Item 11 on our agenda this afternoon is a debate on the Finance Committee report on the impact of variations in national and sub-national income tax. I call on the Chair of the Finance Committee to move the motion—Llyr Gruffydd. 

Motion NDM7385 Llyr Gruffydd

To propose that the Senedd:

Notes the report of the Finance Committee on the Impact of variations in national and sub-national income tax, which was laid in the Table Office on 2 July 2020.

Motion moved.

Thank you very much, Llywydd. I'm very pleased to open this debate as Chair of the Finance Committee on our inquiry into the impact of variations in national and sub-national income tax. As we know, the prospect of differing income tax rates across the UK is a rather new notion, with the partial devolution of income tax to Wales only being in force since April 2019. To date, the rates have so far remained in line with England and Northern Ireland, and the Welsh Government has committed to not raising the Welsh rates of income tax during this fifth Senedd.

With the end of this Senedd fast approaching, of course, the Finance Committee decided to examine the potential effects of having different income tax rates across the Wales-England border, particularly given the concentration of people living close to that border. I would like to thank all of those who contributed, and the Minister for finance for her response to our report and for accepting all of our recommendations, either in full or in principle.

The likelihood of becoming an income tax payer is lower in Wales than it is in the UK as a whole. According to the 2016-17 survey of personal incomes, 44 per cent of the Welsh population were income tax payers, and this compares to 47 per cent of the UK’s population—partly due to lower employment rates and lower average incomes as well. Growing the Welsh tax base is an important element in raising tax revenue for public spending in Wales and we believe that the Welsh Government should focus on implementing innovative strategies to develop this tax base.

We heard it may be difficult to predict behavioural responses in Wales from the various effects of tax changes in other jurisdictions, but there is a substantial body of literature examining taxpayers’ responsiveness, and that offers valuable guiding principles for us in this area. For example, international studies show that high income earners are particularly responsive to tax rates; that it's easier for some high-earning professions to be mobile; and that the stage of an individual’s career can influence their ability to relocate, too. So, the committee recommends that the Welsh Government develops policy options that will help to attract the most responsive groups to Wales, such as those high income earners and young graduates, of course, in order to boost its tax revenues.

We welcome the Welsh Government-funded research being undertaken to develop more complex economic models of the Welsh economy through which to understand better the potential effects changes in taxation rates might have. However, researchers have highlighted that the main limitation in constructing and developing their model is the availability of Welsh-specific data. We recognise that there are sensitivities, of course, surrounding the disclosure of tax data, but it is crucial that data are improved in order to understand the composition of the Welsh tax base and then to support the further development of economic models. Our report recommends greater collaboration between the Welsh Government and HMRC to improve Welsh data collection and dissemination, as well as exploring how the knowledge, analysis and intelligence division at HMRC could be utilised to support research into tax divergence. The Minister has indicated that, building on the evidence presented to the committee, the Welsh Government is undertaking research with HMRC to estimate the behavioural impacts of tax divergence, and we very much welcome this development as a committee.

Our report also identifies further areas of research that we believe the Welsh Government should undertake. We recommend that the Welsh Government should engage with academics to undertake a longitudinal study on the impact of tax rate divergence across the Wales-England border. The Minister’s response, which signals that the Welsh Government is engaging with HMRC and the Scottish Government to explore the feasibility of a longitudinal data set to measure the behavioural impacts of income tax changes within the UK, is encouraging.

Evidence gathered during our inquiry pointed to the influence of non-tax factors on where an individual chooses to live. These factors include house prices, the cost of living, employment opportunities, which are important, too, of course, the quality of public services, which is an important element, and the quality of life in general, which is vital. We recommend that such factors must be considered as part of any further Welsh Government research relating to the impact of income tax variations across the Wales-England border.

