As with my previous posting on this matter any tax raising powers which could be made available to the Welsh Assembly would need to be approved at Westminster

One of the main issues discussed at Bangor University were the options available to those who wish to give the Welsh Assembly tax raising powers.  I am a sceptic on the issue – I do not feel that such a change would be beneficial to Wales in any way.  I was in a minority with respect to the political parties represented on the panel but not so in terms of the academic view of the argument as presented.

Plaid and Labour argued for the provision of such tax raising powers with some passion whilst the Liberals offered a slightly technical (and in my view ineffective) list of possible tax raising areas for the Assembly.  I argued against the concept on the grounds of the damage it would do to the Welsh economy.  The reason for this is simple.  We have, thankfully, an open border with England.  Around 85% of the Welsh population live within 50 miles of the English border.  This is crucial and makes a separate tax system in Wales a damaging prospect for all of us.  I’ll try and explain why in relation to both in-direct and direct taxation options.

In-direct Taxation

Gerald Holtham gave a concise presentation which in my view demolished the options in terms of giving the Welsh Assembly powers to increase in-direct taxation.  I might be wrong, but the way in which he discussed the issue indicated very strongly that the report that he and the commission are preparing will not advocate powers to WAG in relation to in-direct taxation.  Why?  Many of his concerns related to the population structure of Wales and our proximity to heavily populated parts of England. 

Imagine the power to increase or reduce VAT being devolved.  It would play havoc with the economy of Wales and the border counties of England since any significant change would lead to trade moving to England or vice versa.  As we saw this December, the option of saving 2.5% on VAT resulted in people buying electrical goods, white goods and cars before the VAT rate returned to the previous 17.5% rate.  In my view an increase in the Welsh VAT rate would result in an artificial boost to Chester and the North West at the expense of Llandudno and North Wales.  A short drive is well worth the effort if you are saving 2.5% on major purchases. 

Some argued that we could reduce VAT in Wales – but under a devolved system of government would that be a positive development?  The border counties of England and the Welsh Assembly could embark on a race to the bottom cutting VAT for a short term boost to trade but at the expense of the long term tax base of the country.  A variation of in-direct taxes will simply not work in a country where the vast majority of the population live within a 50 mile drive of the border.  In the same way, changes in fuel duty, alcohol or tobacco duty would also create an incentive to travel in order to purchase these products and could well lead to the smuggling problems which have decimated the retail economy of the border counties of the Republic of Ireland.

Increasing in-direct taxation in Wales will not work.

Direct Taxation

The big one here would be Income Tax.  What would be the impact of the Welsh Assembly increasing income tax?  Well it depends.  The perverse truth is that if powers on income tax were devolved then it might be possible to increase the standard income tax rate by 1% or even 2%.  A 2% increase on the standard rate of income tax would cost a worker on £20,000 per year around £260.  Although such a change would be resented it would be difficult to argue that people would automatically decide to move across the border to avoid a few hundred pounds of tax.     

However, the position is completely different if the decision was made to increase taxes on the higher paid in society.  An increase of 10% on the higher rate of tax (which would generate around the same amount of money as a 1% increase on the basic rate in a Welsh context) would be a disaster.  A worker on £80,000 per year would be around £3,800 worse off under such a change.  More than enough to justify a house move I suspect.

Thus the technical argument in relation to income tax is that you could probably get away with increasing income tax rates in Wales but ONLY if you decide to increase income tax for the lowest paid workers whilst leaving the higher rate tax payers alone.  Hardly just and equitable is it?

I invite you to conclude, from these quick examples, that tax increasing powers for the Welsh Assembly should be opposed because they would be a huge handicap to the Welsh economy and an unfair burden on a society which is increasingly less prosperous in comparison with England.  It should also be noted that these comments are not academic issues.  We are facing a referendum on further Assembly powers; there is a commission out there considering tax raising powers for the Welsh Assembly.  Whoever you elect to be your next MP will need to be prepared to debate these issues in Parliament because any change will come from Westminster not Cardiff Bay.

None of my opponents seem ready to go further than their rhetoric.  When they knock on your door ask them how much their ideas for the future of the Welsh Assembly will cost you.  Ask them how increasing VAT rates in Wales will help tourism and retailers in Llandudno.  Ask them how increasing income tax on the poor and not the rich could be justified.  Ask them why they do not want to discuss their ideas in any real detail.  I suspect that you will be disappointed by their responses.

I’ll finish this three part posting at some point by discussing borrowing powers for the Welsh Assembly. 

Guto

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