Land Value Taxation Campaign

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Home Current Affairs Here we go again

Here we go again

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Local Income Tax is an idea that keeps on popping up like a perennial weed. The House of Commons Communities and Local Government Committee has just produced a report called "The Balance of Power: Central and Local Government". In the section on finance, we read...

"A further solution would be to either replace or supplement council tax with a different local tax, such as a local income tax. This proposal has a long pedigree: it was recommended by the Layfield committee as the best means of changing the balance of funding from central to local government. As our predecessors noted in their report, a local income tax could not be introduced without detailed research assessing the practical implications.

"There are also disadvantages to a local income tax, for example revenue would go down during a recession. Pragmatically, it would also be necessary to ensure that the first year of implementation had a net zero impact on tax payers to avoid a backlash against central government. In principle, though, a supplementary local income tax, introduced alongside council tax but with a corresponding reduction in central taxation so that the overall tax burden remained the same, is a potential longer-term solution to the balance of funding problem, and one that Government should seriously consider. It would be possible to replace central funding with such an income tax without any change to the total collected in taxation overall. Councils would then decide at what level to set their local tax."
The Committee has been to Sweden and Denmark where the committee got the impression that it was working well. Whilst Sweden and Denmark are well ordered countries which generally function as they should, it is usually safe to assume, first, that things are not quite as good as they appear on the surface, and second, like many wines that taste good when drunk near the vineyard, Scandinavian practices do not travel well.

Unlike the Committee, we don't think that local income tax is one that the government or anyone else should consider seriously or at all. The obvious trouble is that people can move whereas is fixed, which inevitably makes it difficult to localise taxes on people and goods. The drawbacks of local income tax have been rehearsed many times but for convenient reference here they again:-
  • Income tax is claimed to be related to ‘ability to pay’. In practice it is not. Avoidance and evasion are rife. The system is riddled with loopholes which enable those who can afford to pay for the necessary expert advice to reduce their liabilities. Furthermore, ‘ability to pay’ is a spur to dishonesty and idleness.
  • The cost of supplying basic services to a residence – such as fire fighting and police cover – varies little with the numbers in a household, or whether they are earners. Even the cost of refuse collection is only marginally affected by the size of particular households, as the major expenses of providing the service are fixed.
  • Consider three similar houses on three similar plots in one street. In the first are four adults, perhaps parents and grown-up children, all working and paying taxes. They make little demand on council services, having little time to use facilities such as libraries, parks, leisure centres or adult education classes. In the second are two adults who do not work but make full use of all of these facilities. In the third are two adults and two grown-up children, all claiming benefits and supplementing them by casual cash-in-hand work and criminal activities. Where is the fairness of a local income tax as it would apply to these three instances?
  • It would be necessary to maintain an accurate register of taxpayers’ addresses, and it would, indeed, be necessary to establish a definition of what constitutes residence.
  • Experience with the Community Charge showed that there are problems in linking taxation to place of residence. The total amount of tax payable could differ substantially across local authority areas. This would provide an incentive to avoid and would also give rise to problems of ensuring compliance. In addition, therefore, to the problems that already arise in connection with avoidance and evasion of income tax, the extra tax could be vulnerable to avoidance through the use of “addresses of convenience”, for example by registration where the rate of tax was lower.
  • Complications would arise when taxpayers live in one tax area and work in another. Income tax is often deducted by employers, at source, through the PAYE system. Provision would have to be made for employers to identify by home address the appropriate income tax rate for every employee, make deductions accordingly and ensure that the Inland Revenue was correctly paid, whilst the latter would have to remit the correct amount to the appropriate local authority. Any conceivable administrative procedure will be clumsy and costly in relation to the sums involved.
  • What happens where people have second homes?
  • Unincorporated businesses would contribute, but incorporated businesses would not, as the tax would not provide for direct contributions to local revenue from companies, especially national organisations, nor for dividend interest. This would discriminate against sole traders, partnerships and small businesses not registered as companies, whose profits are distributed as wage income rather than dividends.
  • Non-domiciled residents, who may be very wealthy, enjoy partial exemption from UK income tax.
  • The decline of regular full-time employment and self assessment impose growing strains on the income tax system. Its long-term future must be in doubt.
  • Differential tax rates within different parts of the United Kingdom would influence where people chose to live and work, with consequent effects on regional economies. Property values would eventually come to reflect these differential tax rates, and so a local income tax would in effect act as a property tax at one remove, as the difference in tax liabilities will ultimate be reflected in house prices on the two sides of the boundary.
  • The tax would be ‘lumpy’: small variations in the tax rate would produce large variations in yield, causing problems for local authority treasurers when setting budgets.
  • The yield would be unpredictable as incomes within a local authority area cannot be forecast accurately as tax is paid on past incomes; the failure of a major employer could lead to a large shortfall in revenue.
  • Because earnings per head in many local authorities are relatively low, the yield would inevitably be restricted and those administrations would need more substantial government grants.

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