7. Plaid Cymru Debate: Income tax devolution

– in the Senedd at on 8 February 2023.

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(Translated)

The following amendment has been selected: amendment 1 in the name of Lesley Griffiths.

Photo of David Rees David Rees Labour 5:33, 8 February 2023

(Translated)

Item 7 today is the Plaid Cymru debate on income tax devolution, and I call on Adam Price to move the motion. 

(Translated)

Motion NDM8199 Siân Gwenllian

To propose that the Senedd:

1. Believes the present limitations of the Welsh Government’s tax-varying powers are an impediment to effective policy-making in Wales, particularly the ability to respond to the current cost-of-living crisis, and the crises facing our public services.

2. Believes that the Senedd should possess the devolved competence to set its own income tax bands, in line with the powers already devolved to the Scottish Parliament under the Scotland Act 2012.

3. Calls on the Welsh Government to initiate the process outlined in the Government of Wales Act 2006 to seek powers currently reserved to Westminster to enable the Senedd to set all rates and bands for Welsh Income Tax.

(Translated)

Motion moved.

Photo of Adam Price Adam Price Plaid Cymru 5:33, 8 February 2023

Diolch, Dirprwy Lywydd. Our motion today seeks to ensure that we in Wales have the power to set bands for income tax as well as rates. Now, it sounds like a fairly dry and technical debate, but actually it goes really to some pretty fundamental questions—two fundamental questions that every nation needs to answer through its democratic process. The first is: what should the size of the state be, i.e. what proportion of GDP should be alloted to public expenditure? And the second is how progressive the tax system we use to fund that public expenditure should be. And the question for us in this debate is where those powers should lie. Are we content for those decisions to be made in Westminster, or should we take them for ourselves here in Wales?

Now, clearly, as a party that has as its central goal Wales becoming an independent nation, we clearly want those powers here and want those decisions made by the democratically elected representatives of the people of Wales. But, we would argue that progressives who support the principle of Welsh democratic self-government, even in the context of a continuing UK, should support the devolution of income tax bands, and I hope, in the course of my remarks, Dirprwy Lywydd, to outline why. 

(Translated)

The Llywydd took the Chair.

Photo of Adam Price Adam Price Plaid Cymru 5:35, 8 February 2023

There are two principal reasons, really. One, it would enable us to raise additional revenue for public expenditure to create the kind of decent society we want to be, and to do so in a fairer way by creating a more progressive tax structure here in Wales. So, take that first point—raising more revenue. The problem with the current system of tax devolution that we have is that it makes it very difficult for us to raise additional revenue. We saw an example of why didn't we in the debate yesterday on the income tax rates; we have to stick, at the moment, to the tax bands and thresholds set by the UK Government. And because the lion’s share of the Welsh rates of income tax are raised through the basic rate, we have to use that basic rate to raise the more significant sums, and there is resistance to doing so, because there's no way of directly cushioning the lowest paid. This is why those income tax powers have never been used here since we secured them; that's why Scotland didn't use those income tax powers before 2016, when it was at last given the power to vary income tax bands and thresholds. There was no use of the original right to vary the basic rate by 3p that the Scottish Parliament was given in 1999; no use of the right to vary each band by up to 10p, which they were given following the Calman commission report in 2012—essentially the same power as we have now.

Now, some people have said that the income tax powers that we have now and they had then were unusable. Now, we don't accept that in Plaid Cymru, as we argued yesterday; it's a matter of political will. And at a time of crisis, even given the constraints and the deficiencies, there comes a time where you have to use those powers, for the reasons that we’ve outlined, to defend public services in an age of austerity. But there are barriers, clearly, which make it more difficult than it should be for us to use the powers currently, and you have to ask the Government, if they’re not prepared to use the existing powers—even under these circumstances—what's the point of having them? What's the point of sustaining the cost and the institutional architecture of these powers if they will never be used? And, the consequence of us not using them is that our fiscal capacity, our ability to do what is necessary for our people, will be decided not by us, but for us by a Parliament in another place. That's not a great place for us to be, is it? It will limit our ability to do our work, to deliver on the task of improving the lives of the people of Wales with which we've been charged, because we'll be at the mercy of a Westminster consensus that believes that a Nordic level of public service is somehow compatible with North American levels of tax.

Because Scotland is free to set income tax bands and thresholds, it has been able to use those tax powers; it's got a starter rate, an intermediate rate, which allows it to increase the basic rate in a fair and proportionate way. The Scottish Government's increasing that basic rate: that was the first time that any Government in the UK has increased the basic rate since 1975—a historic moment—because of this flexibility. At the upper end of the income scale, it's been able to increase rates and set thresholds in a way that reflects the income tax structure of Scotland, rather than the UK, and according to the Scottish Fiscal Commission, the divergence between Scottish rates of income tax and the UK tax policy since 2017 is now generating £1 billion extra in revenue for public services in Scotland, and that will rise to £1.5 billion in 2026. These are substantial sums, and the Scottish Trades Union Congress has suggested some additional changes recently: some new bands, and moving the top rate to 48 per cent, as we suggested in our amendment yesterday, which would raise an additional £900 million on top of that existing £1 billion. And if that was applied to Wales, equivalent in terms of our tax base, we'd be looking at an additional £400 million to £500 million next year available to us. So, it raises additional revenue.

