A little bit of politics: replacing the council tax

I know, I know, I’ll be back to posting about Girls Aloud and Macs in a bit. But I was listening to the morning show on Radio Scotland (The Angry Pensioners show – (c) Tony Kiernan) today, and they were talking about the Scottish plans to replace council tax with a local income tax.

Well, that and ranting about dustbins. But I digress.

What I don’t get is, if the aim is to have a fairer tax system – and council tax is manifestly unfair – then why not have a Scottish sales tax? Unlike income tax, clever accounting doesn’t enable you to avoid it altogether; unlike income tax, you can’t dodge it if you work strictly for cash; unlike income tax, it’s directly linked to consumption – so if you don’t spend huge sums of money on stuff, you don’t pay huge wads of tax.

I can appreciate there are logistical issues – how to deal with online shopping is a biggie; you’d need an exemption for tourists, and on things like children’s shoes and other things you don’t pay VAT on – but surely things like the black economy, creative accounting and other things mean a local income tax has more holes in it than a string vest, with the dodgy and the superbly rich more or less evading it while working stiffs pay full whack?

Am I missing something really obvious here?

12 thoughts on “A little bit of politics: replacing the council tax

  1. Tim Worstall says:

    It’s very difficult to have a sales tax higher than about 5% without getting massive evasion. To have a consumption tax higher than that you need to make it a VAT (ie, instead of being charged just at retail, it’s charged all the way down te line). If you make it a VAT, then you’ll be inviting the carousel boys to arbitrage between England and Scotland. Good luck with that one really.
    Further, I’m pretty sure that the vast majority of the Scottish population lives within an hour or two’s drive of England. How many would simply cross the border to shop if the tax were at any level higher than a couple of percent? Under EU rules, you can’t stop them bringing back whatever they want….
    Quick numbers thing. Council Tax and business rates together raise about 50 billion across the UK. VAT about 80 billion. So to replace the property taxes with a sales tax you’d need a rate of, say 12 or so percent. How many would shop in England for a 12% price difference?

  2. McGazz says:

    “if the aim is to have a fairer tax system”

    Then consumption based taxes are a non-starter. Poor people pay proportionally more of their income – diminishing marginal utility and all that.

    “local income tax has more holes in it than a string vest, with the dodgy and the superbly rich more or less evading it while working stiffs pay full whack?”

    One suggestion I’ve heard for stopping Income Tax evasion is to publish all tax returns (http://www.monbiot.com/archives/2004/09/28/expose-the-tax-cheats/)

    Why have a *local* income tax anyway? 80-odd percent of Local Authority funding comes from central Government anyway. Why not just increase the UK income tax to cover the rest, and scrap local taxation altogether?

  3. Squander Two says:

    I’d go the other way: why not scrap the funding of local government by Whitehall? What’s the point of local elections if most of their budget is outside the electorate’s remit?

  4. McGazz says:

    “I’d go the other way: why not scrap the funding of local government by Whitehall?”

    I’m not totally opposed to that, but my main issue with it (and all local taxation) is this:

    East Renfrewshire has the lowest ratio of jobs to residents of working age of any borough in the country (around 0.34, compared to an average of around 0.8). This is because East Renfrewshire is one huge commuter dormitory for Glasgow. The residents of ER travel to work on Glasgow’s roads, visit Glasgow’s events and leisure facilities (there aren’t any to speak of in ER) put their litter in Glasgow’s bins, etc. ER has a very low council tax, because it contains no big towns and its council doesn’t have to provide a lot of things. Glasgow, as a city, has to do a lot more. Glaswegians pay to provide services for people who live a mile or two outside the city, but come in to it every day.

    The City of London has a ratio of 60 jobs for every resident, because very few people live there and everyone commutes into it from outside. There’s no way the people who live there could fund the cost of all the things a world city is supposed to produce.

    I suppose what I’m saying is that a city is, to a degree, a public good, and a system where residents of a tightly defined area in the centre pay for the running of that city, while people whose houses are immediately outside it don’t pay a penny, despite benefiting both directly and indirectly (tourism) from it, is unfair.

  5. Gary says:

    > How many would simply cross the border to shop if the tax were at any level higher than a couple of percent? Under EU rules, you can’t stop them bringing back whatever they want….

    Good point. I hadn’t thought of that.

    > Poor people pay proportionally more of their income – diminishing marginal utility and all that.

    Really? Surely the more you spend, the more tax you pay – so if you buy a £1K car, you pay £1K’s worth of tax; if you buy a £200K car, you pay 200 times the tax? Isn’t that proportionate?

    (I know bugger all about this stuff, hence asking the questions)

    From what I can see in the press so far, the LIT plans sound like a bit of a shambles…

  6. Ben says:

    They may sound like a bit of a shambles, but it does seem fairer than the current council-tax.

    The big boys will *always* find a way round whatever scheme is introduced.

