we could put the two together and have a simpler system that might actually cost less to run.
That is possible, because it is easier to run a tax system in a country of 5 million than in a country of 60 million. On the other hand, we are in the notorious territory of computer systems, Government and big information technology failures. My note of caution is that big IT failures are perfectly possible in a country of 5 million—we all know that they are possible in a country of 60 million. The option is worth exploring, but I would not put my shirt on it.
LBTT is, in effect, a completely new tax, and Revenue Scotland will be starting with it. If it was income tax, we would be starting from where we are. Presumably, one option—rather than just transferring everything to Revenue Scotland—is to split HMRC and to take a chunk of HMRC, which would look after income tax, for example, and that would become whatever we called it in Scotland. Is that an option?
You should take advice from the revenue authorities. My understanding is that that already happens, given that HMRC organises its tax-raising function by tax rather than by region. Some people collect income tax and others collect stamp duty land tax, and so on.
I do not want to detain the committee with details, but I believe that the arrangement goes all the way back to Robert Peel in 1842, when income tax was introduced, and before that to William Pitt in 1799, I think. He wanted to ensure that there was a different administration for each tax on the principle, in those days, that a gentleman should not be interrogated by a tax collector on the whole set of his income.
I think—although you should take evidence from the tax authorities—that HMRC is already organised functionally rather than regionally.
Professor McLean, can you briefly talk us through table 1 in your submission? It refers to the vertical fiscal imbalance, which I believe is one of the priorities that you want to deal with. I want to get my head round the figures. The UK figures, which are helpfully in red—at least in my copy—are 36.4 per cent for central revenue and 4.2 per cent for subnational revenue. For Spain, in the line above that, the figures are 22.7 per cent and 12.2 per cent respectively. However, the vertical fiscal imbalance figures for Spain and the UK are fairly similar. Can you talk us through the way in which those figures come out?
Yes, with pleasure. There are different ways of measuring VFI—for this purpose, I used the simplest possible method, which is in effect to subtract column 2 from column 4. For the UK that is 14.5 per cent minus 4.2 per cent, which gives 10.3 per cent. In the row above, for Spain, it is 22.6 per cent minus 12.2 per cent, which rounds up—there is a slight rounding error there—to 10.5 per cent.
One problem with regard to the year from which those data were taken—I took that year, 2009, because I was working in connection with Calman at the time—was the depth of the financial crisis in all OECD states. You will notice that, in every single case, spending exceeds revenue. Every country in the table was in deficit in that particular year. However, that does not affect the general principle that one way to measure VFI is simply to calculate the difference. There are more complicated ways, but I went for the simplest.
What drives the relatively high UK figure is the fact that subnational revenue is such a low proportion of revenue collection. In the UK, essentially only council tax and business rates are levied by bodies lower than the UK Parliament. That is changing in Scotland, but Scotland is only 10 per cent of the UK, and the changes that we have discussed in this session would not in themselves change the number all that much.
That is helpful—I am grateful for that answer.
I will pick up on one or two other small points. In your paper you mentioned some of the areas that you would not devolve, and you gave explanations for all those areas except for inheritance tax. Given what you have said today, you might have a slightly different view. However, for the sake of completeness, what was your initial reason for saying that inheritance tax would not be a candidate for devolution?
I was once again applying the pure gospel of Adam Smith and saying that inheritance tax is a tax on capital. My reason for changing my mind in real time while sitting before the committee is that the assets that a person who has died typically owns consist mostly of a house. A house is where it is, so it is not subject to evasion.
That is for the moderately rich; there is a whole separate issue with regard to inheritance tax avoidance and evasion by the extremely rich. I have views on that as a citizen, but I did not come here primed to give them. It is an area that I would hope that this Parliament and the Westminster Parliament would look at.
