Taxation of cross-border commuters

Taxation of cross-border commuters

Michael McGoldrick

University of Stirling

One of the reasons that Professor Andrew Hughes-Hallett uses to claim that the Scottish budget will be stronger with independence is that there are “repatriated taxes from cross-border commuters (£1 billion)”. In a later post he then goes on to explain his reasoning “My figures on taxes repatriated from cross-border commuters come from a 2008 report by Oxford Economics”. This seems to be a reference to a series of reports that were undertaken by the City of London to show London’s importance in the UK economy. These reports break down tax receipts on a residence and on a workplace basis for different parts of the UK. Commuting causes differences in tax receipts at place of work relative to place of residence.

Oxford Economics use income tax data on a residence basis derived from the HM Revenue and Customs (HMRC) Survey of Personal Incomes (SPI).  This is combined with the Annual Population Survey (APS), from which employment can be derived on both a workforce and residential basis. These data can therefore be used to compare workers who claim to be working and living in Scotland, with those living in Scotland and working elsewhere. If more workers say that they are resident of Scotland than work in Scotland, this suggests that there is a commuter effect – a discrepancy between the location of tax revenues and place of residence. The LSE methodology is less clear. In 2006-07 they get similar results for the commuting effects in respect of National Insurance and income tax.

Table 1: Results from City of London reports, difference between Scotland residence based and work based. 2005-06 to 2010-11

£Billion 05-06 06-07 06-07 07-08 08-09 09-10 10-11
Total of all taxes 0.7 0.9 0 0 None


1.5 2.2
NI and income tax -0.1 -0.1 -0.1 0 0.7 1.5

The commuting effect increased between 2005 and 2011. The reason seems to be that work based tax revenues have decreased more than residence based revenues since 2007-2008. The City of London reports have stopped and the publicly-available SPI has not been updated since 2009, meaning that it is not possibly to update this research. However, estimates of the commuting effect can be inferred from ASHE (Annual Survey of Households Earning) data. One caveat on the ASHE data is that it does not include the self-employed. The Labour Force Survey (LFS), was also used to construct commuting effect estimates and the results are compared in table 2. It seems quite clear that it would take much more commuting to get a £1bn increase in income tax.

Table 2: Comparing ASHE results to LFS to necessary number to receive £1bn of income tax

Data Source LFS  Quarter 4 2013[2] ASHE 2013 To get £1bn of income tax[3]
Net income (£Million) of those people who commute 780 (extrapolated) 530 5,200
Net number of people who commute and work outside Scotland 10,500 13,000 104,000
Average wage 78,000 41,000 50,000

Scottish ashe

Scottish ashe2

The ASHE data suggest that the net effect of the income of commuters and residents is larger than for just residents in most years; however that has varied across the past 10 years. 2002 and 2007 stand out as years where rUK-resident workers in Scotland paid more in tax than Scottish resident workers in rUK. This implies that the income of rUK commuters into Scotland was greater than the net income of Scottish residents working in rUK.

Would this level of commuting be able to justify an extra £1 billion of revenues? According to Government Expenditure and Revenue in Scotland (GERS) total income tax raised in Scotland is £10.8bn while national insurance receipts are £8.5bn. An extra 9% of income tax would have to be raised by the 1% of workers who work outside Scotland but live in Scotland. The wages of those workers, according to ASHE is only £530 million, while according to my own calculations £5,200 million would be needed or approximately 10 times the current level. Additionally, it is unclear how such taxes might be repatriated, it is unlikely that the tax regimes of the countries that the workers commute to, would view this as a favourable relationship. In fact, regular workers in London, on just one of the tests, would automatically taxed by the rUK, if the same rules applied. It also seems that the Scottish white paper on independence, would agree with this definition and that only the proportion of workers from Scotland, who spend less than a qualifying period of time in UK, would be liable for Scottish taxes, on income and insurance contributions.

