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TitlePrinciples for a Modern and Efficient Tax System for an Independent Scotland
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Page 1

Principles for a Modern and Efficient Tax
System in an Independent Scotland

Fiscal Commission Working Group

Page 2

The Scottish Government, Edinburgh 2013

Principles for a Modern and Efficient Tax
System in an Independent Scotland

Fiscal Commission Working Group

Page 73

3 Principles of Taxation


Figure 3.02 – Influence of Tax Policy on Drivers of Economic Growth

Source: OECD

3.97 Figure 3.02 highlights how different elements of the tax system can be used to influence the

drivers of economic growth – both through level effects (labour utilisation) and dynamic effects


3.98 Different taxes impact on these determinants in different ways. For instance, consumption

taxes are considered to have a more neutral effect on the timing of expenditure compared to

income taxes – and therefore impacts less on savings decisions. Increased saving frees up economic

resources for investment and may be expected to increase future national income


3.99 Ranking taxes according to the impact on economic growth, the OECD

find that recurrent

taxes on the least mobile factors (i.e. immovable property) appear to be the least damaging to

growth, followed by consumption taxes, personal income taxes, with corporate taxes being the most

damaging to growth.

3.100 However, the OECD

point out that there are a number of factors which will determine the

impact of tax reform on growth in different countries and circumstances, and it is generally difficult

to assess the overall effect of an isolated tax reform on economic output for a number of reasons.

Firstly, changes in taxation will often affect multiple determinants of GDP – for instance a

reduction in labour income tax may increase employment, but can also increase the

opportunity cost of higher education with knock on effects to labour productivity.


Tax Policy Reform and Economic Growth, OECD, 2010

The Economics of Taxation, James and Nobes, 2013

Tax Policy Reform and Economic Growth, OECD, 2010


per capita


Hours worked

Physical capital

Human capital

Efficiency in the use of inputs (total
factor productivity)





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Principles of Taxation 3


Secondly, tax reforms predominantly occur at the same time as other changes to tax

instruments making it challenging to disaggregate the often competing effects.

Also, and importantly in terms of considering a whole system approach, the impact of

changes in taxation often depend on the design of other policies and institutions.

3.101 Ultimately it is therefore about getting the right balance and mix of taxes in place.

3.102 Finally, as highlighted above, the investment and use of revenues from taxation is itself a

driver of growth. For example, taxes support government spending on crucial infrastructure

investments and the provision of public goods such as funding education and skills development.

Box 3.05 – Rent-Seeking

Rent-seeking is where resources are spent in order to increase one’s share of existing wealth rather

than creating new wealth. Rent-seeking is inefficient and distorts resource and wealth allocations.

In the simplest form, rents received from rent-seeking practices involve a redistribution of resources

from one part of society to another. This can often be inefficient and unfair. Depending upon the

nature of such rent seeking it can also contribute to increases in income inequality

. As noted, in his

analysis on the links between inequality and growth, Professor Joseph Stiglitz concludes that

countries which are more unequal do not do as well, do not grow as well and are less stable


This has important implications for the debate about taxation of high earners. If some people with

very high incomes are deemed to be participating in rent-seeking, higher rates of tax for such

individuals will only have a limited ‘economic’ impact and may, instead, reduce the benefit from

rent-seeking behaviour and thereby distortions in an economy. Finding this point in the income

distribution is a key challenge. Some recent research does suggest that cutting top tax rates have

only a very limited impact on growth and instead show a correlation between cuts in top tax rates

and increases in income inequality

. However, it can be difficult to identify rent seeking in practice,

particularly in highly regulated or concentrated markets.


Stiglitz, J. (2013) The Price of Inequality

Macroeconomic Fluctuations, Inequality and Human Development, Stiglitz, J, Jan 2012,

Piketty, Saez, and Stantcheva (2011) Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities, NBER Working
Paper No. 17616

Page 146




Accident Compensation Corporation NZ,

Commission on Scottish Devolution,

Doing Business,

European Commission, Tax details,

HM Revenue and Customs,

Ireland Department of Finance Databank,

New Zealand Tax Working Group, University of Victoria,

OECD Revenue Statistics,

OECD Tax Database,

Office of Tax Simplification,

Page 147

© Crown copyright 2013

ISBN: 978-1-78256-794-3

This document is also available on the Scottish Government website:

APS Group Scotland
DPPAS14566 (11/13)

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