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A taxing question

Updated Wednesday, 6th August 2014
Scotland's bid for independence is posing many questions, one of the most important questions concerns funding. So, what effect will devolution have on taxes and how is Scotland funded at the moment?

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A collection of Scottish bank notes. If Scotland gains independence, funding and tax will be a huge question How Scotland is funded now and how it may be funded under independence is a taxing question, or to put it another way, a question of tax. That the state provides a number of services such as healthcare, schools, roads and public transport is a given for most people, but how this is financed is a more challenging question. If we were asked to pay for these services at point of use there might be a revolution, but these services need to be funded somehow, usually through tax.

Presently Scotland is funded through a block grant from the UK, this money is raised through taxes paid by UK citizens and then distributed throughout the UK. There are arguments regarding whether this block grant represents equitable distribution of funding for Scotland (and the rest of the UK) but those are well covered elsewhere (see HM Treasury Statement of Funding Policy).

The issue of tax is central to both the discussions of further devolution and independence. One of the key planks of further devolution seems to be that it would include tax raising powers. The question would be which taxes? The Scottish Parliament already has power in relation to the Scottish Rate of Income Tax (applicable from 2016); land and buildings transactions tax (replacing Stamp Duty from 2015) and landfill tax (applicable from 2015). Council tax and domestic rates are also devolved. However the crux of further devolution of taxes relates to substantive taxes such as corporation tax, capital gains tax, National Insurance and VAT. Devolution of such tax raising powers would need to be commensurate with fiscal autonomy. The more devolution of fiscal autonomy the more the devolved government/parliament can fund its policy and legislative commitments, but the more it also has to take responsibility for those commitments and balancing the budget.

So what of independence? It is a given that any state must raise sufficient revenue to fund the running of the state, taxes are one means of achieving this. How these taxes are raised is a wider question, whether they are upfront taxes such as VAT, or largely unseen taxes such as national insurance they all contribute to the state coffers. The government of an independent Scotland would have to decide whether to retain the current tax system, to design an entirely new system or to opt for a hybrid of keeping the current system but making some changes. There are arguments for and against each of these options but ultimately this is a political decision for any government.

As control over finance provides freedom to control policy, the more fiscal devolution is provided to Scotland, the more the situation will come to look like independence in all but name. However whatever happens following the referendum, one thing is certain, we will still be paying tax.

Further discussion of this issue can be found in ‘The tax implications of Scottish independence or further devolution’.

If you are interested to find out more about the law and Scotland, try our free course ‘An introduction to law in contemporary Scotland’.

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This article is part of the Scotland's Future collection, exploring the debate and national identity as the country prepares to vote on independence.

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