Secondly, it creates a more progressive tax structure. The Institute for Fiscal Studies has concluded that Scotland has the most progressive tax structure in the UK, more progressive than here in Wales, and it's done that through a whole series of interventions, consistently now over the last five years, the first in 2017, it diverged there by introducing a lower threshold for the higher rate. In 2019, it didn't increase the higher rate threshold in line with the rest of the UK. Thresholds for the higher and top rate payers were frozen in 2021, et cetera, et cetera. So, over the last five years, the Scottish Government has consistently, at every juncture, created a more progressive tax structure than England and Wales.

The STUC has pointed out ways in which they could go further along this path by increasing the top rate further, as I said, and creating a lower threshold for its payment, plus the introduction of a new sixth rate in between the higher and top rate. It's because Scotland has this flexibility that you can have this kind of progressive innovation. The Institute for Public Policy Research have suggested that you could go even further; you could actually scrap tax bands altogether and replace them with, effectively, a constant gradual increase in the marginal rate of tax. That would be the most progressive system of all, similar to the kind of system that, actually, is available in many European countries. That's what we could do in Wales if we had these powers, and so the rewards there, in policy terms, are very, very clear: substantial additional revenue, plus the ability to create a much more progressive tax structure, and all that that means in terms of socioeconomic impact in a country that, sadly, is blighted by deep, deep poverty. 

Now, the rewards are there. I'm sure that the Minister, when she shares the Welsh Government view, will talk, as she did in committee recently, about the risks. Well, let's look at some of those risks that the finance Minister referred to in committee. In the short run, greater volatility and unpredictability of revenue. Well, let's look at the current system. The Welsh Government—you yourself said that the budget that you now have is worth up to £1 billion less next year compared with when it was originally announced, and up to £3 billion less over the three-year spending review period from 2022-23 to 2024-25. That's the existing system that you're defending, Minister, which actually is volatile and unpredictable. So, that's the system that we have. The system in Scotland allows us to buffer unpredictability, because of their ability to generate substantial additional revenue.

The other risk that was referred to is the long-term revenue risk, the risk of the Welsh tax base growing more slowly. Of course, the flipside to that is that the Welsh tax base could grow faster. In fact, that's what happened, of late, isn't it? The revenues from the Welsh rate in 2021 exceeded the associated block grant adjustment, providing an additional £62 million to fund public services in Wales. But you can mitigate—

Photo of Adam Price Adam Price Plaid Cymru

—you can mitigate the risk, as well. I have limited time, I'm afraid.

You can mitigate the risk, as well, because the block grant adjustment approach allows for those kinds of risks to be mitigated. We mitigate currently through the fiscal agreement already in place in terms of the budgetary risks that arise from the different distribution of taxpayers that we have in Wales, and that block grant adjustment mitigation policy could be adjusted further to provide mitigation in the way that the Northern Ireland Fiscal Commission has suggested if income tax bands are also devolved there.

So, there are things that we can do to mitigate the risks, but there are great opportunities here, based on the Scottish experience, not only to generate additional revenue, but also to create a far more progressive tax structure than we're currently given by Westminster.

Photo of Elin Jones Elin Jones Plaid Cymru 5:44, 8 February 2023

(Translated)

I have selected the amendment to the motion, and I call on the Minister for Finance to move formally amendment 1.

(Translated)

Amendment 1—Lesley Griffiths

Delete all and replace with:

To propose that the Senedd:

1. Recognises the Welsh Government’s responsible use of its tax-varying powers to support effective policy-making in Wales during the current cost-of-living crisis.

2. Supports the Welsh Government's approach to tax devolution in line with its tax principles and ambitions for strengthened devolution within the United Kingdom.

(Translated)

Amendment 1 moved.

Photo of Elin Jones Elin Jones Plaid Cymru

(Translated)

It has been moved. Peter Fox.

Photo of Peter Fox Peter Fox Conservative 5:45, 8 February 2023

I understand that there is an important discussion to be had about how we fund services here in Wales and that varying tax levels is the go-to for politicians when looking to raise additional revenue, but we shouldn’t forget just how much of the Welsh budget, some £4 billion, is already raised through devolved tax levers; about £2.8 billion is raised through Welsh rates of income tax alone, as we know. These are substantial sources of funding and, before we look to gain more powers over taxation policy and inevitably look at increasing tax revenue, then we need to assess the tax base here in Wales, because what is missing from the motion is what impact that having full income tax-setting and tax-varying powers like Scotland could have on people’s incomes. We already know that, generally, a larger proportion of the Welsh tax base—over 90 per cent of the tax base—pay the basic rate. This is higher than the UK average. Whereas, in Wales, the basic rate accounts for 59.3 per cent of total income tax, it is just 34.9 per cent in the rest of the UK, excluding Scotland.

