The Institute of Chartered Accountants of Scotland (ICAS) has highlighted a £22m ($29.2m) shortfall in tax revenue as a serious cautionary signal.
The organisation cautioned that such “tax divergence” could damage the country’s competitiveness, economic appeal, deter future investment and shrink its permanent tax revenue foundation.
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The organisation was commenting on reports that behavioural shifts among higher earners could be weighing on Scottish income tax revenues.
The ICAS said the emerging data strengthens the argument for a thorough, evidence-based review of how differing tax policies are influencing competitiveness, inward investment, talent attraction and the sustainability of Scotland’s public finances.
ICAS CEO Gail Boag said: “ICAS has long argued that the UK tax system is overly complex and that simplification is essential to improving compliance, reducing administrative burdens and supporting business confidence.
“We have warned for several years that Scotland could be approaching a tipping point, where growing tax divergence from the rest of the UK begins to influence decisions about where people choose to live, work and invest.”
Data indicating that Scotland’s “48p top income tax rate” may have reduced, rather than increased, overall revenue was cited by the ICAS as a reason for concern.
The body said such findings highlight the need for policymakers to consider the behavioural impact of tax decisions.
Boag added: “Analysis suggesting the 48p top rate may have raised less revenue than expected underlines why that warning matters.
“Scotland simply cannot afford to treat tax competitiveness as a secondary issue if it wants to protect its tax base and support economic growth.
“While more evidence is needed before firm conclusions can be drawn, policymakers should not ignore signs that behavioural effects may be starting to emerge.”
The ICAS CEO explained that the potential behavioural changes include declining promotions, cutting hours, boosting contributions or relocating within the UK.
Boag added: “Tax policy can’t therefore be viewed solely as a means of closing short-term budget gaps.
“It must form part of a long-term strategy that supports economic growth, strengthens competitiveness and ensures Scotland remains an attractive place for people to live, work and invest.
“The Scottish Government should look carefully at the evidence and assess the cumulative impact of tax divergence across all income levels – not just among higher earners.”
