Holtham: Taxes and Barnett

A few people have followed up on a post on Tom Bodden's blog about what Gerry Holtham had to say in one of the Plaid Conference meetings over the weekend. Although some good comments were made (and some not so good) I'd like to offer a different perspective. This is what he said:

On Taxes

Some 100,000 people commute across the Wales-England border each day, many of those in the North East, while some 25% of population live within 50 miles of the border.

Varying the basic rate of tax by one or two pence, adding a few hundred pounds to tax bills 'wouldn't pay the cost of the removal van' for the economical mobile to up sticks and leave.

But raising the upper rate of tax, adding £10,000 to £20,000 to the bill ... well, 'they are gone.' You would get virtually no revenue from the upper rate of income tax and if you raise it too far you would probably lose it. If you want to maximise revenue you would cut the upper rate of income tax, then if you put a penny on basic rate ... How you explain that to the Welsh electorate I don't know.

I wasn't there, so I can only comment on what he was reported as saying, but it strikes me as a truism to say that adding 1p to the basic rate of income tax paid by, say, one million people in Wales is going to bring in more money than increasing the top rate of tax for a few thousand high earners by, say, 10p in the pound. That's just simple maths. It wouldn't be right for me to speculate why he would say it ... except maybe as a counter to the assumption that raising taxes for the rich is some sort of "silver bullet" that would solve any country's financial problems at a stroke.

But tax is not just a matter of raising money, it is a matter of fairness too. I am not in favour of "squeezing the rich until the pips squeak" ... but I am all in favour of squeezing the rich until it hurts them (and I realize I've sometimes been in that category) as much as it hurts everybody else. The UK is in the scandalous situation that the poorest pay a bigger proportion of their income in taxes than the richest, as reported here and no doubt elsewhere too. That is immoral and the balance must be reversed.

Where I would take particular issue with GH is his idea that people would "up sticks and leave" if the top rate of tax was 10p higher on one side of the border than the other. Tax is complicated, and every country in the world seems to take the default position of wanting to claim tax from you whether you earned it in one country or another. But to avoid the unfairness of paying two sets of taxes, countries enter into "double tax agreements". These are all different because every country has a slightly different system, but I've no reason to doubt that the UK would want to do much the same as in its agreement with France for people who live in France but work in England (a situation that was not uncommon with commuting on Eurostar). The principle was that tax was primarily paid where it was earned, rather than where the taxpayer lived.

So, in our case, if someone had a £150,000 job in Wrecsam it would of course be a no brainer for him or her to choose to live in the country that had the lower taxes if the rules were set up that way. But—if the UK is consistent—it won't be done that way. People will be taxed according to where the money is earned. So the choice is not where to live, but to try and find another £150,000 job in England. That is something very different.

On Barnett

The Holtham Commission discovered that, in his words, Wales received 'slightly less' under the Barnett Formula than it would if it were treated in the same way as an English region, that is £300m-a-year less. If Wales received a share as an English region it should at least receive about £114 for every £100 on spent on average in England. It actually receives £112.

The Treasury, Mr Holtham reports, are 'fairly reluctant to do anything' about that. Northern Ireland receives £125, when it should get £121, while Scotland's share is £120 compared to £105. So while Wales is £300m under-funded, according to Holtham's calculations, Scotland receives £4.2bn-a-year more.

And running into a General Election where the main opponents to Labour in Scotland is the SNP, Holtham reckons: "If you think they're going to change that, forget it." The Calman Commission in Scotland suggested extending the tax-raising powers there by sharing the income tax base, allowing the Scottish government to tax at 10p in the £, or to vary the bill, and reducing its block grant from the Treasury by say £5bn in recompense. Holtham says this is attractive because it "clarifies political accountability" for the electorate. If the UK Government accepts that argument for Scotland, then it should do so for Wales, he said.

What about a resources tax, say charging more for Welsh water exported to England? The Treasury would probably respond by cutting the Welsh block accordingly, says Holtham and, at any rate, it would be slim pickings, some 5% on £600m turnover would raise £30m, and half of that would lost.

The second part of what Gerry Holtham said is to do with the Barnett formula. Specifically that Scotland does much better out of it than would be the case if a needs based formula were to be applied. Well again, that is undeniably true. But the complicating factor is that Scotland's position is a sort of compromise that in practice reflects the fact that Scotland contributes a substantial amount to the Treasury through North Sea oil and gas even though in theory it is a simple head count formula. More by luck than judgement, the two tend to balance each other out.

Of course it's right to say that Labour, in particular, would never want to open the "can of worms" for fear of increasing support for the SNP if it treated Scotland as severely as it has treated Wales over the last decade or so. But I think the question is much easier to solve if the two issues are kept strictly separate:

•  Firstly, the UK should adopt a needs based formula for funding to replace Barnett. The Holtham Commision has suggested a number of simple to apply indicators that could be used to assess need. That would result in Wales getting more and Scotland getting less, thus being fair to Wales.

•  But secondly, the UK should adopt some way of allowing Scotland to keep a proportion of the taxes raised from North Sea oil and gas. In other words what Scotland loses on one side, they would stand to gain on the other. By separating, rather than conflating, the two issues it should be possible to reach a fairer overall solution.

Of course allowing Scotland to set the level, and keep, some of the taxes which used to go directly to the Treasury is one step further towards fiscal autonomy. But a degree of fiscal autonomy is now inevitable for Scotland because Calman, set up by the three unionist parties to establish a common position between them, has recommended its minimalist proposals for further devolution. In my opinion the principle is right (it is one half of what I said above) but what is wrong with the 10p proposal as it stands is that it gives Scotland control of only one lever. Effective taxation requires a balance of taxes tailored to suit each country's unique circumstances, to promote particular policies (such as green taxes) and to create fairness (because the 10p proposal has no mechanism for varying allowances, tax bands and higher rates it could increase the gap between rich and poor).

I think Gerry Holtham has got it wrong about any taxes Wales raises on its resources. It would be pointless to automatically reduce the amount of block grant Scotland or Wales gets to the same extent that we gain from any money we raise by taxing our natural resources. Of course the Treasury, under its present political masters, would try to do it, even though it would be unfair. One of the problems the UK has is that the Treasury acts as judge in its own cause ... so we need a more objective and independent way of making such decisions. For example, in a federal UK the federal chamber (currently the House of Lords) would make such decisions in a quasi judicial way, with each of the countries of the UK having its own Parliament ... the current House of Commons becoming England's.

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However, for as long as we remain in the Union, we should expect to keep only a proportion of taxes raised in that way, or to get a proportionately, rather than strictly equal, lower block grant. The path towards fiscal autonomy must be one of increasing the proportion we keep from the taxes we set and raise, while reducing the proportion we get because of needs.

So for Scotland, for example, there would be an absolute needs based formula for assessing the block grant, but only 80% of it would be paid if 20% of the baseline taxation raised from Scotland were retained by Scotland. Scotland would of course be free to vary its taxes from that baseline in line with what it sees as its priorities. Later, the proportions could by mutual agreement be adjusted to 60%-40% ... 40%-60% ... and so on. There is also no reason why the proportions should be the same for Wales, Scotland, NI and England. Each could be negotiated separately after allowing for common expenditure such as defence, and it would of course be prudent to set aside a proportion as a common reserve or contingency.

And if any country got down to 0%-100% it would effectively be independent ... at least in fiscal terms. Though I think the political decision to be independent will have been made before then.