The joint CIOT/IFS fringe event on fairness and the tax system in Aberdeen was particularly significant for two reasons: it marked the first time the Institute has held a fringe at the Scottish National Party (SNP) Conference and got off to a flying start with a record-breaking attendance of over 180. Attendees at the event included politicians, party delegates, CIOT and ATT members, lobbyists, people from non-governmental organisations and the media.
Entitled ‘Is the tax system fair?’, the event was chaired by the CIOT’s Scottish Technical Sub-Committee Chair, Moira Kelly, and the panel included Paul Johnson, Director of the Institute for Fiscal Studies (IFS); John Swinney MSP, the Scottish Government’s Finance Secretary and John Cullinane, the CIOT’s Tax Policy Director.
Moira Kelly commenced the event with a short introduction, asking not only whether the tax system was fair between individuals but (appropriately for an SNP conference) between the different parts of the United Kingdom.
Paul Johnson began his speech stating that taxation is ultimately about balance and trade-offs and that ‘fairness’ remains, at best, an ambiguous term to define. He reflected on a number of areas, including corporation tax and a financial transaction tax, both of which might seem to promote fairness but in reality the public may end up paying the cost of increases because businesses reduce profits to shareholders, reduce wages or raise prices in reaction.
He continued, suggesting that one aspect of fairness could be around the right to ’legitimate expectation’ – the argument that people make their plans on the basis of what they understand the tax system to do and it is arguably unfair to change the tax system in a way that undoes expectation; an example being the potential reduction of tax relief for savings for people who have already saved money. He added that taxation was poor at treating similar people similarly. For example, is it fair that an employee pays more tax than a self-employed individual who, in turn, pays more than an incorporated individual? He also spoke about the trade-off between high rates of tax and the incentives for avoidance.
Paul used a variety of charts and graphs to demonstrate what happens to income after the tax and benefits system takes hold. After the recession, many people took a significant cut in their income, absorbed falling earnings and the economy saw an increase in unemployment. Tax credits and benefits helped to cushion the blow for those adversely affected by the recession, which created ‘fairness’. Paul reminded the audience, that despite the negative rhetoric about the ‘1%’ (of top earners), it was they who were paying some 30% of income tax; ‘we are incredibly dependent on a very small amount of taxpayers for a very large amount of revenue’ he remarked.
He went on to reflect on the recent Smith Commission (on the devolution of further powers to Scotland) which talks about fairness, particularly in respect of the Barnett Formula, which Paul said would continue to determine the block grant for the foreseeable future. Many of the Smith Commission principles were individually fair but if all were implemented there would be inevitable trade-offs. For example, if income tax were devolved entirely, the Scottish Government would need to find a way to index the block grant, which would be very difficult, not least in terms of significant population differentials.
Striking a somewhat sombre tone in his closing remarks, Mr Johnson stated that inequality has not shifted in 30 years in terms of income, despite the slew of changes to taxation since then.
John Cullinane spoke about fairness from the perspective of a former partner at Deloitte and now, Tax Policy Director of CIOT. He remarked that many sole traders do find the tax system administratively burdensome and remarked that, in general, the burden of anti-avoidance falls on employers.
He touched on the various ways by which people save, of which the principal way is to purchase a home. You then pay down your debt or save for a pension while the value of the home increases and the owner-occupier finds him/herself in a strengthened financial position. He contrasted this with the position of renters.
Fairness, remarked John, was often about ‘being in the know or not’; the tax system is, after all, very complicated; it’s very hard for most people to even know where they stand with the tax system. He stated that the bureaucratic burden tends to fall disproportionately on businesses with between one and ten employees. There is, of course, a knock-on effect in terms of behaviour; if the self-employed pay less tax there is an incentive to make yourself self-employed.
John said that tax is unfair in some key aspects but that those aspects are often overlooked because people tend to look more at those taxes that have a more noticeable and immediate effect on their lives, such as income tax.
John Swinney MSP began by reminding the audience of the purpose of taxation: no tax = no public services. He said that process, predictability, transparency, dialogue and open scrutiny were ‘fundamentally’ important and had been the hallmarks of his approach to fiscal policy. He joked that those in the audience who were expecting an early announcement on the SRIT would be disappointed; this will be revealed at Budget time.
In his speech at the October 17, 2015 event, the minister criticised the Chancellor saying that he often undertook ‘limited dialogue’, and that because of lack of consultation, old laws had to be continually revisited. He said that the Scottish government had been careful to avoid this by conducting wide-ranging consultations: they speak to CIOT and others with tax expertise through the Devolved Tax Collaborative and the Tax Consultation Forum, but they also speak to representatives of the Poverty Alliance and Scottish Chambers of Commerce among other bodies in their search for a diversity of views.
He said that the Scottish government wanted to be as intolerant of tax avoidance as possible. On the GAAR, he felt that fiscal scrutiny was much greater in Scotland than UK-wide. He said that the SDLT was applied progressively. He also told the audience that post-Smith Commission; the majority of tax decisions will continue to be made by the UK government.
After the panel had delivered their speeches, the audience was invited to pose questions. The first was on incentives: why did politicians say wealthy people needed to be allowed to keep more of their money to incentivise them, but the poor were encouraged to work by taking more of their money away? The minister emphasised the need for better compliance to reduce inequality. Paul Johnson said that benefits have to be reduced or taken away once you start to earn. Reflecting on the recent changes to tax credits by the Government, ‘they took money away from people in work, thus reducing incentives to move into work’.
An audience member remarked that he was ‘dismayed’ that during the Scottish independence campaign, the IFS had not appeared impartial and also asked how much money was being lost to avoidance and evasion. Paul Johnson robustly rejected the assertion and said that the Institute was ‘100% independent’. He did not refute that Scotland was a rich nation capable of governing itself, but reminded the audience that spending in Scotland is about 20% per head higher than in the rest of the UK whilst tax revenue per head is about the same meaning independence would inevitably require ether lower spending or higher taxes. This was what IFS had drawn attention to during the referendum campaign.
John Cullinane remarked that a General Anti-Avoidance Rule would not make as significant a difference as was implied by John Swinney because the UK had introduced so many ‘bits and bobs’ to tax legislation that you had pretty much the same effect that the GAAR induced. Both John and Paul Johnson agreed that it was very difficult to put an exact figure to how much revenue was lost through avoidance/evasion but thought that international evasion was an area where progress could be made.
We look forward to returning to Scotland next year!
Words: James Knell