As well as examining the revenue implications of any tax policy changes, witnesses emphasised the importance of considering the spillover effects of tax policy decisions. For example, increasing the additional rate of income tax may yield revenue, but if it reduces the number of additional rate taxpayers in Wales, then that could lead to spillover such as lower wages or fewer employment opportunities. So, we do recommend that future Welsh Government research considers potential spillover effects of Welsh rates of income tax policy on disadvantaged people, such as, for example, those on low incomes and individuals paying income tax whilst being in receipt of universal credit.

As the power to vary income tax rates in Wales applies only to non-savings and non-dividend income, we heard that Wales will be particularly exposed to taxpayers mitigating their liability through switching from earnings to other forms of income. For example, those who are self-employed could respond to tax variations by incorporating their business, in order to pay corporation tax on profits and dividend savings income tax on the withdrawal of profits, instead of paying the Welsh rates of income tax on self-employed earnings. So, we recommend that the Welsh Government commissions research into the impact of mitigating personal income tax through incorporation and changing forms of income, especially given that a significant proportion of higher and additional-rate payers are employed in the private sector in Wales, and therefore capable, of course, of incorporating their activities. We also call on the Welsh Government to give further consideration to seeking the devolution of savings and dividend income to Wales and to assess the benefits and risks of securing this power.

Finally, though we concluded our evidence gathering for this inquiry before the true extent of the COVID-19 pandemic was realised, it is clear that difficult decisions on taxation will need to be made in order to aid Wales’s economic recovery. The Welsh Government needs to consider all economic levers at its disposal, and we urge the Welsh Government to develop policy options for the Welsh rates of income tax and consider contingencies to deal with adverse economic conditions and possible cuts in public spending. So, with those comments, I look forward, Deputy Llywydd, to hearing contributions from Members.

I'm pleased to be able to contribute to today's debate on the impact of variations in national and sub-national income tax. It's not something that trips off the tongue all too easily on a daily basis, but I welcome the Chair's excellent opening contribution, which I think explained the context within which this important piece of work was compiled.

This report was a very interesting one to be involved in, because it looks at an area key to devolution at the moment—the Welsh Government's new tax powers and what it actually means in practice, not just in the theory that we've been talking about for so long. As the report says, the Welsh border is densely populated, with 17 million people living within 50 miles of it. With 44 per cent of the Welsh population paying income tax, compared with 47 per cent of the UK's population, it was apparent to us on the committee that the Welsh Government must consider ways to develop the Welsh income tax base and maximise tax revenues.

If I can just turn to the recommendations briefly. In recommendation 1 we recommend greater collaboration between the Welsh Government and HMRC to improve Welsh data collection and to use HMRC's expertise in this area to support research. Meanwhile, recommendation 3 calls for an improvement in Welsh-specific data, and, of course, we all want to see that. The lack of Welsh data is a recurring challenge for fiscal devolution. In fact, how many debates do we have in this Chamber and on Zoom where the issue of lack of Welsh data doesn't come up? It comes up all the time, and there's a need across many portfolios for that to be improved.

Our report refers to research that was conducted by Cardiff University, 'A Welsh tax haven?'. That certainly makes interesting reading. That report concluded that changes in the basic rate have little effect on migration and tax yields, but changes to the additional and higher rates would have significant impacts. That reminded me—I'm sure it reminds Mike Hedges—of the work that Professor Gerry Holtham did some years back in this area, when he concluded that it was quite difficult in practice to change tax rates and have a positive effect, other than dropping the higher rate of taxation by around 10p in the pound that could encourage entrepreneurs and grow the Welsh tax base. And that is at the core of the economic problem that we face in Wales and have done for some time. Basically, the Welsh tax base is too small. I fully understand why, in earlier questions to the finance Minister and indeed in discussions with the First Minister, there's been a reticence shown in raising taxes, even though during the COVID pandemic there have been discussions about whether that might be inevitable at some point in time. Of course, within Wales, the tax base is weak enough as it is, so any increases would have to be very carefully thought out and could ultimately have a negative effect.