Who would be liable to pay Scottish taxes?

According to the Scottish Government white paper on independence, an independent Scotland would build on the existing definition set out in the Scotland Act 2012 and general international protocols to establish a definition of a Scottish taxpayer based on residence. In general, this means that people who live in Scotland for most of the year will pay their taxes here.

The Scotland Act 2012 – Section 80F says that to be considered Scottish for tax purposes:

“The number of days in the year on which an individual is in Scotland ……equals or exceeds the number of days in the year on which an individual is in any other part of the UK .. “

Additionally if Scotland was to become a member state of the EU there are some general conventions that might apply:

Each country has its own definition of tax residence; yet: you will usually be considered tax-resident in the country where you spend more than 6 months a year and if you spend less than 6 months a year in another EU country, you will normally remain tax-resident in your home country.

Overall, it seems that there is no clear trend in the number of Scottish resident workers who commute. It is also unclear which of these workers would be taxable in Scotland and how large would be the resultant revenues. The number of workers seems to balance over recent years, to a fairly low number. Will this relationship continue to hold?  If there are higher levels of unemployment or low wages in Scotland this might lead workers to commute more from Scotland. Alternatively if Scotland becomes more desirable due to higher incomes, then more workers will commute in. Under these circumstances, it is difficult to see that the net revenue to the Scottish Treasury from cross-border commuters would amount to £1bn.

Scottish ashe3


[1] Not a City of London report

[2] Wages in the last quarter of the LFS might be skewed

[3] Author’s calculations

Posted in Labour, Migration, Population

The Odds On the Referendum Outcome

What is the best way to forecast the outcome of the independence referendum ? This is an important issue for individuals, organisations and businesses planning the future. In this paper I calculate a new way of forecasting the referendum outcome. It uses  “prediction markets” rather than opinion polls to forecast the outcome. It builds on an important theorem in financial economics – the “efficient markets hypothesis” (EMH). It is an important aid to the understanding of financial and economic markets. The basic idea is that the market price of an asset or good reflects all the information relevant to setting that price. If the EMH is true, there is no point in trying to beat the market because any information that might have a bearing on the price is instantly reflected in the price. One of the best examples of this effect was documented by Roll (1984). He showed that the production of concentrated orange juice was concentrated in a relatively small area around Miami, Florida. The yield, and therefore the price, of the orange juice were highly dependent on weather conditions in this area. He showed that the futures price of orange juice was closely linked with local weather forecasts and indeed outperformed these forecasts in day-ahead temperature predictions. Continue reading

Posted in Debates, Risk, Things no-one thought about before

Scottish Independence: Analysing Views From the Oil & Gas and Finance Sectors.

David Bell & Michael McGoldrick

University of Stirling

Two of the most important sectors in the Scottish economy are finance and oil & gas. These are highly productive and dynamic elements of the Scottish economy. They are also quite large: the financial sector employs 91,000 people while the oil and gas industry has 31,000 employees. Their views on the independence debate should therefore carry some weight. Continue reading

Aside | Posted on by

Attitudes and Voting Intentions

People’s perceptions and attitudes determine electoral outcomes. In this report we examined attitudes and beliefs about the Referendum options. Yougov administered a survey designed by the authors to a representative sample of 2037 people in December 2013. Our findings confirm many of the key predictors of voting intention with party political affiliation, national identity and trust in Institutions all having large predictive effects. Furthermore our report reveals interesting demographic patterns with women being substantially less likely to support Independence and older, higher income people also being more likely to support no. Those with Roman Catholic or no religious affiliation are substantially more likely to support a Yes outcome than Church of England and Church of Scotland voters. Policy preferences also play a role with No supporters being less supportive of universal benefits and immigration. Our report is unique in examining core attitudes to risk and the future in determining voting intentions. Both the Yes and No options involve uncertain costs and benefit is that will unfold over many decades. We asked simple validated measures of risk tolerance and future orientation of our sample. We find no role for future orientation with Yes and No voters scoring equally on these measures.

