Nicola Sturgeon’s barrage of tax rises risks sparking an exodus of rich Scots across the border, the Institute for Fiscal Studies (IFS) has warned.
High-earners in Scotland will be thousands of pounds worse off from changes to income tax that the parliament is expected to approve on Thursday, the think tank said.
Scottish business leaders branded the rising tax burden “a disadvantage for Scotland” and expressed concern it would make competing with the UK for talent harder.
Under the new policies, the richest tenth of Scots will on average be 2.1pc poorer than those south of the border, according to the IFS – a hit equivalent to £2,590.
Meanwhile, the poorest tenth will on average be £580 better off a year from April from benefit rises, lifting incomes by 4.6pc.
Ms Sturgeon’s government is increasingly relying on taxing higher earners to fund its policies, said Tom Wernham, a research economist at IFS and an author of the report.
He said: “With this group in particular, there is a risk that higher taxes will incentivise tax avoidance efforts, such as converting income into dividends – to which Scottish tax rates don’t apply – or even migrating across the border.”
Scotland has more tax bands and different rates to the rest of the UK. Those earning below £28,000 pay slightly less in taxes, while those on higher incomes can pay substantially more.
From April, someone on £50,000 will pay £1,550 more in tax in Scotland than in the rest of the UK, rising to £3,900 more for a person earning £150,000.
The higher tax rates are unlikely to pay off, according to Wernham, with most of the additional revenue from raising the additional rate likely to be lost as high-earners either avoid tax or leave, he said.
He said: “There is a limit to how much further this strategy can be pushed.”
All governments can suffer higher emigration in response to tax rises but the risk is likely higher in Scotland according to Tom Waters, another author behind the report, because it is considerably easier to move within the UK than to go overseas.
He said: “When someone does migrate, the Scottish Government loses all of the income tax they would have received from them. It’s not just the extra few thousands they’re paying in Scotland.”
Ms Sturgeon may instead be forced to consider other avenues such as higher council tax if she wants to raise more money from richer households, according to the think tank.
Scottish income tax and benefits differ from the rest of the UK's because policy decisions have been devolved since 2017.
While high-earners in Scotland already face higher tax rates than in the rest of the UK, Holyrood wants to increase the gap even further.
The higher tax rate is set to rise from 41pc to 42pc, whereas south of the border it is 40pc. Meanwhile, while the highest earners face an additional 45pc tax rate in the UK, in Scotland it will be 47pc.
The Scottish Government has also frozen the tax threshold for higher earners at £43,662 for several years, while in the rest of the UK it is £50,271.
It means any income falling within that gap gets taxed at double the rate in Scotland as south of the border.
Chief executive of the Scottish Chambers of Commerce, Liz Cameron, said the tax rises put Scotland’s businesses and workers at a a clear disadvantage.
She said: “Considering the widespread labour shortages being faced by Scottish businesses already at this time, we must do more to incentivise, not disincentivise, the skilled workforce that we need.”
Tracy Black, Scotland director at the Confederation of British Industry, said that many firms are rightly concerned about the growing income tax gap between Scotland and the rest of the UK.
She said: “We must be vigilant about policies that send the wrong signal about Scotland’s openness for business.”
David Alexander, chief executive of DJ Alexander Scotland, the country's largest privately owned letting agency in Scotland, said he was already seeing signs of high-earners leaving.
He said: “It's a natural situation that people think, ‘actually why would I reside here when I can move not that far and pay substantially less tax’.”
The Scottish Government said its evaluation of the 2018-19 tax reform found no evidence of significant behavioural change, including cross-border migration.
Deputy First Minister John Swinney said: “People base their decisions on where to live and work on a range of factors, including the quality and provision of public services, not just the tax they pay.
“We are taking a different, progressive path for Scotland and asking those who are able to contribute a little more to do so. People are able to access a wide range of services and benefits that go significantly beyond provision in other parts of the UK.”