Don’t expect Rachel Reeves to learn anything from the SNP’s disastrous rule
The fact Scotland’s high earners are fleeing south should be a warning
How can we put the brakes on the ambitions of Rachel Reeves to find ways to tax us more? She has surrounded herself with advisers who back high tax, and when she gives speeches she is very careful to use coded phrases that leave the possibility of more, and higher, taxes on the table.
Fortunately we can point to Scotland as an example of how leftist economics risk sending public finances into a tailspin.
As a Scot, it gives me no pleasure to state it, but the destination of travel for Scotland’s public services must be to fall further behind the performance levels of the rest of the UK.
Why? Because more of Scotland’s highest tax contributors will join those already choosing to move their tax domicile to England, ensuring a widening gap between budgeted and actual tax revenues, which in turn will ensure diminishing funds for quality public services.
It is this lesson that Rachel Reeves and any other prospective chancellors must learn. When the top earning 10pc of UK taxpayers contribute 60pc of the revenues it is this group of people – who also happen to be the most mobile – that tax policy has to be careful to consider.
To emphasise this lesson the lowest earning 50pc of taxpayers contribute only 9.5pc of revenues.
If governments of any colour want to protect revenues they cannot afford to lose even a small number of the highest earning taxpayers.
A government study into the effects of having different tax rates in Scotland from the rest of the UK has provided valuable evidence that fears about a Scottish brain drain are indeed taking place.
Here’s how it has happened. In 2018/19 the SNP split Scotland’s basic rate tax band into three while also increasing the tax rate for higher and top rate taxpayers, creating five tax bands – in contrast to England, Wales and Northern Ireland, where there are three.
Now, in this tax year of 2024/25 the SNP has introduced a new “advanced rate” band at 45pc for those earning between £75,000 to £125,140 and increased the top rate to 48pc.
In general, the Scottish Government has uprated the lower tax bands by inflation, but by freezing the higher rate threshold at a lower level than the rest of the UK, more people earning £40k-£50k in Scotland will now pay at the higher-rate tax bracket.
Anyone having an income of more than £28,867 in Scotland now pays significantly more income tax than someone with the same earnings elsewhere in the UK. Those under it pay slightly less.
The Treasury study found the changes introduced in 2018/19 led to 1,030 higher earners moving south, losing Scotland £61m of tax receipts that year.
While the analysis could not find “reliable evidence of a change in net cross-border migration” for those paying the SNP’s new 19pc “starter rate”, or its new 21pc “intermediate rate”, it did find changes for those liable for the increased 41pc higher rate – 1p higher than England – which applied to income between £43,430 and £150,000.
As if this study is not worrying enough it is fair and reasonable to believe the reality is already far worse, for the Treasury limited its study to only 2018/19 and not the effects of the further SNP tax hikes that followed.
Add the impacts of the top rate becoming 48pc, now having lower starting levels for higher tax bands than the rest of the UK, and the introduction of an “advanced” intermediary tax band at 45pc and the carnage for tax revenues must be worse.
A Scottish taxpayer with an income of £125,000 will pay £5,221 more in income tax than in the rest of the UK – equivalent to a 7pc hit to their post-tax income.
There’s no need to take my word for it, the Scottish Government’s own Scottish Fiscal Commission estimates that “behavioural responses” will offset 90pc of the latest increase in the top rate of tax in Scotland.
For behavioural responses read tax planning by moving tax domicile or sheltering earnings. It takes an especially distorted view of the world to increase a tax rate when you have already been advised it will realise only 10pc of the potential benefit and lose previously content taxpayers to another jurisdiction.
Research showed more than a third of Scots would consider leaving Scotland if income tax rates were increased before Humza Yousaf followed through with his tax hikes, with almost 48pc of 18- to 24-year-olds saying they would think about leaving.
Where will they go? Most will simply relocate to attractive parts of England that keep them within easy reach of Scotland, where they can still work and play, but as English taxpayers.
Amusingly, it was revealed in January some 300 Scottish civil servants actually live in England to avoid high Scottish taxes. Others will look for warmer and more fiscally attractive climes.
Many may consider moving to the US, where incomes are not only much higher but you also get to keep far more of your money. The top federal income tax rate of 37pc in America cuts in at £465,000 whereas in Britain the state snatches 40pc when you earn over a measly £50,270.
Likewise Dubai is another attractive option, not least because take-home pay is double that in Britain, helped by the absence of any income tax.
This is why Ms Reeves and others like her must wake up. Low tax jurisdictions such as Dubai and countries such as Switzerland, Portugal and Italy do not hang back in advertising themselves as places to relocate to. They know the value of a small share of something big rather than a large share of nothing at all.
Despite warnings from Scottish Financial Enterprise, the Scottish Chambers of Commerce, the Institute of Directors – all representing employers who are struggling to attract or keep the best talent for their Scottish members – the SNP insists people are beating a path to work in Scotland.
The British Medical Association, the British Dental Association and even the Scottish Government-owned Prestwick Airport all disagree – complaining it is getting harder to recruit and retain skilled workers.
The SNP is cherry-picking its figures by ignoring who pays the lion’s share of taxes and relying on improved tax take thanks to higher earnings and frozen tax allowances pulling in higher revenue – but the brain drain is real and its financial impact will grow.
Rachel Reeves and other prospective chancellors must learn the lesson of talented higher earners escaping Scotland so brain drain does not infect the whole of the UK.
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