Miliband’s Tax Muddle

At his party’s Scottish Conference, on 2nd March, Ed Miliband weighed into the independence debate. But in doing so, he simply highlighted that Labour’s position on the devolution of fiscal powers is in a bit of a muddle.  

Miliband declared himself opposed to Scotland having control of Corporation Tax, a position seemingly endorsed by Johann Lamont, in her speech to the conference the following day. Yet at the same conference, Douglas Alexander said that Labour ‘must be open minded on how we can improve devolution’s powers, including fiscal powers’, while Alistair Darling has also suggested that he favours transferring control of taxes to Holyrood.

The Labour leader seems particularly hostile to the idea of Scotland having a lower rate of Corporation Tax than the rest of the UK. Yet a lower rate makes sense: there is a wealth of empirical evidence from around the world that shows low corporate tax rates boost tax revenues. It isn’t hard to understand why. For one thing, low corporate tax rates attract inward investment, and help ensure firms that might leave stay put. More importantly, low rates of corporation tax mean that firms have more retained capital to invest: that means more output, more jobs, and higher wages, all of which generates more tax revenue that can be spent on public services. Conversely, higher corporate tax rates mean firms have less money to invest, which leads to lower output, fewer jobs, and lower tax receipts.

So the case for transferring control of Corporation Tax to Holyrood is based on the fact that it would allow the Scottish Parliament to set the tax at a rate that would stimulate economic activity. So what’s the problem?

Well, Ed Miliband says he thinks that cutting Corporation Tax in Scotland would not be ‘progressive’. But Corporation Tax is paid by firms, not by individuals, and there’s nothing ‘progressive’ about a policy – i.e. higher corporate taxes – that chokes off economic growth, and reduces both employment and tax revenues, and thus leads to worse public services.

One possibility is that Ed Miliband simply lacks an understanding of basic economics, though I hasten to add that’s not what I believe. A more likely explanation is that he understands perfectly well that a lower Corporation Tax rate would boost investment and jobs in Scotland, but might do so at the expense of investment and jobs that might otherwise go elsewhere in the UK.

It’s hard to blame him for taking that view. He is, after all, MP for Doncaster North, in Yorkshire. He’s taking a perfectly reasonable intellectual position, and if I were a voter in Doncaster, I expect I’d want my MP to be fighting to keep investment there, rather than in, say, Dundee.

But the Dundonian voter is more likely to be interested in what’s best for Scotland, and may not be persuaded by a pitch of ‘pay higher taxes, and see jobs and investment go south’, which is the logical implication of Ed Miliband’s position.

Maybe Labour’s new devolution commission will sort out the muddle and clarify the party’s position on Corporation Tax. Unless, that is, the commission won’t look at the issue, Ed Miliband having ruled it off limits.

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