Now, the argument could be that a new, lower rate of income tax could be established in Wales if we had the powers to do so, and that is true. If we look at Scotland, we know that not all that shines is gold. The starter rate only accounts for people earning between £12,571 and £14,732, and the rate set is just 1 per cent lower than the basic rate. Meanwhile those in the Scottish intermediate rate band pay more than those within the UK basic rate. Indeed, someone earning £43,600 in Scotland is subject to an income tax rate that is an eye-watering 22 per cent higher than the equivalent person elsewhere in the UK.

So, there could be political promises that additional powers would result in fairer tax bands, but the political reality is often different. We know that Plaid’s current plans, as we heard yesterday, would be to raise Welsh income tax by 1p, hitting the pockets of the majority of Welsh taxpayers, and in particular those who can least afford to pay more. In fairness to the Minister, she has taken a clear position on this issue, though I do have questions about what the pledge to not raise income tax levels for as long as the effects of the pandemic continue actually means, and what threshold the Government is using to determine this.

However, the issue with the Welsh Government’s amendment is that it refers to its future tax plans, which include things like a tourism tax. The industry has made it clear that it sees such an idea as an unhelpful tool at a time of great difficulty for the tourism industry in Wales. There is a risk that it becomes a blunt tool, with businesses in areas that do not introduce the tax gaining an advantage over those in areas that do introduce a levy.

For both income tax and tourism tax, we need to view this with regard to the porous borders between Wales and the rest of England. Would raising income tax in Wales persuade people to move elsewhere, and we lose their tax revenue? Would a tourism tax encourage people to stay in accommodation in England and avoid paying, and then travel into Wales for holiday activities?

I know that the Welsh Government wishes to introduce other taxes as well, but we must consider what the possible disadvantages of these may be on the economy and communities as well, because, when a Government believes it needs a new tax, often the argument becomes one-dimensional, much like what we are seeing with the tourism tax.

To conclude, I believe that we need to make sure that we're doing all that we can with our existing budgets, and that we're spending it on priority areas before we start looking at introducing taxes. As I've said in this Chamber before, it, sadly, seems the default position for Plaid and for Labour is to just tax, tax, tax. We need to think about innovation and how we use the levers we have far better. Thank you.  

Photo of Luke Fletcher Luke Fletcher Plaid Cymru 5:49, 8 February 2023

Conversations around tax are always difficult. I don't think that any of us in this Chamber would deny that. But it is a conversation that we have to have nonetheless. There's certainly a conversation to be had around the effectiveness of taxes, such as: what are we trying to do? To what level do we want to redistribute wealth?

But it is important for us also to remember that tax isn't the be-all and end-all of effective policy delivery. It certainly plays its part, and in the current devolved context is one of the few fiscal levers at Welsh Government's disposal. Now, effective policy delivery is dependent flexible fiscal levers that are truly responsive to the communities on which the policy outcomes impact. The inflexibility of the block grant model, for example, has created a discrepancy between the scope of policy design and that of policy delivery in Wales, which compromises far-reaching and long-term strategies for dealing with issues in our society, especially in terms of capital investment in infrastructure. The example of HS2, whereby Wales was deprived of Barnett consequential funding, even though not one inch of the track is being laid in Wales, underlines the inequities of the block grant model. The experience of the pandemic also exposed this discrepancy—for example, the UK Government refusing to extend furlough to accommodate Wales's firebreak lockdown in November 2021 despite the fact, of course, that Welsh Government's decision was fully consistent with its devolved competence over health policy.

In fact, the pandemic showed us all the need for greater fiscal powers here in Wales, particularly when it comes to Welsh Government's ability to borrow. I was and still am an avid reader of the reports published by Wales Fiscal Analysis, and during the pandemic the work they undertook in scrutinising the budget in relation to COVID-19 money was invaluable and set out clearly the restrictions on Welsh Government fiscally. We all remember the criticism that was made of Welsh Government in this Chamber for holding back spending the full amount of what was coming down from UK Government. There was, of course, significant unallocated spend within the budget. The Tories were the biggest critics, but it was precisely the inability of Welsh Government to flex any meaningful fiscal power that forced the Government into that position. Then, of course, there's the loss of the Welsh Government's access to EU funding, and the shortcomings of replacement funding from the UK Government. 'Not a penny less', we were told. Really, they should have just been upfront and told us to forget about the penny altogether. 

Now, to conclude, Llywydd, enhancing the Senedd's power over devolved taxes does not only make sense from a practical perspective, but it would also increase the accountability of the Welsh Government for its own policy decisions, something that I'm sure every Member in this Chamber would agree is an imperative if we are to have a well-functioning democracy in Wales. Devolution was about bringing power closer to people in Wales. Devolution of taxes was to bring responsibility for raising the funds, rather than just spending, closer to the people. There's still, of course, some way to go before we can do anything meaningful to actually raise said funds. 

