finance

Scottish tax system 'not fit for the future'



Scotland’s tax system is not fit for the future and needs to be completely redesigned, according to a report from think tank Reform Scotland.

The paper argues that tax revenues will need to increase in coming years to meet ongoing pressures driven by population ageing and to fund the up-front investment needed to mitigate climate change.

It said the scale of revenues required means that the “traditional tweaks” – such as to income tax or national insurance – will not be sufficient.

Report author Heather McCauley stated that the tax system will need to be completely redesigned, rather than simply tinkering with the rates of current taxes.

She said: “Scotland will face increasing pressure on its public finances in the coming years, both as a result of global issues such as climate change and the pandemic recovery, but also because of local issues such as Scotland’s demographic challenge.

“Inevitably, higher tax revenue will be required to deal with this, in order to create the right environment for optimal tax raising, debate in Scotland needs to focus as much on the way money is raised as it does on the way money is spent.

“Having studied tax systems in similarly-sized countries across the world, from New Zealand to Scandinavia, it is clear to me that the current structure of Scotland’s tax system is not fit for the future.”

McCauley continued: “In short, Scotland needs to start again. It needs a new and fairer tax system, focused more on immobile tax bases such as wealth and less on mobile ones such as employment income.

“This new system needs to be used to drive sensible and sustainable increases in overall tax revenue to cope with the challenges of the rest of the 21st century.”

The paper highlights that National Records of Scotland (NRS) projections are for Scotland’s population to begin falling in 2028 and reduce by 1.5% by 2045, while the UK population will grow by 5.8%.

In considering how to use its existing tax powers, raising new taxes or arguing for further tax devolution, Scotland needs to consider the tax system as a whole and be clear about its direction of travel, the report stated.

The climate crisis means that fossil fuels and other environmentally-damaging subsidies embedded in existing tax design need to be removed “as a matter of urgency” and all taxes – whether environmentally-focused or not – assessed for their environmental impacts.

Reform Scotland director Chris Deerin said: “Tax is among the most controversial and difficult issues in politics – most people would prefer to pay less of it, but we live in times where the demands on the public purse are growing.

“The pandemic has raised national debt levels and governments are also trying to help households through the cost-of-living crisis, with its consequences for heating bills, the weekly shop and mortgages.

“It’s very difficult to see how Scotland can meet its future commitments – whatever its constitutional status – without looking afresh at the tax system, at who and what we tax, and at what the right balance should be.”

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