  7. Squander Two says:

    > The residents of ER travel to work on Glasgow’s roads, visit Glasgow’s events and leisure facilities (there aren’t any to speak of in ER) put their litter in Glasgow’s bins, etc.

    So devolve power and let Glasgow charge a daily entrance fee, if they like. Or enter into some sort of appropriate agreement with East Renfrewshire Council. I’d imagine the largest unfair cost would be transport infrastructure, which would be eaily solved through tolls. And all the people who come into Glasgow to work are, of course, working for Glasgow-based employers, so Glasgow could fairly easily implement a system that taxed them at source.

    These issues are all exactly the same in the US, yet they’d think you were mad if you suggested that New York’s City Hall needed to be funded by the Feds. So there must be ways of making it work.

    > How many would simply cross the border to shop if the tax were at any level higher than a couple of percent?

    Depends what they’re shopping for. Buying a kitchen, maybe (though the increased delivery charge might offset the lower tax). Buying a PC, sure. Buying your groceries and a bottle of wine, though? Really, who’d bother?

    > Really? Surely the more you spend, the more tax you pay

    Only in absolute terms. For instance, say you’re buying a PC for £500, so the VAT’s about £75. If you earn £1000pcm, that VAT is 7.5% of your monthly income; if you earn £5000pcm, it’s 1.5%. And most people aren’t like us, and don’t react to having 5 times as much money by buying 5 times as many computers. The extra tax money you get out of richer people is a tax on their luxuries. A sales tax on the basic costs of living simply hits the poorer harder.

    On the other hand, that’s only when it’s considered in isolation. A benefit system could counteract that.

    I also understand that there are good economic reasons for taxing consumption rather than earning, but I have no idea what they are. Assuming they are in some way valid, you might well calculate that the disadvantage to the poor of a regressive tax system is outweighed by the various advantages to them of living in a healthy economy. Or you might not.

    > The big boys will *always* find a way round whatever scheme is introduced.

    No, only if it’s worth their while. No-one’s going to pay an accountant £30k a year to save £10k a year.

  8. Stephen says:

    I also understand that there are good economic reasons for taxing consumption rather than earning, but I have no idea what they are.

    One good reason is that taxing earnings penalises saving and investing (interest, dividends, and capital growth are all earnings), whereas taxing consumption rewards it (spend less, save more, pay less tax).

  9. Gary says:

    Hey everyone, thanks for the comments – it’s very interesting. Sorry if I appear to be AWOL; I’m under a bunch of big deadlines just now…

  10. McGazz says:

    “the disadvantage to the poor of a regressive tax system is outweighed by the various advantages to them of living in a healthy economy. Or you might not.”

    How does regressive taxation automatically lead to a healthier economy? Britain’s economy was healthy enough in the 60s, despite income taxes being higher (and more progressive) than they were in, say, the early 90s.

    Regressive taxation does increase economic inequality, which has been proven to be unhealthy for the less well-off.
    http://en.wikipedia.org/wiki/Economic_inequality#Effects_of_inequality

    “taxing earnings penalises saving and investing (interest, dividends, and capital growth are all earnings), whereas taxing consumption rewards it”

    Which is all very well if you have any money left over after buying your consumption-taxed necessities. Otherwise, an already regressive tax becomes more regressive when those with more income can invest the excess.

  11. Squander Two says:

    > How does regressive taxation automatically lead to a healthier economy?

    I didn’t say it does, and I also said that, if it does, I have no idea how. All I said was that the arguments exist, they are respectable economic arguments, and that, if one were to assume that they are correct then one might draw certain conclusions. I take no position on the matter, so don’t expect me to defend it.

  12. Stephen says:

    Which is all very well if you have any money left over after buying your consumption-taxed necessities. Otherwise, an already regressive tax becomes more regressive when those with more income can invest the excess.

    Depends what you define as necessities. I would say that for most people, a lot of spending is discretionary. And if a bit of extra incentive was what it took to get some to forego a few nights at the pub, or the newest 40-inch LCD, and save the money instead, that would be a good thing, I think.

    I know it’s heresy to doubt Wikipedia but I can’t help thinking the inequality argument is a tad overdone. Bill Gates or Warren Buffet being trillionaires or not has bugger-all effect on my personal wellbeing. The article even ropes in De Tocqueville: but in the quote he is clearly talking about equality of conditions (ie equality of opportunity) in America as opposed to the then-current situation in Europe. It’s just silly to pretend he was talking about equality of outcomes.

    And the whole hand-wringing equality brigade never really admit that their “solutions” are anything but. Taking money from those who are prepared to work and giving it to those who aren’t doesn’t make society more cohesive. A graphic illustration was the programme last week about the Polish vegetable pickers. The presenter went down to the local job centre and tried to interest the yobs there in the jobs available on the local farms. “I’d rather sign on than do that,” said one of Britain’s finest. So the hardworking Poles come over here to do jobs the locals won’t, and pay the taxes that the Government gives to the locals to keep them in beer and Sky subscriptions. That’s a nice societal outcome, isn’t it?

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