Political economists understand that the power to tax is at the heart of effective states. This is far from being a purely technocratic issue: a government must be able to raise revenues to spend on infrastructure and a range of public services.<\/p>\n\n\n\n
But throughout history, enlarging the public purse has been a surprisingly difficult task for many countries. Although since 1998, Scotland has been granted some limited tax-raising powers and autonomy over public spending<\/a>, the nation currently does not have the capacity to collect broad-based taxes. Hence it is not a strong fiscal state in its own right, given that \u2013 under the current constitutional settlement \u2013 it is not responsible for its own tax system and lacks the institutions to raise revenues.<\/p>\n\n\n\n A government\u2019s accountability rests primarily on how it chooses to spend money rather than how it raises it. This would change were Scotland to become an independent country, and it is important to be aware of the tasks that would be entailed in making such a transition.<\/p>\n\n\n\n There are many politico-economic studies emphasising the importance of fiscal capacity in the history of nation-building. Over the past century, fiscal capacity has increased dramatically (Besley and Persson, 2014<\/a>). Expanding the base for taxes on income and consumption is the fulcrum of modern fiscal capacity.<\/p>\n\n\n\n Far from impeding prosperity, it is high-growth countries that tend to have a larger share of tax revenues in GDP (Dincecco and Prado, 2016<\/a>). This is partly because governments with high fiscal capacity have strong incentives to invest in prosperity to maintain and build the tax base; and hence they tend to strengthen other branches of the state that support economic development (Besley and Persson, 2011<\/a>; Besley et al, 2021<\/a>). For example, investing in the health and education of citizens or regulating an economy in a way that supports growth will pay dividends in the form of higher tax revenue.<\/p>\n\n\n\n High fiscal capacity can also support protection against economic shocks, as was apparent with the scale of the furlough scheme during the Covid-19 pandemic. It can also increase economic flexibility by sharing the burden of economic transitions, as is likely to be seen in the coming years as we move towards a low-carbon economy.<\/p>\n\n\n\n It is also fiscal powers that enable a state to borrow at reasonable cost. But a good part of building these powers lies in acquiring a reputation for using them wisely and having appropriate constraints in place to underpin this.<\/p>\n\n\n\n Excluding revenues from North Sea offshore oil and gas activity, Scotland\u2019s average tax revenue as a share of GDP<\/a> is 39.2% (over the period from 2016 to 2021). By this standard measure, Scotland looks like a country with high fiscal capacity, in parallel with many high-income countries. Notwithstanding this, most fiscal decision-making still lies with Westminster.<\/p>\n\n\n\n Developing a strong fiscal state requires an extensive state infrastructure<\/a>, such as a trained and effective bureaucracy to monitor tax collection processes and enforce sanctions (Xu, 2019<\/a>).<\/p>\n\n\n\n Research has shown that collecting broad-based taxes, such as income tax and value-added tax (VAT), is key to this endeavour (Migdal, 1988;<\/a> Besley and Persson, 2014<\/a>). This stands in contrast to more \u2018basic\u2019 taxes, such as trade tariffs, which can simply be collected at ports by monitoring flows of goods.<\/p>\n\n\n\n Revenue Scotland<\/a>, which was established in 2015 as the nation\u2019s tax authority, currently oversees only the collection of fully devolved taxes<\/a> \u2013 the Land and Buildings Transaction Tax (the replacement for Stamp Duty) and the Scottish Landfill Tax. Two other taxes \u2013 Air Departure Tax\u00a0and Aggregates Levy \u2013 will also be collected by Revenue Scotland, although full devolution has been delayed.<\/p>\n\n\n\n While Scotland has its share of the administrative infrastructure for income tax collection, it does not currently have oversight over broad-based taxes, which are collected by HM Revenue and Customs (HMRC).<\/p>\n\n\n\n Even though the Scottish government can vary tax bands and rates on income tax, administration is still undertaken by HMRC. Around half of VAT revenues<\/a> estimated to be raised in Scotland are planned to be assigned to the nation in the future, but again these will be collected by HMRC, with an estimate of how much has been collected in Scotland allocated to the Scottish budget.<\/p>\n\n\n\n Essentially therefore, Scotland\u2019s government spending is currently dependent on the fiscal capacity institutions of the UK as a whole, which have been built up over more than two hundred years. Although Scotland has been part of these two centuries of history, does it matter if the current set-up changes?