Photo of Mike Hedges Mike Hedges Labour 5:53, 8 February 2023

I think it's always good to discuss taxation, especially when it's being discussed not as part of the budget-setting process. I think if we could perhaps repeat this sort of debate again, well away from the budget, because I think it's got far deeper meaning than this year's budget, and I think that to come back to it in six months' time would be incredibly helpful, either brought here by the Minister or brought here by one of the political parties, to give us a chance to talk about it again. 

My view on devolution is well documented; I support devo max. I also support devolution from the Senedd to the regions and councils of Wales. On devolution I have a pragmatic approach: what works best for the people of Wales is what I support. 

The motion today is a continuation of Plaid Cymru's policy of independence by instalments, or salami-slicing powers from Westminster until we eventually find ourselves independent. The Conservatives are consistent: they oppose any additional devolution at any time. What is more surprising, of course, is that in 2016 and 2007 they wanted a coalition with Plaid Cymru. I think perhaps they need to reconsider. 

Where I do agree with Plaid Cymru is you cannot continue with asymmetric devolution. Scotland, Wales and Northern Ireland and English cities such as London have different powers being devolved. This cannot continue. It makes no sense whatsoever, and everybody's saying, 'They've got it—can we have it?' without actually having it set out. Germany doesn't have that problem. The United States of America doesn't have that problem. And America's probably even better to look at because you've got, in America, tiny states with populations smaller than West Glamorgan, and you've got California and New York. So, it can be done. It's not about size; it's about actually saying, 'This is your state responsibility.' With this asymmetric devolution, it will always cause problems. It's got to be resolved. It's got to be resolved in Wales, Scotland and Northern Ireland, but the biggest question is the English question, which people don't seem to be looking at.

Peter Fox criticised the Government on raising tax too much. Plaid Cymru attacked them on not raising tax too much. There's got to be something somewhere in there. Wales has done well out of devolving income tax, but that is due to a freezing of tax thresholds that means more people come into taxation and move into the second band, rather than improving relative tax. There are problems with income tax. It is meant to be a progressive tax, but there are so many ways of reducing individual tax liabilities to zero. Let's look at taxation of somebody earning £30,000 a year. If they run to retirement age, they pay income tax and national insurance. When they reach retirement age, they cease to pay national insurance. A graduate on the same income will pay back a student loan, income tax and national insurance. Some level of fairness is needed in there.

Someone who receives income via dividend, which is a lot of what self-employed people do to avoid income tax, will pay substantially less. Dividends are taxed substantially lower than income tax, so it's a great way of avoiding paying tax. I'll use the word 'avoiding', because, if I use the word' evading' I'd get into trouble, but it's a way of avoiding paying tax because you have been paid by dividend, and that's very easy. You create a company, search the company's name, enter your business and personal details, receive your limited company certificate and your business bank account at the same time, arrange for all payments to go into the business and then receive your income as a dividend, thus paying substantially less tax. And more importantly for us, we don't get any of the dividend income. I think something that we do need to start arguing about is that dividend income should come to us as well, and we should also be arguing that any dividends that come from a company that people have set up and of which they are the sole recipient is effectively income, rather than dividend. That's the sort of thing that I think we need to start discussing. I do not believe that this is fair. We need a less complicated system that ensures that everybody their fair share, with dividend rates taxed the same as income tax.

Then, the tax benefits exist—this only works for relatively well-off people—the travel expenses you can claim, what you're entitled to if you work from home, clothes for work count as expenses, how donating to charity can be good for your tax bill, pensions' relief. And finally there is the elephant in the room—non-domiciled status, used by the wealthy to avoid paying any income tax in Britain whatsoever. UK residents who have their permanent home outside the UK may not have to pay UK tax on foreign income, so if you have a dividend payment paid into a foreign bank and it becomes foreign income, you don't have to pay any at all; the same rules for foreign capital gains tax. All the above benefits disproportionately benefit those paying tax at a higher tax rate. Very few of my constituents get the benefit of that. The best financial devolution you could have would be for dividends to be devolved and for powers over non-dom status and for tax-deductible items to be examined, for pensions tax relief to be only at the basic rate. 

Photo of Sioned Williams Sioned Williams Plaid Cymru 5:58, 8 February 2023

Yesterday in the debate on the Welsh Government's draft budget, I spoke about how the people of Wales are facing multiple crises, unprecedented crises since the advent of devolution, and I agreed with the Welsh Government that this was a difficult budget in a difficult time, and outlined the support that is needed for those who need it most, why the services providing this support must be given the resources that they need to fill those huge holes that exist in the safety net, which has been torn to shreds by the Westminster Tories. 