I will ask my last question with a slight twinkle in my eye. You have spoken about the devolution of taxation for North Sea oil. If that were to happen, there would obviously be a block grant adjustment, as we have seen with LBTT and landfill tax. If there were to be such an adjustment and oil taxes were to be devolved, do you think that the Scottish Government would stand by the oil revenue projections that it came out with a couple of months ago?
That is a question on which I am damned if I say yes and damned if I say no. The Scottish Government can make whatever projections it wishes, but the revenue will be whatever it is and any forecasting body needs to make projections to do sensible planning of future spending commitments. That is as far as I dare go, as I am aware that members round the table will hold opposite opinions on that question.
I am grateful.
A couple of points arise from some of the things that you said, Professor McLean. One that comes up often concerns variations in taxes across the border. It is suggested that if, for example, we were to tax cigarettes really highly, there would be a massive warehouse in Cumbria or in Scotland, depending on the variation. Is that really a concern elsewhere? The border of every other country in Europe is crossable—we can cross from Northern Ireland to southern Ireland and so on. That does not stop variations in tax on wine, for example. People in England can and do nip across the Channel and come back with crates of wine. Is it seriously a consideration?
It is a consideration for sure but, as I said earlier, it is one that the Parliament cannot do much about. Some people will jump in their cars and drive 100 miles for a few pence off something and others will not. Scotland is relatively lucky because it happens to have a thinly populated border. The issues are more difficult for Wales and much more difficult for Northern Ireland.
That would limit the freedom of the Parliament to set tobacco taxes, for instance, but it would not take it away. The Parliament would still have the freedom to set them. It is interesting that the data from “Government Expenditure and Revenue in Scotland”, which I recycled in table 2, shows that tobacco duties come joint second after the aggregates levy in the figures for Scottish revenue as a percentage of UK revenue. That says that there is more revenue from tobacco duties in Scotland per head than there is in the rest of the UK. Were tobacco duties to vary, some people would drive to Carlisle for their smokes, of course, but not everybody would.
The other question that I have concerns the costs of devolving taxes. During the pre-referendum debate, those were cited as unthinkable but, to my uncertain knowledge, they were not mentioned at all when it came to the vow. Do you have a view about that?
The costs of setting up a tax administration were an area of controversy before the referendum. Indeed, I had some involvement in that because my academic colleague Patrick Dunleavy from the London School of Economics produced some numbers that, I have to say, were unrealistic and misleading. When we drilled down into his numbers, it turned out that his estimates of the cost of setting up an independent Government were actually the same as everybody else’s and it was just that he had used a label that he called transition costs.
If the vote had been yes, those costs would have been inevitable. Given that the vote was no, the costs are, to some extent, optional. Parliament can decide whether to expand the capacities of Revenue Scotland to cover every tax or to have an agency arrangement with Her Majesty’s Revenue and Customs. I do not know which would be cheaper. The opposite points have been made in the discussion that, on the one hand, there are economies of scale and, on the other, taxing 5 million people might be less expensive per head than taxing 60 million people. I do not know the answer to those questions. They are weighty matters that would have to be explored further.
11:45
Finally, on your support for a land value tax, I hear what you say about people who want to raise the issue of a land value tax being seen as mad, but do you agree that it really should be debated and seriously considered in Scotland and that it could, in fact, be quite a large revenue earner and, indeed, fairer than either the council tax or the business rates that we currently collect?
I do think that, but mostly as a citizen rather than as an academic—I must stress that. On the fairness point, to repeat myself, there is a very strong argument, which was made by Smith and Ricardo, that land should be taxed in proportion to its value and a land value tax is the least distorting of taxes. On a personal note, when I was about 15, I picked up Tom Johnston’s “Our Scots Noble Families”, which was first published in 1909. I think that it was the greatest radical manifesto of its era in Scotland, but when I commend that, I am speaking as a citizen and not as an academic, which members will already know.
So that I am clear about the difference, what if you were speaking as an academic?
