Yes or No – Scotland looks set for significant fiscal change

Britain has become so transfixed by the idea that Scotland could become an ­independent country that it has paid relatively little attention to what might happen if it does not.

But if Scotland votes No in September’s referendum – as the polls suggest that it will – this will not be the end of the story. Scotland’s relationship with the rest of the UK will still be on the brink of change.

A law has already been passed that will devolve significant new powers to Scotland. And all three pro-union parties have promised another big dollop of devolution on top of that.

“Voting No does not mean you’re voting for the status quo, because actually no one’s offering the status quo,” said Adam Tomkins, a professor of constitutional law at Glasgow university.

What would a No vote mean? First, it would mean the implementation of the Scotland Act 2012, which would establish a Scottish rate of income tax in April 2016 for the first time.

This law has been “completely overlooked and unloved, but it’s massively important,” says Prof Tomkins, who acted as an adviser to the Scottish Conservatives on their devolution proposals.

Under the act, tax rates for Scottish taxpayers would be calculated by reducing the basic, higher and additional rates of income tax by 10 pence in the pound, then adding a new “Scottish rate” set by the Scottish parliament.

If Scottish lawmakers put that rate at 10 per cent, income tax would remain the same across the UK. But they would have the option to set it higher or lower, raising the possibility that people in the UK could pay different tax rates depending on where they live. Scotland would also gain power over stamp duty and landfill tax.

The changes would probably not stop there. Labour, the Conservatives and the Liberal Democrats – mindful of the looming referendum – have all promised to devolve more tax-raising responsibility to Scotland if it rejects independence.

But there is little agreement about when or how this devolution – sometimes loosely labelled “devo-max” – would come about.

“There’s no consistency,” said David Bell, a professor of economics at Stirling university. “Assuming there is a No vote, all of this is suddenly going to come back into focus very substantially.”

Scottish Labour has proposed giving Holyrood the power to vary income tax by 15p in the pound, but not the power to cut the top tax rate on its own.

The Scottish Tories have gone further, proposing to give Scotland full power over income tax rates and bands. The Lib Dems would give Scotland power over income tax, inheritance and capital gains tax and replace the Act of Union with a declaration of federalism.

The Scottish National party, meanwhile, says these promises guarantee nothing, and points out that the UK government refused to put a “devo-max” option on September’s ballot.

While there may be no coherent collective vision for “devo-max”, some are already starting to think about the potential economic and political implications.

Prof Bell says that devolving some income tax raises the possibility of both “horizontal” tax competition (where Scotland and the UK compete to attract high earners, for example) and “vertical” tax competition (where the UK and Scottish governments compete to tax the same pool of taxpayers).

The Scottish Conservatives, under leader Ruth Davidson, have been most vocal about what they hope to gain.

“She wants to write a manifesto that says, ‘If we were in government, these are the taxes we’d want to cut,’ ” said Prof Tomkins. “You can’t be a tax-cutting politician in a parliament that doesn’t have tax-levying powers. It makes that kind of politics possible in Scotland for the first time.”

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