The OBR has already said that the gap between the UK and Welsh tax per person is due to Welsh taxpayers having lower average incomes. Well, 'A Welsh tax haven?' identified that the migration and revenue effects of a higher rate differential become stronger over a longer period, with a reduction in the additional rate from 45 per cent to 40 per cent probably having the biggest impact in increasing Welsh tax revenues by an annual rate of £55 million after 10 years. So, there is an accumulative benefit of tax cuts over time, but, of course, the flip side of that is that reducing the rates means that, at least in the short term, there's a reduction in revenues and public spending, which isn't particularly acceptable, particularly at the time of a pandemic.

Now, there have been some comparisons made with Scotland and modelling has been done up there to see the effect of differential rates of income tax north and south of the border, but the Finance Committee concluded that the Scottish and Welsh situations are simply too different for an effective comparison. Indeed, trying to draw conclusions from tax changes to other countries simply doesn't work. We need more Welsh-specific research in this area and that's going to take time to develop. But the fact we're having this debate today shows how far we've come and how far the tax system here has already evolved. And the current and future devolution of tax powers gives this Senedd a number of opportunities to use that system to encourage entrepreneurship, grow the tax base and stimulate the economy. In the case of lowering taxes, ultimately that could generate more tax revenues and should be looked at closely.

In conclusion, Dirprwy Lywydd, the pandemic clearly makes major changes difficult at the moment, but tax policy is and will continue to be key as we build back better beyond the pandemic. As far as I'm concerned, I think we need to keep taxes in Wales as low as possible and I hope that this is a report that will contribute to a growing body of work so that we have more Welsh-specific data and we can take the decisions in Wales we need to grow the economy and keep the tax base here efficient and effective.

Of course, the power to raise tax and to levy taxes is one of the great powers of a state, along with law-making and the role of a legislator in doing so, and it really is a coming of age, if you like, of this Parliament that we have powers now to levy taxes as well as to legislate. It's about shaping the country that we want to see, about shaping the sort of society and community we want to see in this country in the future, and it's also about the maturity of this place, not only as a place for discussion and debate but also our wider political discourse as a country.

I was very taken by the remarks that we've just heard from Nick Ramsay because, in many ways, the election that we will fight next year is the first mature election and the first mature political debate that Wales will have as a country, because we will not simply be debating expenditure as we have done for the last 20 years—we've had enormous debates over how the money will be spent, but we've never been able to debate how the money will be raised, and that's a fundamentally different debate. It's a fundamentally different politics and it's a great maturing of our politics and it's something that I very much welcome.

I hope that we will be able to have the conversations that Nick Ramsay has just started about the nature of the tax base in Wales, but I think we need to go further than that. I think we need to have a debate about the nature of taxation in Wales, and this report, I think, is a landmark report, quite honestly, and I'm very grateful to Llyr, as Chair, for leading it, and to the secretariat for the support that they were able to provide to the committee over the last period that we did this work. And I say it's a landmark report because it demonstrates very clearly that the barriers that some people may have argued exist to a Welsh taxation policy are simply not there. They aren't there. Where the barrier exists, possibly, is not that determined by the Treaty of Montgomeryshire many a century ago in the border, but in our own minds, and in our own creativity and our own imagination. And I believe that as politicians and leaders in different parts of the country, we need to have a very different debate, and this report I think sets the basis for that. I don't think it's good enough for anybody on any side of the Chamber, wherever they sit in the Chamber, to simply say, 'We're going to build back better as a consequence, post COVID', without saying where the money comes from, and this report demonstrates that we can have that debate.

It isn't good enough simply to say that we need to be able to spend more on the national health service, as every party does, without saying where the money comes from. And we've got a debate later on this afternoon on second homes—a fundamentally important debate about the nature of communities across Wales. What is the role of taxation in tackling that issue? What is the role of taxation in shaping that debate? What is the role of taxation in shaping our response to climate change? I believe that we need to go much, much further in defining taxation as a part of the policy arms of Government, as the armoury of Government is, to enable us to shape different parts of our lives, and climate change is an obvious example of that.

But I also think we need to learn more lessons—[Inaudible.]

We've lost—

Sorry, I pressed the wrong button. [Laughter.] I was getting overexcited with my own rhetoric. [Laughter.]

