How smarter taxation would help build a fairer Scotland

 

The SNP’s Social Justice and Fairness Commission recently published a report that sets out a road map to a fairer Scotland. At Business for Scotland, we have for several years supported many of the policies that have been proposed in this report.

Indeed, we are particularly happy to see that some of the concepts concerning fairer taxation that we have for years encouraged the Scottish government to adopt have been embraced within this report.

In 2019 Business for Scotland presented a report and plan on benefit corporation tax credits to Kate Forbes, who at that time held the position as the minister for public finance and digital economy.

So after years of promoting this concept and encouraging the Scottish government to support this idea of reforming the tax system and introducing incentives, we would like to offer a bit more detail on what exactly this type of taxation system could look like.

The UK taxation system

The UK’s tax system is widely recognised as dysfunctional. It is complex, ineffective and very centralised. Furthermore, any reforms that have been introduced have failed to keep up with economic and societal changes. The UK government often cuts corporation tax, which currently sits at 19%, in an attempt to make businesses more competitive and stimulate investment.

While it is true that too much tax can lower profitability and ultimately slow down private sector investment, this notion is not relevant to the UK’s current situation. Indeed, the UK government has no reserves and instead possesses a massive sovereign debt.

Cutting taxes will not stimulate the economy and will instead directly impact front line services

Furthermore, Brexit has greatly damaged private sector investment and the Covid-19 pandemic has had, and will continue to have, a critical and long-lasting impact on the economy.

Therefore, with the UK’s current economic situation looking rather grim, it is clear that cutting taxes will not stimulate the economy and will instead directly impact front line services.

Unified taxation powers

Corporation tax cuts can work, but only as part of a collection of flexible taxation powers and policies. For taxation policy to be successful it must involve a wide range of unified tax powers, otherwise the weight of taxation will be placed too heavily on one societal group. This issue has been recognised within the Social Justice and Fairness Commission’s report, highlighting that the burden of taxation must be shifted. The Joseph Rowntree Foundation has revealed that “the total cost of poverty to the UK economy is in the region of £78bn per year”.

A more balanced approach to taxation can be achieved in an independent Scotland. Indeed, with progressive policies such as those that Business for Scotland have advocated for years and that have now been proposed in the SNP’s report, Scotland can achieve a fairer tax system.

Changing behaviour

In 2019, we suggested to the Scottish government that rather than implementing ‘something for nothing’ tax cuts, taxation should be incentivised. For example, solutions such as benefit corporation tax credits could be introduced.

In the commission’s report, it is stated that taxation should be “used to influence actions or behaviours that generate good outcomes for society.”

This complements our campaigning and the ideas that we have proposed within many of our articles and reports. For example, in a previous article we offered a hypothetical scenario in which this concept was implemented:

Imagine if Scotland decided to avoid corporation tax cuts and instead raised taxation by 1%. While some may fear a decline in competitiveness, we suggest that this could be resolved through the numerous benefits of linking corporate taxation to the business pledge.

Under this system, businesses that are willing to make positive changes to company behaviour and support a more equal society will pay less in tax

This pledge asks businesses to behave in a way that benefits the company, wider society and the economy by changing corporate behaviours. However, because there is currently no profit to be gained from signing this pledge, it is easily ignored. Therefore, we advise that corporations should be able to earn back this loss and also gain further tax credits by signing this pledge and positively changing their behaviour. This may involve targeted investment and corporate behaviours that help create a better, fairer and more prosperous Scotland.

Positive changes rewarded

Under this system, businesses that are willing to make positive changes to company behaviour and support a more equal society will pay less in tax.

This system will fund itself with its benefit/cost approach. For example, corporates that invest in environmentally sustainable practices would pay less in taxation, but their contribution to society would help efforts to tackle the climate crisis and boost Scotland’s environmental and recycling sectors.

This concept of incentivising corporate taxpayers will also improve the growing issue of tax evasion and avoidance that exists across the UK. With the obvious benefits of this system, corporates are more likely to pay their taxes and ultimately this will increase Scotland’s taxation revenues by several billion every year.

Conclusions

Firstly, it is evident that the people of Scotland and the Scottish government desire change to the current UK taxation system and this emphasises the need for the powers to do so to be devolved to the Scottish Parliament. Secondly, we welcome the Scottish government’s proposed changes to create a fairer taxation system, particularly the concept of incentivising corporate tax.

For years, Business for Scotland has promoted the idea of benefit corporation tax credits, and we are pleased to see that the road map for an independent Scotland involves this progressive concept to encourage the development of a fairer and more prosperous country.

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