Thursday, March 13, 2008

Why I Want Rid Of Council Tax

SNP plans for a Local Income Tax (LIT) seems to have become the target of choice for the opposition now that the budget and council tax freeze have gone through. As if on cue, out is being wheeled by Labour and others the archetypal hard-working, 2-income family, whom we are being invited to believe will under LIT be left subsidising pensioners in big houses who live off bloated share portfolios.

First things first - comparatively few people are in a position to live off their investments, but presenting a more balanced picture wouldn’t have the desired effect in terms of trying to whip up opposition to LIT. However, as a strong supporter of LIT, I thought I’d throw two very real examples into the mix, which have resulted from my own domestic arrangements over the past few years, which help explain my complete disdain for the council tax, or for that matter any kind of property based tax.

I own a flat in Edinburgh, which when I lived there at first, I shared with my partner of the time. As a band ‘B’ property, our combined water and council tax bill came to about £1,200, or £600 each. However, after we split up, even with a 25% single person’s discount my bill shot up to £900 – or about 5% of my household income at the time. I hadn’t become any wealthier in the intervening period and made no more demands of local services than I had previously. However, purely as a result of a change in my personal circumstances, my Council Tax had increased overnight by 50%.

Fast forward a few years to the present. As work for the moment requires that I have somewhere to live in London, I rent a room in a 4 bedroom semi-detached house in Lewisham, in the south-east of the city. Nice as our bit of town is, Notting Hill or Hampstead or trendy north London it most certainly isn’t (actually, that’s probably a good thing). It’s a very diverse area, with a high proportion of young families and a large number of homes of multiple occupancy.

There are 5 of us living together in the house – myself (parliamentary researcher); an IT consultant; a banker who shares a room with his fiancĂ©e (who is also a parliamentary researcher); and another banker. Fortunately, we all get on very well, although this may be helped by our different work start times and the fact we have a big kitchen and 2 bathrooms, so it isn’t quite as cosy as it sounds!

Based on salary alone, the five of us probably have a combined annual income of between £250,000 - £300,000 (I should make clear that myself and the other researcher lag quite some distance behind the rest). However, as a band ‘E’ property, the bill for us all comes to just over £1,500 – or £300 a skull if we split it 5 ways – just 0.5% of the total household income. It’s quite a difference from the £900 I used to get stung with for living on my own in Edinburgh, and an obscenity when you consider the couple with two pre-school kids over the road who have to pay an identical bill out of just one income.

And that in the end is my beef. Council tax hits households with low incomes disproportionately. Since it is based on the value of the house, there is little correlation between this and one’s ability to pay. Worst of all, the eventual bill you end up paying hits those who live on their own the hardest.

While being young, professional and childless means we don’t make huge demands of the services of Lewisham Council, on balance, we’re happy that we’re making a contribution towards policing, parks, adult education, libraries, schools, trading standards, refuse collection, the fire brigade, social services etc in the area. Splitting the bill 5 ways makes us better off financially, but I don’t think any of us would object seriously to being asked to make a bigger contribution given that we’d all be more than capable of so doing.

There will be winners and there will be losers in any change to a tax system – something which those calling for council tax revaluations and extra bandings and additional rebates would be wise to remember. Instead of conjuring up grotesque, false spectres of families being downtrodden by the supposedly idle rich, Labour and the Conservatives should be honest enough to explain why they believe that the rich man in his castle should pay a lower marginal rate of tax than the poor man at his gate.


Bill said...

Funnily enough (funny, because I have no time at all for anything even vaguely 'socialist' in nature) I tend to share your point of view.

When the much-derided 'Community Charge' (aka 'poll tax') was being introduced I owned a property in Inverness - which was purely a holiday home in those days - and was then spending a year in a rented apartment in London, paid for by my employer, as I was only temporarily in the UK as my career was outside the UK. I paid far less for the 'Community Charge' on my property in Inverness than I had on the pre-existing rates and a similar situation would have arisen with the rented flat in London (although I would not have been paying that as my employer would have picked up the bill for whatever I might have had to pay, just as they picked up all the costs of the rent/rates on the apartment). I thought it was quite wrong that I, who earned quite a lot (or in fact was paid quite a lot, even if some of our more cynical socialist brethren might have questioned whether fatcat yuppie bankers such as me actually 'earned' it!), should be paying less, because I lived alone, than much less well-off families, even if they did have more than one earner in the household; they of course saw their bills go up considerably over the relatively low rateable value of the properties they occupied, which led to it being a very politically unpopular, and vote-losing, tax.

I'm not specifically for or against the idea of local income taxes, per se, but I'd like to see a detailed analysis of the the potential effects. Assuming that the current Council Charges were to be reduced/removed and replaced by the 3p in the pound local income tax (presumably this would be done under the existing ability of the Scottish Executive/'Government' under the Scotland Act to vary income tax in Scotland up or down by 3p, so requiring no new legislation, a power which has until now remained unused?), I would imagine that some people whould pay considerably less than at present, whereas some would pay a lot more, particularly households with mutiple-earners. Once the full effects of this change work through and become understood, just how much of a vote-winner will it be? I think the Community Charge was a very 'fair' tax, but a political disaster and I knew from the beginning that it would be an own-goal for the Conservatives. Has the local income tax policy been properly thgought through in this context?

Richard Thomson said...

Hi Bill,

I’ll fess up straight away and say that I’ve had no hand in drawing up the SNP’s LIT policy, so the finer details of what is being proposed will elude me until there’s time to read the consultation document properly. However, my understanding is that it would operate as a ‘flat’ tax of 3% on all earned income above the present personal allowance.

It could be collected through the Parliament’s existing tax varying powers, but I don’t envisage it will be, since although the SNP wants initially to cap the rate at a national 3p, we will likely want to have room to vary the rate down the line. Frankly, the current Holyrood tax powers don’t have the flexibility to allow differing rates across the country, or indeed to move the rate to, say, 2.7p or 3.1p if that’s what was needed in future.

Either HMRC or a new agency could collect the tax. It would be perfectly feasible to ask HMRC to assess individual liabilities as part of either PAYE or self-assessment and then to collect and remit monies to Scotland’s local authorities on that basis. Aspects of the policy will probably have to change if it’s to get the support of the Lib Dems. However, as things stand, the SNP reckon that 80% will be better off, 10% will see little difference and 10% will pay a bit more.

The people who’ll see the biggest difference won’t necessarily be the poorest, although many in the lowest earning brackets will certainly benefit. The biggest benefit will come to those who work but who earn just enough to make sure they don’t get any financial support as things stand.

There’s some pre (or even post) siesta reading on the topic here, if you’re interested :-)