But we also need to learn lessons. This was in many ways a lesson-learning investigation and inquiry for many of us. The idea of a Welsh tax policy is new to us in Wales, but the idea of differential tax policy within federal states is not a new one across the world. And we need to be looking where different states have different tax policies in different places, levied by different Governments, and how they, taken together, help shape that territory, that community.

And let me finish by saying this: in having this debate, we need to have an honest debate. I've heard speakers in different parts of the Chamber talk about a low-tax Wales versus a high-tax Wales, and we've had that conversation before. The reality is we've got a very low tax base at the moment. We've got both a low tax base and low taxation levels, and we've always fooled ourselves—this extraordinarily dishonest approach that we can have Scandinavian-level services with American levels of taxation. And that's a debate we've not actually had, and we've believed it—we've been daft enough to believe our own rhetoric. And I believe we need to move away from that and to have a very real debate about where taxation lies in Wales, where it should lie. We're always home to the national health service when we want to be proud of it, but are we prepared to spend money on the national health service? We clapped this year, but will we put our hands—

Can you wind up, please?

And that's the sort of debate that we really need to have, and I hope it will be a rich debate. And I'm sorry for testing your patience, Deputy Presiding Officer. Thank you very much.

Thank you. Mike Hedges.

Thank you, Deputy Presiding Officer. I also welcome the report by the Finance Committee. Can I say I agree with almost everything said by Nick Ramsay and by my friend Alun Davies? The only thing I would hold with Nick Ramsay—. If we were to drop the top rate of income tax by 10 per cent, does he not think that England, across the border, would do exactly the same thing, as we engage in a race to the bottom? That's my concern—that if we enter a tax competition, we as the smaller and weaker part are going to lose.

There are three impacts of varying income tax: individual behaviour, in terms of moving to a lower tax area; impact on quality and level of public services; and the political effect caused by paying more or less than those you work alongside or those living perhaps a few hundred yards away from you. The study we undertook concentrated solely on the first of these options—what people would do. As Wales approaches the third year of partial devolution of income tax and the final year of the current Welsh Government's commitment to not raise Welsh rates of income tax, and an election year, I think it's really appropriate for this to be out there being discussed.

We've got a border, as Nick Ramsay said earlier, with 17 million people living within 50 miles of it. Many people cross the border daily for work. And we also know, and our late friend Steffan Lewis would have said, 'We're not unique in this. Other countries across Europe and across the world have exactly the same things; why do we believe in British uniqueness?' Actually, I think he said that very regularly—I certainly remember it, and I'm sure other Members do. I think that's absolutely true.

And we can look at what's happening in international studies or what happens in other places, and we probably have fewer people commuting than places like Luxembourg and the Benelux countries, and also some of the Länder in Germany. But international studies show that high-income earners are responsive to tax rates. They can decide where they live, where they have multiple homes, and they can decide which one is going to be their main home. Some professions, like barristers, are highly mobile. We also know that tax considerations are not the sole determinants of migration. The influence of non-tax factors—wages, family, house prices, and I would say especially house prices, and quality of life—cannot be underestimated, and must form part of future Welsh Government research on the impact of tax diversions across the Wales-England border. 

We were told a change in the basic rate of income tax had little effect on migration. Well, why would it? Because saving those small sums of money is not going to get you to move many miles. We know from council tax that we have huge variations in the number in each band, and we also have huge variations in the amount paid. Now, let's compare Blaenau Gwent and Monmouth. Blaenau Gwent have over half their properties in band A; Monmouth has just over 1 per cent of their properties in band A, and almost 6 per cent in the top two bands. The precept of a band D in Blaenau Gwent is 1,712. In Newport 1,198, and Monmouth 1,381. There's a substantial difference. But if you look at property prices and mortgage costs—they also vary considerably. I went on Zoopla—other places are available—to look at purchasing houses: £150,000 gets you a very nice three-bedroomed semi in Tredegar. It also gets you a one-bedroomed apartment in Monmouth.

