Options Instead of Council Tax
The public hates council tax?
First it was the rates, then the poll tax and now council tax. In the UK we seem to have a ingrained hatred of this form of taxation - whatever it is called.
The council tax was introduced in 1993 and the amount you pay depends on which area of the country you live in and which band your house price falls into. As such it isn't locked to the amount of money you earn, but if anything, with sky rocketing mortgage debt, how much money you owe.
The valuation of the house is based upon what it would have been worth in 1991 and is takes no account of where in the country you live. An example to illustrate the point is that a small terrace in London could be in higher band than a detached property in Blackpool because in 1991 house prices were more in London than Blackpool. This says nothing about the income of the people living in either of these properties.
People generally understand the need for local taxation but get very annoyed when they hear rumours of
- Plans to re-grade houses when you know that the overall outcome will be more houses going up a band than down.
- Plans to ‘snoop' on you to see if you have tried to improve your living circumstances by adding a swimming pool or extension then again re-grade your house up a level.
- Plans to increase the level of council tax if you live in a location with a nice view!
Who knows what the real truth behind any of these rumours is, but it just serves to annoy people more and more.
What are the alternatives though? Filling out petitions and complaining will not get us anywhere unless there are financially viable alternatives of collecting the revenue.
How much is raised by council tax?
In 2006-2007 the projected income from council tax is £22 billion up from £21 billion in 2005-2006. Sounds like a lot of money, how does it compare to the rest of the treasury income?
So whilst it seems a lot of money to you and me as part of the overall treasury income it is about 4%.
But, where would the money come from?
There seem to be a few options:
- Continue as we are and try to complicate the system so we are not sure whether they are taken more tax, the same tax or less tax - Labour.
- Replace the council tax with a ‘Local Income Tax' - Liberal Democrats
- Raise other forms of taxation nationally - ‘Is it fair' Campaign
- Appear to have no 'financed' opinion on this matter whatsoever - Conservatives
I'll come back to point 4 later.
We won't go into point 1 as we are considering if there are alternatives, not just accepting what we have got.
First let's explain, by hypothetical example, a trio of commonly used terms in taxation policy as discussed in the media and by political parties.
If everyone had to pay a fixed amount of £5000 on their income that would be a regressive tax. Why, well if you earned £10000 per year you would be paying 50% of your income as tax and if you earned £50000 per year the rate would be 20%. So the more money you earn the less percentage taxation you pay. Obviously this isn't fair for lower income earners.
Council tax is seen by many as a regressive tax.
Here you are taxed different rates which get higher the more you earn. For example if you earned £10000 per year and paid 20% tax you would pay £2000. In a progressive tax system there would be a change in tax rate at a certain level of income, say £32000. Therefore you pay 20% on the first £32000 and then 40% on the last £18000 of an overall £50000 income totalling £13600 tax.
Proportional / Flat rate tax
Here everyone pays say 20% so in the above examples the lower income earner would pay £2000 and the higher income earner £10000.
Why are these important, well governments recognize that one section of society cannot take the whole burden of the tax system. Obviously making the lower income earners even poorer is no good (so no regressive tax), but neither is over taxing the higher income earners as it doesn't encourage enterprise (so not too much of a progressive tax). The general opinion is to have something that is progressive but not too much.
Local Income Tax
The plan would be to get rid of the council tax and replace it with a rate of local income tax that was determined by the local authority (presumably with some limitations or capping structure in place). This income tax would be collected via the same methods as NI and income tax and so would be reasonably efficient.
The Liberal Democrats (LibDems) like this as an alternative to the council tax and it is outlined in their Tax Commission Report. According to the report it would be combined with allowing local authorities the power to set and collect their own business rates. This was previously stopped due to authorities raising business rates and lowering domestic rates as businesses generally cant vote!
The LibDems have concerns about dropping council tax as it has a few nice points (at least for a government)
- It can act to slow down sudden increases in the housing market and may overall make it less volatile.
- It's difficult to evade even for the very rich, which is becoming more of an issue for governments.
To replace the income from council tax the level of local income tax would need to be around 4.0-4.5%, but would be settable by the local authority.
They estimate that removing the bureaucracy of council tax would save £300 million pounds per year.