I set out in my contribution why Welsh Government should feel duty-bound to use all the levers available to it, which was the purpose of our call for it to use the income tax-raising powers it currently has to serve and support the people of Wales during these crises—the cost-of-living crisis, the NHS crisis, the social care crisis, the cost-of-learning crisis, the cost-of-doing-business crisis, the housing crisis, climate crisis—crises that disproportionately affect the most vulnerable of our citizens, and whose effects will scar our communities not just today or tomorrow, but for years to come. Because I, for one, am frankly fed up of hearing Welsh Government Ministers say over and over, 'We'd like to do more but we don't have the money'. If devolution truly is, as famously described by Ron Davies, a process, a journey with no fixed end point, enabling us to make our own decisions and set our own priorities, then calling for the powers we need for Wales to be able to afford to do so is a completely logical step, especially given the need, as our motion describes, to respond to the current cost-of-living crisis and the crisis facing our public services. So, that's the 'why', and in it's an important 'why' because it's not powers for their own sake but the means to make devolution work more effectively, to fund the levels of public expenditure we need.

We've already heard how Wales is something of an anomaly compared to the rest of the UK when it comes to its limited tax powers, and, to quote a recent report by the Institute of Welsh Affairs on this matter, as a nation we are

'in the relatively uncommon position of having little control' over our devolved budget, with limited taxation powers, next to no influence over the block grant from Westminster, as we heard from Luke Fletcher, and exceptionally limited borrowing powers.

And our anomalous situation is also relevant within a wider international context. As a recent Organisation for Economic Co-operation and Development study illustrated, the UK possesses one of the most rigidly centralised tax systems in the world—something Mike Hedges alluded to. Every other G7 nation collects more taxes at a local or regional level compared to the UK. For example, devolved or decentralised taxation accounts for 30 per cent of total German tax revenue, 34 per cent in the case of the USA and almost 50 per cent in the case of Canada. This compares to just over 10 per cent of local UK tax revenue that is collected at the devolved level.

We can look to the example of Euskadi, the Basque Country, too, whose devolved Government has extensive powers over personal income taxation, corporate taxation and its own wealth and inheritance and gift tax. This has engendered economic growth in the Basque Country, which has been described as highly inclusive by the Foreign Policy Centre. The region features among the top in Europe, not only in terms of GDP per capita, but crucially, given the current economic context, also in having a low percentage of population at risk of poverty or social exclusion. So, what we're proposing here isn't particularly radical, therefore; rather, it seeks to normalise what is already happening, and happening well elsewhere.

The argument that we can't use tax to fund the spending we need, to create the fairer, more prosperous Wales we all want to see, is patently fairly ridiculous when set in the international context. And with the powers to set all rates and bands, income tax can be a fair and proportionate way to secure the resources we need, to help us overcome the shameful levels of poverty that blight the lives of too many of our citizens, and the dire need for investment in our public services. Westminster has never and never will work for Wales. Devolution is a journey, a journey of discovery that the Westminster way of doing things is not a good model for Wales to follow. If you believe in devolution, if you believe in taking the responsibility of governing seriously, and if you believe in serving the people of Wales, you should vote for our motion.

Photo of Gareth Davies Gareth Davies Conservative 6:03, 8 February 2023

I'm pleased to take part in this debate this afternoon, and I'm going to keep my contribution fairly brief and to the point today. And I thank Plaid Cymru for tabling such an important discussion, as it shows again that the so-called Party of Wales is the most out of touch it's ever been with the needs of the people of Wales. Only last week, Llywydd, they were happy to grandstand with their showcase policy of raising taxes for working people, but do you think that's what people really want during a period of increasing cost in fuel, energy, food and everything in between? Is this really the Party of Wales acting in the best interests of the people of Wales? I think not. Most of Plaid-held constituencies are in the west of Wales with a high proportion of middle-class, socially conservative Welsh-speaking communities, rural areas with farmers and all the traits that go with it. Do you really think that the good people of places such as Lampeter, Cardigan, Aberystwyth, Newcastle Emlyn, Porthmadog, Dinas Mawddwy, and Beddgelert, even, appreciate your party being pulled in the direction of Corbynista-style nationalists? Again, I think not. Again, the self-styled Party of Wales like to believe they represent Welsh people better than anyone else and purport they are putting Wales first, but you want to devolve justice, devolve more tax powers, devolve the Crown Estates, devolve broadcasting and devolve the kitchen sink, all in the endless pursuit of independence. Goodness gracious me.

This Welsh Labour Government, propped up by Plaid, can't even run the current devolved powers or even run a bath, for that matter, but want to add insult to injury. Look at the state of the NHS in Wales and social care, for example. It's in a mess: one in four people on a waiting list, patients waiting longer than any other UK nation, the failure to build north Denbighshire community hospital in Rhyl after 10 years of broken promises. I could go on all day, but sadly I don't have the time. But what I would suggest is that we get our own house in order before we consider any further devolution to Wales, and you hardly help yourselves, do you? Anyway, I'll leave it there as that's pretty much my view on the subject and would urge Members to oppose this hideously out-of-touch motion. Thank you.

Photo of Delyth Jewell Delyth Jewell Plaid Cymru 6:05, 8 February 2023

Doing nothing has a cost. The absence of action carries consequences for our society, and our debate today is all about costs. Not only what costs should be paid by people able to contribute to our society, but also the cost of not doing more to forge a fairer society, because the tax system in Wales neither adequately reflects the income and societal profile of our country nor our country's needs. There is an opportunity here to change that if we choose to take it. An opportunity and a cost, and economists would see a lesson there.

