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A Scottish National party push to control business taxes would potentially cut corporation tax revenues in Scotland and the rest of the UK, a think-tank said on Wednesday.
The Institute for Fiscal Studies warned that corporation tax “is not a natural candidate for devolution”, as it set out the risks and complexity, as well as the potential benefits, of the SNP’s plans for more control over tax and benefits.
Business taxes, along with welfare, national insurance, the minimum wage and equality policy, are seen by the SNP as prime candidates for devolution.
Nicola Sturgeon, party leader and Scottish first minister, on Monday unveiled the SNP manifesto which said it would seek the devolution of “the powers we need to create jobs, increase revenues and lift people out of poverty” before a move to full financial responsibility.
The think-tank said the Scottish government might be able to design improved benefit and tax systems if it gained the new powers it sought.
But they “would also entail additional spending and revenue risk and involve a number of complex technical and administrative issues”.
The SNP called, in its manifesto, for “more meaningful tax powers” that would allow it to provide incentives for business to invest in Scotland and expand overseas.
It also proposed using “targeted changes in business tax allowances” to encourage investment, research and development and the growth of smaller companies.
The IFS said it was not surprising that the party was asking for similar powers to those granted to Northern Ireland, which has won agreement in principle to the devolution of corporate tax rate-setting powers. But it warned that corporate tax might prove a less effective new lever for attracting additional investment and profits than hoped, if Westminster responded to any reduction in tax rates in Scotland by cutting tax rates in the rest of the UK.
“Instead, tax rates and revenues may be lower in both Scotland and the rest of the UK than if rates were set centrally for the whole of the country.”
The think-tank also said allocating profits between Scotland and the rest of the UK would involve “significant administrative complexity”, even if tax rates were the same and companies had no incentive to game the system.
In a relatively positive assessment, the IFS said the SNP’s call for the devolution of national insurance contributions (NICs) could be seen as a “natural next step” after the devolution of income tax on earned income.
But the move would raise “tricky administrative issues” because of the links between NICs and contributory benefits such as pensions.
The IFS said the SNP’s call for the devolution of welfare in its entirety might result in a system better suited to Scotland’s particular needs and preferences.
But radical reform “inevitably involves difficult trade-offs” and the costs of any improvements to the generosity of the system would have to be found from within the Scottish budget if welfare were devolved and the plans were not adopted UK-wide.
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