INCOME TAX POWERS FOR WALES
The subject under scrutiny was probably one of the most important to come in front of the committee in recent years, namely a pre-legislative scrutiny of the draft Wales Bill.
As well as changing some of the electoral arrangements for the National Assembly elections, the main thrust of the Wales Bill is to give the Welsh Government direct responsibility for raising some of the money it spends.
This follows the report of the Silk Commission which recommended that by 2020, the Welsh and UK governments should share responsibility for income tax paid in Wales and that the Welsh Government should have the power to set the rate of its share.
Simply put, this would enable the Welsh Government if it so wished to lower or raise the level of income tax.
This could mean that if it wanted to raise more money for devolved services such as health or education, it could do this by increasing the income tax rate. For example, a 1p increase in the basic and higher rate of income tax would raise around £200 million in additional income for the Welsh
Government to spend on schools and hospital every year.
However, raising taxes to pay for additional public services could have a direct effect on the future prosperity of the economy. For most businesses in Wales, many of whom pay income tax as sole traders or partnerships rather than corporation tax as limited companies, the higher the income tax rate, the more capital is taken out of their hands and into government coffers.
There is also the danger that increased taxes would lead to entrepreneurial activity being driven
underground into the so-called ‘black economy”, resulting in a reduction in the overall tax take for the government. For example, there is evidence to show that potential entrepreneurs may well not become involved in starting a business, at least within the formal economy, if they believe that high tax rates will have a negative effect on their profits.
This is not only about increasing taxes as the Welsh Government, if it wished to, could also lower the rate of income tax. This could be potentially good news for many small business owner managers, given the prevailing wisdom that lower personal income taxes can leave entrepreneurs with more money to reinvest in their business that, in turn, can lead to greater job creation.
There is also a debate as to whether the Welsh Government should be able to vary the rates for each band of income tax independently of each other. Currently, the UK Government has suggested that Wales should follow Scotland in having a "lock-step" system that stops Wales varying tax bands individually. This means that if the Welsh government decided to cut the basic rate by 1p, it would have to cut all other rates of income tax by 1p too.
Critics have noted that this would restrict Welsh politicians in Cardiff Bay from proposing innovative tax policies such as cutting the top rate more than the standard rate or the or the other way round. This could then, for example, prevent a more selective and radical approach to supporting high net worth entrepreneurs or investors through the tex system as there could not be a cut in the higher rate without a corresponding decrease in the lower rate, which would be prohibitively expensive for Welsh finances.
Certainly, it will be interesting to see whether this proposed lockstep policy is eventually changed if, following a close Yes vote in the Scottish referendum, greater fiscal powers are granted to Edinburgh.
But it is not only in Wales where potential cuts in personal taxes are being promoted as a tool for stimulating the economy.
In Ireland, a radical report by an expert group on entrepreneurship policy recommended that income tax should be dramatically cut to encourage risk-taking in business and bring in foreign start-up companies.
The private sector led Entrepreneurship Forum has recommended a flat tax on all income of between 15 and 20 per cent in a long-term strategy to attract corporations, immigrant business people and keep wealthy Irish in the country.
As it notes, "high income tax rates results in fewer jobs, results in more people on social welfare, and results in a dying economy” although such a groundbreaking change in fiscal policy has already been quietly dismissed by the Irish Government, although the fact that it is now been raised publicly will inevitably lead to some compromise in the future over the level of taxation paid by entrepreneurs in Ireland.
With most of the discussion around business taxes having focused on either business rates or corporation tax, it is a positive move that Wales is now being given the opportunity to control a proportion of the income taxes it raises. There is, however, the caveat is that the final decision for these additional powers will not lie with politicians but with the people of Wales as the UK Government has decided that such an important decision must be put to Welsh voters to approve.
Certainly, it is my view that Wales needs to mature its democracy towards a system where it has responsibility not only for the spending of the block grant from the Treasury but for raising part of the income for this expenditure itself.
Of course, there is the strong possibility that the Welsh Government, as has happened in Scotland for the last fifteen years, may not choose to use such powers but the fact that it has this available as a potential tool in the future to boost economic development should be broadly welcomed.