Tax policy and the budget: consultation

2 – Principles of good tax policy making

Every tax performs one or more of the following functions:

• raising money to fund public services;
• providing economic stimulus;
• promoting a more equal society through redistribution;
• encouraging people to change their behaviour.

Any tax system must generate sufficient revenues to support government spending, ensuring revenues grow in line with demographic and economic conditions and reflect broader changes in technology and society. There are also times when tax policy can be used as a lever for economic stimulus, as was the case in response to COVID-19. Taxes also play a role in the redistribution of income and wealth, especially through progressive taxation. Finally, tax can be used as a lever to increase the cost of harmful behaviours, or reduce the costs of desired behaviours, in order to incentivise change.

The Scottish Government’s approach to tax policy has developed over time, particularly following the devolution of further tax powers in 2016. Our approach is underpinned by a set of principles, including the four principles of taxation proposed by renowned Scottish economist Adam Smith (namely: Certainty, Proportionality to the ability to pay, Convenience and Efficiency). We added Engagement and Anti-avoidance to embed a set of six guiding principles that will underpin tax policy in Scotland. We have set out below how each of those principles is interpreted and applied by the Scottish Government today.

This is not an exhaustive list. It reflects prominent attributes of good tax policy design; a set of values that can be identified in international good practice and tax policy literature, as well as the fabric of our approach to date. Nor is it a list of absolutes. There may be tension or conflict between certain principles in specific cases. Hence, these serve as a basis against which to assess tax policy and to promote system-wide coherence.

Figure 3: Scotland’s Approach to Taxation (the principles)

• Certainty
• Taking a firm approach to potential tax avoidance
• Proportionality to ability to pay
• Undertaking engagement with stakeholders
• Convenience
• Efficiency

Proportionality: Taxes should be levied in proportion to taxpayers’ ability to pay. The Scottish Government also believes that a fair tax system should be progressive, i.e. that the proportion of tax paid should reflect the relative income or wealth of the taxpayer. Equally, comparable circumstances should attract comparable tax treatment, in the absence of strong justification to the contrary.

Efficiency: The tax system should maximise economic efficiency, balancing revenue generation, behavioural responses and the effects of deadweight loss. In relation to tax deadweight loss refers to the impact of a tax on the market/s to which it relates, for example the increased price of consumer goods when VAT is added.

Certainty: Taxpayers must know if they are liable to pay tax, the amount to be paid and when it is to be paid. Changes to the tax system should be justified and, where possible, follow a predictable fiscal cycle or published roadmap.

Convenience: Taxes should be collected at a time and in a manner that maximises convenience for taxpayers. Tax policy should be as simple, clear and straightforward as possible and opportunities to streamline the tax system should be taken.

Engagement: The public and businesses should understand the tax system and governments must be open and transparent about tax policies and their decision-making, consulting widely. This is crucial for accountability and trust.

Anti-avoidance: Taxes form part of the fabric of society and we should all be proud of the contribution they make. The tax system should therefore prevent avoidance practices and governments and tax authorities should work proactively, and respond quickly to tackle them.