Speaking as a citizen, if I had a vote in Scotland, I would vote for whichever party made promises to introduce land value tax. Speaking as an academic, I have to say, “Here are the advantages and here are the disadvantages.” An obvious disadvantage of any tax change is that there would be losers, and you would hear from them for sure; indeed, I think that you are already hearing from the losers. With any major tax change of that sort, we hear much more from the losers than from the winners. For what it is worth, that would be my advice as an academic.
Thank you very much, Professor McLean.
Funnily enough, I was just saying exactly the same to Jim Johnston. The issue is not just that we hear more from the losers; it also depends on how many losers there are relative to the number of winners and the extent to which they lose out.
The committee’s questions have concluded, but there are one or two things that I want to round up.
Table 2 in your submission is entitled “Current revenue, Scotland 2012-13, including geographical share of North Sea, in descending order by tax”. It is, of course, interesting that gross operating surplus is fourth highest in that table and Scotland has a disproportionate share of that. Can you give us a wee bit of detail about what that is specifically and why Scotland has a very high share relative to its population?
Yes, convener. I noticed that, as well. I have simply recycled numbers that your Government produced in the GERS series, so I do not know. It would be easier for you to ask the GERS team to come and give evidence. However, I assume—I think that this is the assumption behind your question, too—that that arises because there are functions of Government that are public in Scotland and private in England. Water comes to mind. I do not know whether that is the correct answer; I advise you to check with the GERS team.
Yes. To be honest, the issue was not so much the content; it was more the proportion. However, that is a reasonably good answer.
We have talked about the costs of setting up an independent Scottish tax system or enhancing the tax system here through Revenue Scotland or whatever and the differences in costs. Before the referendum, the Institute for Fiscal Studies said that, if we start a new tax system more or less from scratch, we can obviously get rid of many of the horrendous anomalies that exist in the UK system. I—and, I am sure, all MSPs—got a thing through that said that some £34 billion remained uncollected from the 2011-12 financial year. That is 6.8 per cent of the UK’s tax take. We are not talking about money that HMRC has said people do not have to pay because of some kind of avoidance arrangement. That money should have been collected. That uncollected £34 billion is more or less equivalent to the entire Scottish budget, of course.
If such tax powers were devolved to Scotland, given that we would have not quite but almost a clean sheet of paper, would that allow us to make a much more efficient tax-collecting system? You hinted that running a tax system for 5 million people might be easier than doing so for 60 million people.
There are arguments on both sides. It might be easier to run a tax system for 5 million people, and it might be easier to chase tax avoiders. On the other hand, the very fact that new differences between Scottish and rest-of-the-UK taxation would be created unfortunately and inevitably in itself would create more opportunities for tax avoidance.
There is a notorious historical example from Northern Ireland that has been on the public record for a long time. The Vestey Group meat corporation took advantage of a tiny provision of Northern Ireland tax law that nobody else had noticed to almost exempt the company from tax, in effect, although it had no domicile in Northern Ireland. One would be balancing the greater ease in going after avoiders in a country of 5 million than in a country of 60 million against the new opportunities for avoidance that any variation in tax rates automatically creates.
Would there be more opportunities? If there was a principles-based system as opposed to a rules-based system, surely that would reduce the likelihood of avoidance, because it would be a matter of what was meant through the principle rather than the specific wording of legislation that has tied the UK down in 300 different tax-avoidance rules that it has had to specifically develop.
I can only perhaps cynically refer to the title of a book by my colleague Andy Wightman, whom I mentioned earlier: “The Poor Had No Lawyers”. The converse of that is that the rich do have lawyers.
I will leave it there, convener.
Okay. Thank you very much for that.
Given that we are now in the winding-up session, are there are any further points that you wish to make in addition to anything that you have said? Have any light bulbs switched on in the past hour or so, for example, along with the inheritance tax one?
I think that we have covered everything that I came here expecting and hoping to cover. Thank you.
Thank you very much. The committee certainly appreciates your forthright answers to our questions.
11:51 Meeting continued in private until 12:19.
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Draft Budget Scrutiny 2015-16