We know from the OECD that tax competition is widespread and occurs in most countries. Taxes on capital income are most prone to tax base mobility, followed by personal income taxes. Other factors also affect tax competition and tax base mobility, such as house prices, spending on public services and easier travel to work. Also, people often live in an area where they get non-financial benefits—access to family support, family childcare, parks, beaches and leisure facilities. The political effect of increasing taxes over those of England would, I believe, be very serious. 'Why am I paying more than someone in England on the same income?' It will affect how people vote.

Whilst we know that the 'yes Wales' group are prepared to see all Welsh taxes increase by over 20 per cent, I do not believe this is a view that is universally held. Also, we know that a 1 per cent increase in the basic rate would raise £200 million. That sounds like a large sum of money, but if you put it in perspective, the Wales Audit Office has shown that over the course of the last three years, Wales's seven health boards were £352 million in the red.

Scotland had the ability to vary income tax for very many years—it did not take it. It could move up or down by plus or minus 3 per cent. What happens? Increasing income tax raises little money, makes people angry, and unless the rise is large has no appreciable effect on public expenditure. Reducing income tax costs little money but reduces spending on services. That's why Scotland kept it the same, and I'm sure we're going to.

Thank you. Can I now call the Minister for Finance and Trefnydd, Rebecca Evans?

Thank you. And I thank the Finance Committee for undertaking this inquiry and producing its report. The inquiry considered some really important issues. Differences in income tax in different parts of the UK is a relatively new concept for us to contemplate, and we're just beginning to understand the possible impacts on our communities. Having this report, along with access to the relevant data and analysis, is critical to our evidence-based approach to policy making in Wales. 

To be clear, this Government has committed not to changing the Welsh rates of income tax for the lifetime of this Senedd. However, it is essential that we consider the evidence on the likely effect of any variations on Welsh taxpayers, and their possible behavioural responses, as we consider our future devolved tax policy.

The recent outturn and projected outturn for Scotland has shown that there are potentially big differences in revenue growth between different parts of the UK, largely concentrated at the top end of the income distribution. I therefore welcome the committee's report and accept all of the committee's recommendations in full or in principle. Indeed, as my written response to the committee makes clear, many of the recommendations in the report are consistent with the existing Welsh Government tax strategy framework and reinforces that our current taxation strategy principles are the right ones for Wales.

I recognise that much more work is needed to fully understand the likely impact of variations in income tax on the population of Wales. This is an evolving area of research in the UK context, and the Finance Committee's report will add to the growing body of evidence. The Welsh Government will continue to assess how the current arrangements in Wales perform, ensuring an appropriate balance between devolved tax levers and exposure to fiscal risk. The balance between investment in public services, the competitiveness of the Welsh economy and the impact on taxpayers will be at the forefront of decisions on devolved taxes. So will how we use taxes as a lever to advance fairness and equality, enabling us to tackle social issues, including justice and economic security.

So, turning to some of the specific recommendations, the Welsh Government continues to collaborate closely and constructively with analysts across the UK Government, including HMRC. The service-level agreement between Welsh Government and HMRC includes performance measures designed to ensure that there's a continued focus on identifying and maintaining an accurate and robust record of the Welsh taxpayer population.

The outturn data for the latest tax year—the first full year of Welsh income tax devolution—will start to become available from summer 2020-21, and a detailed data set for that year will be available in 2022. The Welsh Government is working closely with HMRC to ensure that that data can be provided in an accessible and useful way for researchers. Moreover, the Welsh Government is already undertaking research with HMRC into the possible effects of tax divergence. This work builds on the evidence already presented to the committee by Welsh Government officials for this inquiry.

As the report recognises, tax considerations are not the sole determinants of migration. Non-tax factors, such as wages, family, house prices and quality of life must and will form part of any future research on the impact of tax divergence across the Wales-England border. Therefore, part of our work includes consideration of a longitudinal data set to provide more sophisticated research into the behavioural impact of income tax changes and potential differences within the UK. By collaborating with HMRC, we will look to generate a data set that would be appropriate for both Government and non-Government researchers, while still respecting tax data confidentiality.