So, let's look at the detail. Only a minority of people in Wales pay income tax—roughly 43 per cent of our population—because so many people either don't earn enough or are past retirement age. Almost all, as we've heard, the income tax that's raised is raised at the basic rate, and the system and the bands we have at our disposal don't allow us the flexibility to better equip our communities with the funds they so desperately need. Because taxes are a force for good. It shouldn't be radical to say that, but the tired cliché of the tax 'burden' is accepted as the norm. Tax is only a burden if we live in a society where services are not funded enough to provide a decent quality of life to all citizens. Here's a quotation, Llywydd:

'I like to pay taxes. With them, I buy civilization.'

Those words are attributed to Oliver Wendell Holmes Junior, Associate Justice to the US Supreme Court in the early twentieth century. And taxes do buy us chances to do things differently, to build something better for all.

If we look at the powers transferred to Scotland, both of the 2012 Act and subsequent to it in 2016, it's been able to set a lower rate for those who just creep into the bracket of paying income tax to buffer the support for those who need it most. The extra powers buy their communities hope. And the very fact that we don't have those powers in Wales has meant that revenue has to be raised through other, more regressive means. Wales has allowed council tax to go up significantly for years and, as the Wales Governance Centre and the Bevan Foundation have made clear time and again, council tax increases put more pressure on household budgets. It is simply not a fair or progressive way of raising revenue.

What's more, a higher share of revenue is raised in Wales from value added tax than income tax. It’s the reverse in England and Scotland. Why does that matter? Well, lower income households pay proportionately far more in indirect taxes like VAT than they do in income tax, so the people least able to afford it are once again shouldering more weight. Now, that is a burden we shouldn't be seeing. But doing nothing has a cost, a consequence. If we throw up our hands or sit on them, that cost doesn't disappear; it accumulates, and the quiet misery of millions continues. But, Llywydd, we could instead choose to lend a hand, to intervene, to create a more progressive schedule of income tax, to see tax as a means of creating the society we want. We have this opportunity to throw off the constraints of the Treasury-imposed straitjacket, to demand powers that will allow us more freedom, more flexibility, and create a system that truly works for Wales. Yes, I'll take that intervention.

Photo of Mark Isherwood Mark Isherwood Conservative 6:09, 8 February 2023

I think 92 per cent of taxpayers in Wales are basic rate taxpayers. Only 0.3 per cent, barely 4,000, are additional rate taxpayers. Do you recognise that higher tax rates, particularly in those sorts of circumstances, can generate lower tax revenues? 

Photo of Delyth Jewell Delyth Jewell Plaid Cymru

Thank you for that intervention, Mark. Obviously, making a change like this can't be a—. I think we heard earlier, perhaps in a different debate, there's no silver bullet. This on its own cannot revolutionise the economy. We also need to have far more investment to make sure that there are higher paid, quality jobs, but I don't think that anyone would look at the tax system that we have in Wales and think that this is actually doing what it should be for the people of Wales. And I believe fervently that a change like this would benefit the people who need it most in our society. So, let's create a system that truly works for Wales, and a fairer future for everyone. Diolch. 

Photo of Elin Jones Elin Jones Plaid Cymru 6:10, 8 February 2023

(Translated)

The Minister for finance to contribute to the debate—Rebecca Evans

Photo of Rebecca Evans Rebecca Evans Labour

Diolch, Llywydd. Well, this has been a really interesting debate this afternoon, and I absolutely agree with Mike Hedges that it is really good to be talking about tax in a more open and searching way that is just outside of our normal budget-setting process. So, long may that continue. And Adam Price said at the start that he feared it might be seen as a bit of a dry debate, but I think it's been anything but that. 

So, I will just begin with a few words on our current approach to setting tax rates for the next financial year, but I will then move on to address that longer term issue. So, our approach to setting income tax rates for next year is set squarely within the context in which we operate. And, as a responsible Government, we consider the setting of tax rates every single year, and we do that within the context of the time. We do face considerable pressure now on our public services due to high levels of inflation, and, of course, people across Wales are challenged every day with the cost-of-living crisis. The nature of our income tax base does mean that any significant increase to our resources through Welsh rates of incomes tax would have to mean that we raise the basic rate, and that's at a time when people are struggling to pay their energy and food bills. So, I have been really clear that now isn't the right time to increase income tax in Wales. And, let's remember that, with the UK Government's decision to freeze income tax thresholds, our lowest earners now are being dragged into the income tax system, and raising the basic rate would add an additional tax burden to the poorest people in our society at a time when tax is at the highest level for 70 years, and I don't think it's right to do that at this time.

