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Devolution of taxes to sub-national jurisdictions could reduce expected tax revenue if some households move to lower tax regimes, constraining devolved government policy. We develop an indirect approach to establishing lower bound revenue impacts of possible devolved tax changes by allowing for tax-induced migration. The results suggest that limited tax devolution, such as conferred on Wales by the UK 2014 Act, could trigger substantial tax revenue and gross value added (GVA) spillovers from migration on the devolved economy. The prospect may have, and perhaps should have, discouraged decentralization of taxation to the same extent as decentralization of spending in the Organisation for Economic Cooperation and Development (OECD).
In the UK, the current progressive income taxes are Base Rate (BR) = 20%, Higher Rate (HR) = 40%, and Additional Rate (AR) = 45%. Before 1997 the only decentralized source of fiscal revenue was local authorities' property taxes, covering about 25% of their spending. Since 1997 three much larger devolved spending administrations have been created, Northern Ireland, Wales and Scotland, responsible for one-sixth of the UK population. Limited decentralization of taxes followed, of which a portion of the income tax rate was the most important. The Scottish government reduced the lower tax rate and increased the higher rates in 2018. To examine the effects of future devolved income tax policies, we build a Computable General Equilibrium (CGE) model applied to the Welsh case. Estimated based on the local authority level data, we simulate intra-national migration effects and the economic effects following the hypothetical income tax changes after fiscal devolution.
Figure 1. Effects of changes in income tax rates on migration. (Notes: The vertical axes are migration flows of M1 = lower income taxpayers, M2 = middle income taxpayers, and M3 = high income taxpayers. The horizontal axes are net changes of BR, HR, and AR.)
Figure 2. Revenue and productivity effects of changes in income tax rates. (Notes: The vertical axes are simulated effects (percentage) compared to the status quo. The horizontal axes are net changes of BR, HR, and AR. (A) 100 = £4.88 billion; (B) 100 = £20.14 billion; (C) 100 = £1.96 billion; (D) 100 = £37.881)
This research has a wide public impact on policy dicussion:
Press Release: BBC, ITV, WalesOnline
More details of the research can be found in the following publications:
Foreman-Peck, James and Peng Zhou. 2020. "Devolving Fiscal Policy: Migration and Tax Yield." Regional Studies, 54(3): 308-317. DOI: 10.1080/00343404.2019.1602256.
Data, Matlab code, Stata code and slides
Estimated migration effects: Excel
Foreman-Peck, James and Peng Zhou. 2020. "Welsh Taxes." Welsh Economic Review, 27: 18-24. DOI: 10.18573/wer.254.
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