The committee recommends giving further consideration to the issue of devolving tax on savings and dividend income to Wales. I agree that this is something that should be considered. It is, of course, still early days for income tax devolution here in Wales, but, nevertheless, we should be open to further developments in tax devolution where the evidence suggests that there is a case for change.

The committee says that the current climate means difficult decisions on taxation will need to be made in order to aid economic recovery. The temporary increase to the land transaction tax residential starting threshold for homebuyers demonstrates our ability and our willingness to use our tax policies alongside other fiscal levers to aid Wales's recovery from the global pandemic.

So, as we go forward, the evidence contained in this report will help to shape future tax policies in Wales, and the role played by devolved taxes in exploring the opportunities and responding to the challenges that we face in Wales. Thank you.

Thank you. Nobody has indicated that they wish to make an intervention. Therefore, I call on Llyr Gruffydd to reply to the debate. Llyr. 

Thank you very much. Deputy Presiding Officer. May I thank everyone who has contributed to this debate—particularly to the Minister, as she mentioned earlier, for accepting all of the recommendations, either in full or in principle? We note, of course, that she is open to further devolution on taxation powers to Wales.

Mike Hedges has drawn attention, of course, to the fact that, when Nick Ramsay mentioned how many people crossed the border between Wales and England on a daily basis, that is not something that's unique to Wales. Certainly, if anything, I would think that it happens on a higher level in other countries worldwide. So, it's no reason for us not to get to grips with changes of tax rates. I don't think Nick suggested that was a barrier, but that is something that we need to be aware of. But, as Alun Davies and others said, there are examples across the world of where this has happened and where this is being effectively managed. So, I do think that—there is a risk that that could appear more of a problem than it should, and I think that we should be aware of that. 

Nick also referred to the unwillingness of the Welsh Government to consider tax divergence at the moment. I understand perhaps why they are doing that, but certainly the discussion and this report and this debate are part of this national conversation that we do need to have. Because, as Alun reminded us, it is a sign of a Senedd coming of age that we do have taxation oolicies or powers, but that dimension will add a very new dimension to the election in front of us in some months' time, with parties publishing their manifestos. I hope that the committee's work in this field will assist that discussion and debate within the parties, and more widely in Wales, in terms of our direction of travel from the point of view of tax policy. Because, as was mentioned, it's one thing to talk about how one spends money, but it's an entirely different discussion when you need to discuss how you spend the money that you're raising, and how you're levying that funding yourself to meet your expenditure commitments.

The varying factors have been referred to. Taxation is one element of what impacts on people's mobility, and Members have been entirely right to refer to such things as wage levels, house prices, quality of life and family networks, of course, which are just as important for a number of people.

One thing that is obvious, of course, is that there is a great deal more work that needs to be done, and that includes having a clearer picture of the Welsh tax base. The Minister referred to the need to examine the outturn from the first year of the Welsh rates of income tax next summer. We need to improve the work of collecting data in Wales and the dissemination of those data in Wales, and that has come through clearly in this debate, and to consider what drives taxpayer behaviour and how we can attract more of those groups that need to be attracted to boost revenues. 

But these are still early days in our tax devolution journey, and we recognise the challenges faced by the Welsh Government in seeking to anticipate taxpayers' migratory avoidance and economic responses to potential income tax rates changes in Wales. 

But it's important to recognise the role that the Welsh rates of income tax can play in developing the Welsh economy. It's an opportunity perhaps for us to think differently, to be innovative, and to develop policies that support the economic recovery in this current situation. 

But, as I say, I hope that the committee's report and this debate  this afternoon have contributed to that conversation that needs to be had, and that conversation will continue until the election in May and beyond.

Thank you very much. The proposal is to note the committee's report. Does any Member object? No. Therefore, in accordance with Standing Order 12.36, the motion is agreed.

Motion agreed in accordance with Standing Order 12.36.