Photo of Rhun ap Iorwerth Rhun ap Iorwerth Plaid Cymru

Thank you for taking an intervention. Hopefully, the Minister will acknowledge that this isn't a motion about increasing bands of taxation; this is about principle. She's acknowledged that this is an important debate to have, and that she wants to have it again, but will she give an undertaking to actually address why she as a Minister, and this Government, and Labour, cannot back the principles that are included in our motion today, because that's the key of this debate?

Photo of Rebecca Evans Rebecca Evans Labour

Yes, I am, absolutely, going to come on to the points within the motion that relate to the rates and bands and so on, but I did want to add that there is considerable uncertainty relating to the impact of raising the higher and additional rates. And the evidence base for any behavioural impact that might occur in relation to any material increase to higher or additional taxpayers is uncertain, because we know that those people have options that aren't available to other people—for example, changing their primary home arrangements to mean that they don't pay income tax here in Wales.

And, of course, we've got that long, porous border with England, and that creates the risk of outward migration for those more mobile taxpayers. And we had some questions yesterday in terms of how we consider that. So, just to reassure colleagues, that is already built into our ready reckoner, which estimates that a 1p increase in the additional rate actually generates a mechanical rate of £7 million, but an actual estimate of only £3 million, due to what we would expect the behavioural impact to be. And I mentioned yesterday that that was relating to the Swiss study, which is seen as the closest proxy that we have. 

Obviously, we do—

Photo of Adam Price Adam Price Plaid Cymru

On the question of the primary home, what discussion have you had with HM Revenue and Customs in terms of having a concordat in terms of rules for defining what a primary home would be, because that applies, of course, in other tax contexts as well?

Photo of Rebecca Evans Rebecca Evans Labour

Yes, so that's set out in legislation and in guidance; we use the same kind of thing for council tax as well. So, obviously, Welsh Government officials and HMRC officials are in constant contact, both in terms of Welsh Treasury and the local government finance officials as well. So, I think that we have a shared understanding as to what a primary home would be. And we see that in effect, if you like, when we look at income tax and the C code. And we had lots of debate when we were introducing the Welsh rates of income tax about how HMRC could ensure that Welsh rates of income tax payers did have that C code attached to their rates of income tax, and we've had very good work done to make sure that we are making sure that as many taxpayers as possible have that code attached to their work. So, we also publish—I think it's annually—a report on the work of HMRC in Wales in relation to those codes as well, and I'd be happy to share more information with colleagues on that, if needed in future.

Turning to the longer term, in any change we will obviously be guided by our tax principles. They commit us to designing clear and stable taxes that deliver our progressive agenda, whereby those who are most able to pay pay more than those who are less able. So, whilst powers to vary income tax thresholds would provide additional policy tools for the Welsh Government, we do need to consider carefully our specific needs and the risks, including the risk of a much greater exposure to relative tax base growth between Wales and elsewhere in the UK, and that would be a particular concern to us in relation to the higher and additional rates, where the Welsh Government is only exposed to 10p in each band.

Photo of Mabon ap Gwynfor Mabon ap Gwynfor Plaid Cymru 6:16, 8 February 2023

Does the Minister recognise that the maximum personal income rate tax in Germany is 45 per cent, while it's 55 per cent in Austria, and have you seen that transfer of people moving from Austria to Germany, based on the high tax rates in Austria?

Photo of Rebecca Evans Rebecca Evans Labour

I'll happily explore the issue between Austria and Germany. I would suggest that the situation is somewhat different here in Wales, given the fact that we are talking about different tax rates operating within the United Kingdom, and I will come onto that point when we look at the experience of Scotland, very shortly, as well. Mike. [Interruption.] Of course.

Photo of Mike Hedges Mike Hedges Labour

Do you share my concern about the use of dividend income to reduce the amount of tax being paid, and that we don't get any share of the dividend income of people who get paid by dividends in Wales?

Photo of Rebecca Evans Rebecca Evans Labour

Yes, and that would be another one of those challenges, and again I'll come onto the Scottish experience there as well.

Just to round off what I was saying in relation to the higher bands, growth in revenues for those two bands does tend to be more volatile from year to year than basic rate revenues, and they do vary more between parts of the United Kingdom, and that does affect the year-to-year net budgetary impact of income tax devolution via the block grant adjustment mechanism.

So, to give an example and to turn to the Scottish experience, Scotland does have full devolution of income tax, except for income on savings and dividends, and what I'm going to say next is really important, because it does set out and demonstrate the real risk that is involved here and the real volatility, which is what we really do need to consider before determining which way forward would be right for us. 

So, the Scottish Fiscal Commission is expecting a net negative impact of around £100 million on the Scottish Government budget this year, and that is despite additional tax effort by Scottish taxpayers of around £850 million from the rate and threshold changes. I think that does demonstrate the level of risk that is taken on when we're looking at this. So, understanding the behavioural changes is key, and I'm looking to better understand the behavioural impact in relation to the changes that the Scottish Government have made.

Photo of Rebecca Evans Rebecca Evans Labour

I will give way when I've finished my sentence.

