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Welsh taxpayers set to pay more income tax than English

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Former Welsh First Minister Rhodri Morgan has come out against granting the  tax-varying powers.

Following a UK government-commissioned review by the Holtham Commission, which earlier this week recommended the Welsh assembly be allowed to vary  by as much as 3p in the pound, reports Mr Morgan as saying there is "no mandate" for the change.

Criticism of current funding arrangements

Currently, the Welsh assembly funds its £16bn annual spending through direct payments from the UK government sitting in Westminster. The same is true of the  of and .

The amount the UK government sends the devolved governments is calculated according to the so-called "Barnett formula". As things stand, the formula means .

This has led to a backlash among 'small government' Conservatives, who hope granting tax-varying powers will eventually lead to the end of the subsidy.

In so doing, they have formed an unlikely alliance with the nationalist parties, Plaid Cymru and the SNP, who traditionally favour higher rates of public spending, but also see tax-raising powers as a further step towards independence.

Meanwhile, Liberals have long advocated a 'federal' structure and see devolving responsibility over tax as a way to increase accountability over the way tax revenues are spent.

Hazards

There are of course a number of potential hazards with devolving responsibility for tax.

First, to maintain current levels of spending, the Welsh assembly would probably need to increase income tax, which could devalue property in Wales and spur high earners to move to England (which would all of sudden look like a tax haven).

Second, even if they increase income tax by 3p in the pound, the Welsh would likely struggle to replace the current subsidy from England. The estimates a penny rise in the basic rate of income tax would only bring an extra £152m into assembly coffers. And an increase in the higher rate could actually cause revenue to fall.

Third, in giving increased power to a devolved government there is a danger that cracks will open up in the provision of public services.This often happens in the United States, where state governments often blame the federal government for failing to fund initiatives, and vice versa, which just leads to a game of finger-pointing.

Fourth, there is a risk that the competition to forever decrease tax rates within the UK - or globally for that matter - to attract high-earners and businesses, results in a "race to the bottom", since as tax revenues fall so necessarily must government spending. Certainly, this has also been the case in the United States where spending on public services is traditionally much lower than in Europe.

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