Taxing an independent Scotland

If Scotland were to become independent it would gain considerably more control over its tax system than it currently enjoys. In this paper we consider the consequences of independence for the optimal design of a new Scottish tax system, an analysis which would also be of some relevance for considering the consequences for tax design of independence of other smaller nations. Scotland is different from the rest of the UK in some ways that are important for tax system design. Incomes are more equally distributed, for example. That is one reason why the progressive income tax currently raises less per head in Scotland than in the rest of the UK. It also suggests that there is less to be gained in terms of redistribution from sharply progressive taxation. Independence would create additional complexity for individuals and firms working or trading across borders. It could also put downward pressure on tax rates and our analysis suggests that optimal tax rates in an independent Scotland are likely to be lower than optimal rates in the UK as a whole. At the same time, the context of a substantial budget deficit will continue to put upward pressure on tax rates.