Photo of Adam Price Adam Price Plaid Cymru

Seeing as she's quoting the Scottish Fiscal Commission, does she also recognise that the net additional revenue that the Scottish Fiscal Commission has identified for next year, in terms of the divergence between the policies, is £1 billion extra? That's the net additional revenue that Scotland has.

Photo of Rebecca Evans Rebecca Evans Labour

I do recognise that, and of course you'll see that we also are expecting net additional revenue here in Wales as a result of the block grant adjustment. It's just simply important and responsible to consider the risks before we seek to devolve powers any further, and of course all of that needs to be seen within the context of our strategic tax policy priorities, and of course the future of Wales within the United Kingdom.

I'm really looking forward to seeing what the Independent Commission on the Constitutional Future of Wales has to say on tax in its final report. In its interim report, the commission did recognise the imbalance in the current constitutional arrangements, and these imbalances do play into the current impasse that we have in seeking the devolution of further tax powers of all sorts in Wales. So, any argument to seek further powers can't be divorced from the need to address the inadequacies of the current devolution settlement.

So, just to conclude, this is an important agenda. I really do welcome colleagues' interest in it. I would say that when we do consider the role of income tax in future, I think of it in terms of supporting sustainably our longer term strategic priorities, for example, such as addressing the pressures in social care for the future, rather than seeing it as a short-term tool to address those immediate funding pressures that we have. But, of course, I really would welcome an ongoing discussion with all colleagues who have an interest in this across the Chamber. 

Photo of Elin Jones Elin Jones Plaid Cymru 6:20, 8 February 2023

(Translated)

Adam Price now to respond to the debate.

Photo of Adam Price Adam Price Plaid Cymru

Well, certainly it has been an illuminating, if somewhat dispiriting debate in its conclusion, with the remarks of the Minister, but I'd like to thank all Members who contributed to it. Peter Fox is a reasonable man—I'm not sure that I can say that more broadly, it has to be said—but I think the central point here, Peter, is this: if we have these powers, there's no point having powers if they're incredibly difficult to use. And, at the moment, with devolving rates but not bands, it means we don't really have the ability to use the powers to the full. And that's, really, the reasonable demand. And you can make your case in terms of your aspirations as to how to use them and we'll make ours, but isn't that how democratic accountability is meant to work? And that's, essentially, the core point that my colleague Luke Fletcher was making, that fiscal policy is critical to being a parliament, isn't it? We need to be accountable to the communities that we're meant to serve and, at the moment, without these full powers, we're not able to do that.

I agree with Mike—I should have taken an intervention now, Mike; I apologise. You referred to asymmetric devolution, and let's remember that the policy that we are seeking to get a Labour Government to adopt here was a Labour proposal. Through the Vow, through the Smith commission, this was a Labour policy, a Labour proposal, and yet here in Wales, with the one Government that the Labour Party runs, they're opposing it. I think you're right, Mike, as well, that there's a wider agenda. We've got to look at dividend income, income from savings, et cetera. I think we've got to look at capital gains tax as well to make sure that, when you devolve the powers and use them, there aren't actually loopholes. I'll be kind like you and talk about tax avoidance, rather than anything else. So, let's look at that and let's look at the interrelationship with national insurance as well, as the Scottish Government are calling for. 

Sioned Williams is right that, in the Basque Country, we see more devolution there of tax powers. In fact, even the provincial councils of Gipuzkoa and Bizkaia arguably have more formal tax powers than we have here. So, certainly we're outside of the mainstream, aren't we? Even now, even after 20 years and more of devolution in this hugely centralised UK state. And that's the core of this motion, to try to liberate ourselves from that.

I'd like to say that Delyth Jewell reminded us that we need to break this negative right-wing narrative around tax and public expenditure. The Labour leadership at Westminster and more broadly is falling into a trap here, I think, in the kind of language that it's using, because ultimately, instead of talking just about tax burdens, we need to talk about tax levers, about tax tools and tax instruments, because taxation ultimately, revenue, is the means by which we actually generate the basis for public expenditure, to do everything that we do in this place for the people that we represent, and we should make that positive case.

That's why we should have the powers, and that's why I was so disappointed by the response of the Government—a Government that has talked about radical federalism. There is nothing in the policy that the Minister has announced, rejecting this, that you could describe as either 'federalist' or 'radical'. There are two adjectives that I can apply to what I hear from the Minister, which are 'conservative' and 'unionist'. Where is the vision for the future—? [Interruption.] Well, you'll be voting with the Conservatives on this motion, won't you, in rejecting our position? Because you do not essentially accept the case that we have set out, that unless we actually have full devolution, we are not going to be able to meet the challenge that we have set ourselves in creating the kind of decent society—. And I don't see it; where is the radicalism in your constitutional vision for Wales, based on what the finance Minister has said to us?

Photo of Elin Jones Elin Jones Plaid Cymru 6:24, 8 February 2023

(Translated)

The proposal is to agree the motion without amendment. Does any Member object? [Objection.] There are objections. We will therefore postpone voting until voting time.

(Translated)

Voting deferred until voting time.