<\/p>\n\n\n\n Historically, war has been the key impetus for a state to build its fiscal capacity (Dincecco and Prado, 2012<\/a>). As the late historical sociologist Charles Tilly<\/a>\u2019s famous aphorism goes, \u2018war made the state and the state made war\u2019.<\/p>\n\n\n\n Although war is destructive, it can also be a key source for creating a sense of \u2018common purpose\u2019. November commemorations of the fallen in world wars that take place everywhere in the UK are a collective appreciation of the sacrifices that were made to maintain the territorial integrity and independence of the UK.<\/p>\n\n\n\n Following this logic, creating a sense of common purpose will be key if there is a referendum vote in favour of Scottish independence. If the referendum is divisive, that may not be easy; the ordeal of trying to resolve Brexit in a harmonious way is a salutary experience.<\/p>\n\n\n\n We would expect Scotland to retain the broad administrative and political institutions that are conducive to this, especially strong constraints on executive power and openly contested elections. Of course, much would depend on the future party configuration that emerges in a post-independent Scotland once the raison d\u2019\u00eatre<\/em> for the Scottish National Party (SNP) is no longer relevant.<\/p>\n\n\n\n Robust checks and balances have been a key part of the institutional fabric that has built strong fiscal states throughout history, as a means of limiting the possibility that a government is run by a narrow unaccountable elite (Besley et al, 2013<\/a>).<\/p>\n\n\n\n Being part of the UK adds to the checks and balances on both the reserved and devolved powers of the Scottish government. Once these have gone, debates surrounding the role of a second chamber and a constitutional court would surely become salient.<\/p>\n\n\n\n Scotland already has it own fiscal commission<\/a> to support fiscal forecasting, and if it aspires to rejoin the European Union (EU) post-independence, it is likely that it would have to step in line with the requirements for entry to the euro area (although these seem to be only loosely adhered to and policed for existing members).<\/p>\n\n\n\n How to design the tax system would open a host of new political cleavages and possibly some new constraints for Scotland. As will be covered by other authors in this series, irrespective of the long-term views on the success or otherwise of independence, the post-independence Scottish government would need to act carefully to counter any threat of exit by firms and high-earning individuals.<\/p>\n\n\n\n Since 2015, Revenue Scotland<\/a> has been a well-established bureaucratic agency for administering tax collection, and there are unlikely to be significant start-up costs in establishing a tax collection system if registered taxpayers under HMRC are simply \u2018handed over\u2019 to Revenue Scotland. Nevertheless, the core challenge goes beyond administrative concerns, since relying exclusively on the coercive and administrative power of the state is unlikely to be enough in itself.<\/p>\n\n\n\n Evidence suggests that higher confidence in government is correlated with higher levels of willingness to comply with taxes (Besley, 2020<\/a>). Fiscal capacity is thus generally complemented by strong norms and values \u2013 what is often referred to as \u2018civic culture\u2019<\/a>.<\/p>\n\n\n\n Building this confidence comes, in part, from institutional constraints such as checks and balances. States with a record of accomplishment in raising revenues and spending have a reservoir of confidence on which they can draw. For new states taking on new tax-raising powers, this needs to be built. States that are, or have been, dependent on external aid or natural resources have often struggled to build such confidence (Deaton, 2015<\/a>; Jensen, 2011<\/a>).<\/p>\n\n\n\n To succeed as an independent fiscal state, Scotland would have to rely on its strong civic culture to bolster the piecemeal process of state capacity. Figure 1 presents data from the Scottish Social Attitudes (SSA) survey<\/a>, showing that Scots have far more trust in Holyrood than Westminster based on the question \u2018How much do you trust the [UK government\/Scottish Parliament] to work in Scotland\u2019s best interests?\u2019, of which we take the proportion of respondents answering \u2018only some of the time\u2019, \u2018most of the time\u2019 or \u2018just about always\u2019, relative to \u2018almost never\u2019.<\/p>\n\n\n\nThe importance of fiscal capacity<\/h3>\n\n\n\n
Where does fiscal capacity come from?<\/h3>\n\n\n\n
The importance of trust and confidence<\/h3>\n\n\n\n
Figure 1: Scots\u2019 trust in the UK government or the Scottish Parliament to work in Scotland\u2019s best interests<\/h4>\n\n\n