Analysis: What the Silk Commission means for taxpayers

Under Silk, around 25p in every £1 spent by the Welsh government would come from taxes decided in Wales

The Silk Commission has released its report into the way Wales should be funded in the future - with some far reaching recommendations.

There would be a big transfer of power from London to Cardiff if its 33 recommendations were enacted.

BBC political reporter Toby Mason considers what it means for all of us.

What does the commission say about income tax?

This is the biggest and by far the most controversial element of the Silk report. It recommends that by 2020, the Welsh and UK governments should share responsibility for income tax paid in Wales - and that the Welsh government should have the power to set the rate of its share.

Take the basic rate of income tax - 20p in the pound. Silk says the Treasury would be responsible for raising 10p of that and the Welsh government the other 10p.

Ministers in Cardiff would have the power to vary their 10p rate as much as they wanted - so if they put it up by 1p to raise more money for devolved services, a basic rate taxpayers in Wales would pay 21p in the pound, while their English counterparts would pay 20p.

Likewise, they could also lower the rate, so that Welsh basic rate taxpayers pay less. But that would mean the Welsh government has less to spend.

A key recommendations says the Welsh government should be able to move the rate of each tax band independently and without limits.

What about other taxes?

Paul Silk and his colleagues, including representatives from all four major parties in Wales, considered which other taxes could be devolved to Wales.

They decided the aggregates levy (a £2-a-tonne tax on quarrying) stamp duty, air passenger duty and landfill tax should all be devolved, and the Welsh government should have sole responsibility for business rates.

On the other hand, they say corporation tax, national insurance, capital gains tax, VAT and fuel duty should all remain the responsibility of Westminster.

How does this compare to the current system?

This would be a radical change. At present spending by the Welsh government is almost entirely funded from a block grant from the Treasury.

The commission proposes an interim system ahead of a referendum later this decade on whether the shared responsibility for income tax should be brought in.

Called "assigned income tax", the interim system would take £2bn off the block grant and replace it with a nominal £2bn of Welsh income tax. Crucially, in this system, the Welsh government would have no powers to vary the rate at which the tax is paid - so the commission concludes it would not require a referendum.

How would it work? And without powers to vary the rate - what's the point?

If wages rise and the total amount of income tax paid in Wales increases, then ministers get a share of the proceeds and have more to spend.

Likewise if income tax receipts fall there would be less to spend on public services. At the moment, the Welsh government has no real financial stake in growing the Welsh economy. The new system means for the first time it has a direct incentive to increase prosperity.

But with that comes risk. Income tax receipts in Wales fell from £5.1bn in 2007-08 to £4.8bn in 2010-11 as a result of the recession.

Would the block grant remain to some extent?

Yes, the combination of taxes proposed for devolution by Silk would mean the Welsh government would be responsible for raising around 25% of the money it spends. The rest would still come from the Treasury.

How would it change Welsh politics?

At the moment, debates centre around how to divvy up the block grant. Spending more on the health service, for example, means cutting funding for other things, perhaps education or agriculture.

With tax-varying powers at their disposal parties could stand for election promising to increase spending in particular areas and have the option of raising one or more of the tax rates to pay for it.

They could also promise to cut taxes in order to stimulate the economy. For the first time since 1999, Welsh politics would cease being a zero sum game.

Will it happen?

Mr Silk and his colleagues have laid out a timetable to move from where we are now to tax-varying powers by 2020 - if it is backed by the Welsh people in a referendum.

That referendum can only be triggered by a two-thirds majority vote in the assembly as well as the backing of both Houses of Parliament. Similar arrangements existed for last year's referendum on the assembly's law-making powers.

The commission's members unanimously agreed the report. However, the issue of tax-varying powers for Wales is likely to provoke much greater public debate than the move to primary law making powers.