Raise Other Taxes
One of the champions of this idea and is the Isitfair campaign. It has put pen to paper and is actively seeking to open dialogue with the policy makers to try and find alternates to the council tax, which it believes as unfair - hence the name.
They see council tax a regressive tax as isn't strongly linked to the amount of money you earn and wish to change this without altering the whole progressiveness of the tax system.
They have looked at a few options for raising more tax, that would effect people on an ability to pay rather than an happenstance circumstances.
They identify income tax and VAT as the main areas for tax review. Income tax is a progressive taxes which is good and VAT is about purchasing power and so to some extent is a matter of choice (except when placed on energy).
They would propose spreading the loss of council tax income to these two other taxes. There are a few options for the actual amounts. One example is (rounded to the nearest whole percentages)
- Basic rate income tax - 24%
- Higher rate income tax - 42%
- VAT - 21%
This would raise around £25 billion or more than enough to cover the loss of council tax and keep the tax system at roughly the same progressive level.
Spin and bluster
I went to one of the conservatives websites, they have many, trying to find an equivalent of the LibDems taxation policy document. Couldn't find it.
‘Ah maybe its on one of these other websites with confusing designations?', nope they are forums to discuss possible policy.
OK a search, nope, internal search engines are mostly rubbish.
Last resort I wrote to them, via email of course and got a back a bullet point list of what their intentions, I guess that's what you would call them, are with regards to local taxation and I quote from the email
"Conservatives want to see councils freed from the top-down regulations, burdens, red tape, regional diktats, not only to allow local communities to set their own priorities, but also to keep costs and hence taxes down for local people. We are:
- Opposing Labour's agenda to raise council tax further through its plans for a council tax revaluation, re-banding and home improvement tax.
- Pressing the Government to relieve councils of the unfunded burdens, regulations, inspection and red tape that have forced up council tax.
- Arguing for councils to have more freedom and discretion to fund their local priorities - not Whitehall's.
- Calling for power to be given back to local people, and the abolition of the unelected and unwanted regional assemblies."
Well I'm a lot clearer now - power to the people, cut red tape and oppose the government.
Council Tax Conclusions
As a country we require a certain level of overall taxation to run things, directly or indirectly that money mostly comes from us.
Council tax is a regressive tax as it is not wholly linked to the income of the individual or household, but rather the valuation of the property. As such it is seen, rightly in the authors opinion, as unfair.
The overall income from the council tax is around £22 billion and if it were to be capped or scrapped the loss of monies would have to come from elsewhere. The two main option for this appear to be
- Replace it a with a local income tax based upon the ability to pay and is hence progressive.
- Replace it with changes to the national income tax rate (both lower and higher) and also raise the VAT rate both of these are based upon ability to pay and are progressive.
Overall something needs to be done to quiet the growing discontent on council tax and these alternatives will need to be considered in light of the upcoming Lyon's Review on Council Tax by the government.
Any questions or comments please email us at firstname.lastname@example.org.
JP can't remember who he voted for at the last election and wishes politicians would think more than talk.
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"Ralph. I can see the progressive and fair nature of your points. However, the one area in which I disagree is that local taxes are somehow all about services per person. The aim of taxation is redistribution of public services whether that be through national, regional, or local government. I find a false distinction in many arguments about local taxes which runs: local government is a corporation charging us for its services, national government is a different animal. This seems to be an unsupported belief that centrally organised resources are somehow more important than those locally organised. They are not different services they are simply at different scales. The local income tax idea tends to push many people's buttons due to this belief that local services should not be as progressive as national taxes because local services are less important. If our bins are not emptied then we would all suffer. If the roads are not maintained our fragile techno-industrially centralised way of life would eventually collapse and the rich would be worse of by more millions than the poor - our whole way of life is supported by redistribution and will fail without it. Progressive taxation should be shouldered wherever the services are paid for."
"Any alternative to Council Tax should be based on the services an individual household uses not the income or value of the property. If property A only has two adults living in it why should they pay the same as neighbours who have several children and an adult child who also works. Or even more if their house is in a higher band. Even a local income tax will penalise those who use less services just because they earn more. Have a standard property surcharge and than fixed costs for each adult present and each child present. For example, £100 fixed surcharge plus £250 pre adult and £100 per child. That way each household pays a fair amount for the services the household draws upon. then make Council Tax Benefit more accessible to low income families."