20 08 2018

Tax talk: Time to think outside the box in Wales?

Reports without recommendations are sometimes the best. They don't come with an agenda and when facts speak for themselves you can come to your own conclusions.

There's an excellent example of this published today, produced by the significant brains at the Wales Governance Centre for the Wales Centre for Public Policy.

You can read the 90 pages here, but here's a brief summary.

Tax is a dirty word. No one likes paying them and people get twitchy when there's talk of changes to tax rates.

From next April, the Welsh Government and local authorities will have responsibility for collecting £5bn of tax revenues. It amounts to 30% of their combined current spending.

In 2019 there will be a Welsh rate of income tax. It will allow ministers to cut or raise rates by 10p within each tax band.

But here's the good news. If you interpret the report in the way I suspect the authors want you to, it doesn't necessarily mean that taxes will go up.

Not if the the Welsh Government is "on the make" rather than "on the take". Let me explain.

If you put 1p on the basic rate on tax you would raise £184m. As the report points out it accounts for only 2% of the spending on health and is therefore hardly a game changer for the finance secretary.

You could cut the additional rate of tax, paid by those earning over £150k, but to make up the shortfall you would need to entice an additional thousand extra high earners to live in Wales.

Income tax, of course, is such a political vehicle that decision makers often just leave it alone and look elsewhere.

This is where the "make" comes in.

If we make Wales a more productive nation, with higher rates of employment and achieve growth in private sector wages, we could be in clover.

Let me quote from the report.

"Extra revenues from sustained private sector earnings growth in Wales (+0.5%) are the equivalent of increasing the higher rate of income tax in Wales by 2p by 2024-25 and 3p by 2029-30."

Over to Mark Drakeford, finance secretary and probable future first minister, a man known for putting public before private.

Another tool rarely tampered with is council tax. The authors say the current system "lacks buoyancy" primarily because property values haven't been assessed since 2003. There is, they say, a "disruptive feature" to the banding system because the more the house is worth, the less is paid in tax as a proportion of its value.

Income tax powers set to come in 2019
Call for tax increase to fund social care
Welsh taxes 'raising £1bn' take effect
Many living in Blaenau Gwent (50% of dwellings in the lowest band) for example get a raw deal compared to some people in Monmouthshire (+50% in the top two bands).

Although the authors don't come to any conclusions per se they feel it makes sense to look again at council tax at a time when income tax powers are devolved.

If you like charts, graphs and modelling this report will make your Monday.

Wales is nearing a new era of fiscal responsibility.

It could be time for thinking outside the box rather than resort to the usual box ticking of tinkering with income tax.