IN our last two articles, the Scottish Banking & Finance Group (SBFG) has argued that the new independent Scottish state, based on a written democratic constitution, will have a leading role to play in directing the economy. Taxation plays an important role in shaping how the economy functions – what is produced in the economy and how the fruits of production are distributed.

It is important to say at the outset that, contrary to mainstream economics and popular belief, taxation does not fund government spending. The money to pay tax has to be created somewhere in the first place. It is created in the very act of government spending into the economy. Taxation removes some of this from circulation subsequently.

The government pays for services to be provided, infrastructure to be built and maintained and also pays a variety of social and welfare benefits. This money is then circulated in the economy, within the private sector, as people and businesses exchange goods, services and their labour among themselves.

Since tax does not pay for public spending then there is no need for the government to work out how much tax revenue has to be found before the spending can occur.

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Taxation can be designed to shape the economy and to help promote greater social equality. Government does not need to rely so heavily on income tax, which can be designed to reduce poverty, leave people with more money with which to manage their finances and increase the potential for more people to build up personal savings rather than get into debt.

We would suggest no income tax should be payable in Scotland on incomes below a national minimum annual wage set by a Job Guarantee scheme. If that were £12 per hour, for a standard 40-hour week, the annual minimum would be about £25,000.

Companies should be liable for corporation tax based on the profits generated from their activities in Scotland but discounts could be provided if certain conditions were met – conditions which promote industrial democracy, employee participation, collective bargaining, profit sharing and full financial and carbon accounting and disclosure, for example.

The use of “transfer pricing” by multinationals to artificially reduce profits made in Scotland should be banned and prohibition strictly enforced.

National Insurance Contributions (NICs) should be abolished, although we propose there be contributions into a national pension fund by all workers and their employers, including by the self-employed.

We have outlined in previous articles how a National Pension & Investment Fund could be established and how it should invest its funds. Any such contributions should be exempt from income tax, and the effect of this would be to further increase the effective tax threshold.

VAT should be abolished and replaced with targeted product taxes which are focused on harmful products and also to discourage designed obsolescence and the “throw away” culture. Products should be made to last and to be easily repaired, reused or recycled – the tax system could be used to support development of a circular economy.

Insurance Premium Tax (IPT) should be abolished. People need to be able to obtain affordable insurance cover. IPT just makes getting insurance more expensive and there is no social or economic benefit to be got from it.

Introduction of a wealth tax will also be important in order to tackle social inequality and to limit the availability of finance for political lobbying and cronyism in our public institutions. Excess wealth is associated with the corruption of democratic governance and the unequal distribution of power and resources. Scotland must not be a country run by oligarchs. Capital gains tax and an estate tax could be part of this.

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In previous articles we have argued strongly against allowing financial speculation to dominate how our financial system and institutions operate. The introduction of a financial transactions tax designed to penalise speculative behaviour would reinforce the kind of reforms we have proposed to our banking and financial system.

A land tax should penalise the holding of land which is not being used productively, including uses which are having a negative impact on the environment and obstructing the right of our people to enjoy nature and Scotland’s magnificent landscapes.

Local taxation will form an important part of public finance in an independent Scotland. If we wish to have a system of decentralised governance based on applying the principle of “subsidiarity” then local communities will need access to finance in order to be fully empowered to make and implement decisions on matters which affect them.

Decentralised governance needs decentralised tax powers so that money in the local economy can be recycled locally. Municipal authorities cannot issue their own currency and so they must raise taxes in order to finance local spending. This can be supplemented, as at present, with direct funding from central government.