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MSPs questions to new Fiscal Commission go to heart of Scottish Parliament debate over tax

First Minister Nicola Sturgeon and Finance Secretary Derek Mackay Photo: PA

Holyrood's finance and constitution committee spent a lot of time today - a lot - talking about taxable income elasticities.

I'd be deceiving you if I said it was a riveting watch. Full of slick soundbites and rhetorical flourishes it was not.

It was pretty damn technical as MSPs sought to get the measure of the witnesses from the newly created Scottish Fiscal Commission.

The Commission was set up when Holyrood was given more extensive tax powers following the independence referendum and the Smith Commission.

It's job is to look at the Scottish government tax proposals and forecast what they mean in terms of revenue and projected growth, among other things.

That's where we got the figure that the income tax plans unveiled by finance secretary Derek Mackay last week would raise an estimated £164 million in 2018-19.

And it was the Fiscal Commission which gave us the grim forecast that Scotland' growth will be below 1% up to 2021 only rising above that to 1.1% by 2022.

However, the reason why MSPs on the committee spent so much time on elasticity was that technical as it sounds, this is the issue that goes to the heart of the tax debate in Scotland.

Essentially, income elasticity is an estimate of how much effort people will make to change their behaviour - or change their tax arrangements to put it more crudely - to avoid paying a possible tax increase.

The members of the Commission told MSPs that, based on work by the Treasury and academic investigations, they think that the higher your income the more intensive will be, well, your elasticity.

In other words, if you earn £80,000 a year you might try to change your circumstances. Might.

But if you are on £500,000 you are very likely to try to avoid higher taxes - swapping earnings for dividends say, or doing something more fiendishly complicated and clever, though legal.

The Fiscal Commission even had a go at predicting how this might work across various income levels, and this is the table in their report.

Credit: Scottish Fiscal Commission

The reason this proved to be of such interest to MSPs was that these forecasts, and their reliability, are central to the future debate over tax north of the Border.

MSPs from the Left of the debate, who believe that you can and should raise even more money from the wealthiest, are sceptical of these projections.

Those from the Right, and that's only the Tories in Holryood, who believe you should not over-tax people and that if you do it is counter-productive - your tax take falls - were keen to dispell any scepticism.

It's obvious why. Out of a total revenue budget of some £25 billion, Mr Mackay's budget only raises £164 million a figure reduced by an assumption that £51 million will be lost through "behavioural effect".

If that happens after Mr Mackay sets out what are relatively modest tax changes, set out in this table...

Credit: Scottish Government

...then what might happen if there are even more radical proposals in the future aimed at raising a more substantial proportion of the Scottish budget?

The economists from the Fiscal Commission would not say precisely but they stuck to their conclusion that there is strong evidence that when taxes go up people, wealthy or wealthier people, try to minimise their effect.

These are of course early days for Scotland and its new tax powers. It might be that the Commission has been rather too cautious in its assumptions. If that's the case those who want to raise taxes further will feel vindicated.

If it is proved right those who are reluctant to increase taxes further - including in private a fair number SNP MSPs - will use the evidence to argue against further hikes.

It is likely we won't know the answer which is right for a few years yet as the new tax system beds down. It's a real life real time economic experiment.

But whatever happens, riveting or otherwise, you will be delighted to know (or not) we certainly have not heard the end of the debate on income elasticities.

PS: For those who like a nice table, and wanted some further information on the budget, here are the projections by the Commission for tax for the years ahead.

Credit: Scottish Fiscal Commission

And for those who like their analysis in detail, the full 224 page report of the Fiscal Commission can he found here. Enjoy!