Scotland needs a new tax system and higher tax revenue

This was the conclusion reached in a paper published by Reform Scotland at the end of June 2022 and written by Heather McCauley, a former senior civil servant who has worked for the UK, Scottish and New Zealand Governments.

We have published a series of articles on potential tax reform and the proposals being considered by both UK and Scottish government ministers, with a number of specific taxes and reliefs being mooted for increases, decreases and abolishment in our updates and recent Tax Matters 2022-23 guide >Read more Tax Matters 2022-23

We like to keep you to up to date and informed with what is going on and what could be coming your way as we help you to plan your financial and tax affairs.

We do appreciate that whilst we live and breathe our particular disciplines, we know they are not everyones cup of tea, so we do aim to inform you about the relevant changes and potential future developments, and to keep our pointers brief.

Much of the discussion about tax reform is often impacted by political events of the day, as we hearing at the moment with various tax cuts and offers being made day-to-day by the prospective Conservative party leadership candidates.

Taxes and politics whilst not quite fully joined at the hip are good bedfellows. Tax, pragmatism and politics whilst forming an excellent and complimentary back three on paper, can often have their creative differences when they are on the park playing together. They can all be guilty of being too eager to go for the first ball, irrespective of the movements of the other two.

This paper looks at the the most significant issues we are facing in society today and concludes that if we want to continue funding the standard of public, health, welfare, transport and leisure and recreational services most of us have come to take for granted that there will have to a fundamental rethink on how we pay and who pays, and it needs to happen very soon.

Scotland needs to rethink how tax is collected and from whom

To deal with the challenges already here as we recover from the pandemic, and the significant future challenges presented by Scotland’s ageing population and climate change, Ms McCauley is urging a complete rethink of how tax is collected and from whom and why.

She claims that Scotland needs a new and fairer tax system, focused more on immobile tax bases such as wealth and less on mobile ones such as employment income.

Central to her argument is that by 2045, Scotland’s population is forecast to be 1.5% lower while the UK’s is forecast to nearly four times that at 5.8% higher. 

More worryingly for future tax revenues under the current tax regime in Scotland and the rest of the UK, the number of people above the age of 76 will rise by around two-thirds, whilst the population of those in their 30s, 40s and 50s i.e. the majority of the working age population will be static, and the population of under 30s is forecast to fall by 16%.  

This will have significant implications for tax raising as well as for government spending.

Ms McCauley stated “Scotland will face increasing pressure on its public finances in the coming years, both as a result of global issues such as climate change and the pandemic recovery, but also because of local issues such as Scotland’s demographic challenge.

“Inevitably, higher tax revenue will be required to deal with this. In order to create the right environment for optimal tax raising, debate in Scotland needs to focus as much on the way money is raised as it does on the way money is spent.

“Having studied tax systems in similarly sized countries across the world, from New Zealand to Scandinavia, it is clear to me that the current structure of Scotland’s tax system is not fit for the future.

“In short, Scotland needs to start again. It needs a new and fairer tax system, focused more on immobile tax bases such as wealth and less on mobile ones such as employment income. 

This new system needs to be used to drive sensible and sustainable increases in overall tax revenue to cope with the challenges of the rest of the 21st century.”

>Read the full report – and introductory excerpts – Taxing Times: Why Scotland needs new, more and better taxes