The elections for the Scottish Parliament next year will be hard for the Scottish Liberal Democrats, as I explained here. Being the fourth largest party in the Parliament has been a hard fact to swallow, if only because we are the second largest party representing Scottish seats in Westminster. We need to gain more seats in Scotland and to do this we need to offer the people of Scotland something totally different from the other parties. We also need to offer something positive and hopeful for Scotland because the narrative of painful cuts is a negative one were Scotland is either a victim of the Tories and Lib Dems in Westminster (a Labour point of view) or a victim of the Union (SNP). Neither negative narrative needs to be the correct one – the Scottish Liberal Democrats need to offer a positive and radical vision for Scotland.
I believe that we can offer a number of policy agendas that can separate the Scottish Liberal Democrats from the other parties. The first of these policy agenda concerns the tax system and level of taxes in Scotland. By offering far-reaching reform of the taxation system we can offer a radical vision for Scotland.
Wednesday’s unemployment figures revealed a sorry situation in Scotland with unemployment rising to almost 9% of the population despite it actually falling in England. This shows the fragility of the Scottish economy which in turn demonstrates how few economic leavers the Scottish Government actually has to use when trying to grow the Scottish economy. The SNP would argue that Scottish independence would free Scotland to run its own economy but recent events in Ireland and Iceland have shown what happens to small economies during international economic crisis. Given that popular opinion is against Scottish independence there needs to be a different attempt to increase the control Scotland has over its economy.
In 2006, The Steel Commission published its proposals for Scotland to gain fiscal federalism. Put simply, fiscal federalism would allow Scotland to set the rates for taxes levied in Scotland, have them collected by HMRC and then directed straight back to the Scottish Government (with some money retained for reserved expenditure like welfare payments and Defence expenditure). This would mean that Scotland would be able to set things like income tax rates, VAT, Corporation Tax and Environment Taxes.
As Caron at Caron’s Musings points out, the Calman Commission report is a more recent development which recommends a partial level of fiscal autonomy with some powers over Income Tax, Stamp Duty and Landfill Tax. I agree with Caron in that, at best, the Calman Commission should only be seen as a stepping stone to full fiscal federalism. In fact, the Steel Commission noted that full fiscal autonomy ‘exists in no other industrialised country in the world’ so we should not be seeking full fiscal autonomy even when Calman is implemented successfully.
Fiscal Federalism will give Scotland a much greater range of economic power and economic policy making ability and we should be saying to the people of Scotland that we want to have a much greater say in how the economy of Scotland operates in the wider UK economy.
Using new powers gained from Fiscal Federalism we can offer some Liberal approaches to personal taxation. Income tax allowances can be raised to ensure that the lowest earners are not paying tax and those people on welfare will see a real rise in their economic situation if they take a job. If a person earns the minimum wage working 40 hours a week then they earn £12k a year. That then makes an ideal starting point for income taxes as it is unfair to ask people to work for a minimum wage (as opposed to staying on benefits) yet start taxing them when they have earned less than what is deemed an acceptable minimum reward for their efforts.
But making work pay means people need to have a job and the unemployment rate suggests this may be a problem (that said – using jobseekersdirect I can see well over 50 available jobs that require little or no technical experience). However we need to encourage more employers to take on staff and to do that they need to have the money to do so. Businesses in Scotland pay the following taxes – Corporation Taxes, Business Rates, VAT and National Insurance.
With Business Rates in particular, we have the almost crazy situation where business are incurring major costs before even a profit is made. This may work where the economy is flying but we should be looking at every way possible to reduce the burdens on business when we are looking to them to employ people. The recent problems with the revaluation of Business Rates in Scotland have shown the gap between the reality of operating a business in Scotland and how businesses are perceived as cash cows for the state. For example, a business can find cheap accommodation that allows them to expand their services but straight away they have increased costs via Business Rates – in effect a penalty on trying to grow a business. This needs to stop if we want a successful economy.
There is a solution to the Business Rates problem. Abolish them and introduce a form of Land Value Tax (LVT) on land used by businesses (I propose introducing a Local Income Tax for residential properties – explained below). LVT is a method of raising public revenue by means of an annual tax on the rental value of land. It would replace, not add to, existing taxes. The key part here is the rental value of the land meaning the site alone, not counting any improvements. The value of buildings, crops, drainage or any other works which people have erected or carried out on each plot of land would be ignored and the valuation would be based on market evidence.
LVT makes sense for raising money for local authorities in that all land is contributing to their income. It will mean that those companies that buy land speculatively or, in the case of supermarkets to prevent competitors from building a rival store, will have to contribute economically to the local authority. All land in Scotland should be considered either available for use for business in which case it is liable for LVT, have a home built on it which means that it would be residential land (and thus potentially increase the housing supply), or be designated by the Scottish Government as a protected green space (like a National Park). Local authorities could set their own LVT based on their own economic preferences and situations. And that full economic use of all the land within a local authority means that the costs incurred by individual business will fall (except those business that hold land to prevent economic or residential activity)
LVT for business properties in Scotland makes sense for a variety of reasons all of which can be found here at the LVT Campaign website. That particular campaign wants a LVT for all land and to use the income from that to replace all taxation. I really do think that there are problems applying LVT to residential properties which then results in problems for using LVT as a replacement for all taxation. One of the problems for LVT on residential properties is that the tax is payable with no concessions, allowances or thresholds. This is exceptionally regressive and penalises those on low incomes not related to where they live, like pensioners. Another argument against LVT can actually be seen from an old argument put forward for its implementation –
‘The landlord who happens to own a plot of land on the outskirts of a great city … watches the busy population around him making the city larger, richer, more convenient. .. and all the while sits and does nothing. Roads are made … services are improved … water is brought from reservoirs one hundred miles off in the mountains and -all the while the landlord sits still … To not one of these improvements does the landlord monopolist contribute and yet by every one of them the value of his land is enhanced … At last the land becomes ripe for sale – that means the price is too tempting to be resisted any longer … In fact you may say that the unearned increment … is reaped by the land monopolist in exact proportion not to the service, but to the disservice done.’
Winston Churchill during debates on the Finance Act 1910, as quoted by Hagman and Misczynski, Windfalls for wipeouts: Land value capture and compensation, 1978
The problem with this argument is that it assumes that the landlord is not the person living there and that the landlord wants the improvements being made to actually happen. Not all people want to live in an area that will be improved to meet societal needs. For example, a retired couple could move to a small village or an area of a city that is not near a primary school but if one were built and deemed successful, thus increasing the value of the land (and ergo the rental income) then they would be penalised financially for something that was nothing to do with them, nor something that they wanted. This is regressive and shows why LVT should not be applied to residential properties.
Residential taxes need to be progressive and a local income tax is the most progressive form of residential taxation. Council Tax takes no accountability of ability to pay and since Council Tax benefit is a benefit that takes into account the amount of council tax due as well as income, many people who are asset rich, income poor find it difficult to claim. Local Income Tax is fairer on a number of other levels as well as income. The number of single person households in Scotland is rising yet Council Tax is calculated based on the premise that two people live in a residential property. The single person discount is only 25% which many people may find galling when suffering a break up of a relationship or even a bereavement. Taxes on individuals need to be based on their ability to pay.
Coming next, Let’s Be Radical! (Part 3) – Corporation Tax and a Renewable’s Based Economy