Continue reading

Posted in Population, Risk, Things no-one thought about before, Uncategorized

Creating a border effect

My blog on The border effect and Scottish independence(*) was published last week at the LSE Politics site. The exercise that this post was based on, is the comparison of the apparent border frictions between Scotland and the rest of the UK, with the apparent border frictions between Ireland and the UK. These differences do not arise because of language or because of any explicit tariffs or border controls (the UK and Ireland share the Common Travel Area). Rather, the differences in apparent border frictions are likely to arise because firms in UK and Ireland do not share all of the same social and business networks(**).
Continue reading

Posted in Business, Trade

The future costs of the State Pension

David Eiser, David Bell and David Comerford

Nicola Sturgeon and James Naughtie had an interesting debate on funding pensions in an independent Scotland on GMS this morning (available here). The debate was a response to the latest UK Government paper on the economics of Scottish independence, this one from the DWP focussing on welfare spending and pensions.

Sturgeon claimed that pensions cost less to fund in Scotland in both absolute terms and as a percentage of tax revenues. Naughtie pointed out that the DWP paper argues that an independent Scotland would face an additional £1.4 billion in pension costs by 2032, amounting to around £400 per working age person in Scotland. So who is right? As ever, there is something to take from both sides. Continue reading

Posted in Uncategorized

Scottish Labour’s devolution proposals: analysis

David Bell and David Eiser

The Scottish Labour Party has proposed further powers for the Scottish Parliament. They are perhaps not as radical as might have been expected, but the argument is that rights that are enshrined at UK level – such as free health and education – should be paid for from UK tax resources. This leaves around 40 per cent of spending that could be directly paid by Scottish taxes.

In terms of cash raised, the most important proposal is to extend the Scottish share of income tax from 10p to 15p of each rate band.  The 10p rate is included in the Scotland Act 2012, and will become a reality for Scottish taxpayers in 2016. The Office of Budget Responsibility is charged with forecasting the revenue from the 10p share. It does so at each budget. Its forecast in March 2013 was that the value of the 10p share to the Scottish Government would be around £4.5bn in 2014-15. Another OBR forecast for Scotland will be published alongside this week’s UK budget, but is unlikely to be substantially different, given the recent sluggishness of tax revenues. Increasing the share to 15p is likely therefore to generate around a further £2.2bn in revenues, broken down across bands as per the table below. Continue reading

Posted in Uncategorized

Budget 2014: distributional implications

Speaking before Budget 2014, John Swinney declared the Budget was the Westminster Government’s ‘last chance to seriously tackle inequality’. Early in his Budget speech, George Osborne argued that ‘income inequality is at its lowest level for 28 years’, so he clearly agrees that it is an important issue[i]. But did the Budget measures do anything to improve this statistic further? Continue reading

Posted in Uncategorized

The 50p tax rate and inequality

Alex Salmond has twice this week refused to commit to re-introducing the 50p rate of income tax on incomes over £150,000 – first following his New Statesman lecture in London, and then at First Minister’s Questions on Thursday.

In making the case for independence, the Scottish Government has frequently argued that having access to tax and benefit levers would enable it tackle inequality more effectively than successive Westminster governments have tended to do. Against this backdrop, the First Minister’s refusal to support the re-introduction of the 50p rate seems contradictory – but is it?[i] Continue reading

Posted in Uncategorized | 1 Comment

The Ageing Population Problem

After the release of our paper, Funding Pensions in Scotland: Would Independence Matter?, I was called to the Scottish Affairs Committee at Westminster to give evidence. The most interesting issue that we discussed was the level of net migration into Scotland that we would need to see in order to eliminate the cost differences that are projected between Scotland and the UK, and eliminating the costs of an ageing population. Continue reading

Posted in Migration, Pensions, Population, Uncategorized | 1 Comment