Reforming council tax

Tax
Tax.
I completely understand why the SNP’s proposal for reforming council tax in the next parliament are so timid and unambitious. It’s a political minefield to change it drastically during a recession (or during a very slow recovery for that matter), because no matter what you do, some people will have to pay more, and they might very well be in a position where they can ill afford to do so.

After all, you’re not necessarily cash-rich just because you’re living in a big house. For instance, just top of my head there must be many people that fall into one of the following groups:

  • They have negative equity, so they can’t sell their house without making a loss.
  • They now earn (much) less than when they bought their property, but they have paid off enough of their mortgage to make it affordable to stay in.
  • They have inherited their large house.
  • They have climbed the property ladder by exploiting rising house prices, so their salary is tiny compared to the value of their house.

During a boom, most of these people could probably remortgage to release some money for paying the new council tax, but many people don’t qualify these days, and if a tax change forces people to sell their house against their will, a lot of them will be very angry indeed.

That said, the current system is indefensible. It really should be replaced by a combination of land value taxes, property taxes and income taxes, and the value of land and property should be based on a recent valuation, not on 1991 figures that are now completely out of date.

I also find it odd that councils raise so little of their income through tax. The consequence is that if they need to increase their income by 5%, they’ll need to put up council tax by about 20% if their block grant doesn’t go up.

Of course, if councils had to raise all their income themselves, council tax would go up dramatically. Although it’s hard to compare taxes across countries, it is interesting that in Denmark most people pay more income taxes to their council than to the state.

So all in all it is very difficult to reform council tax without creating major problems.

If I had been in charge, I think I would have guaranteed that nobody’s council tax bill would go up by more than a small percentage year-on-year, but that the government would gradually introduce land value tax and a local income tax, as well as committing to a new property valuation within the next parliament. I don’t think anybody would be terribly upset if it took more than a decade to move to a fairer council tax, so long as small and sensible steps in the right direction were taken each year.

Of course the SNP’s proposal might be seen as such a small and sensible step, but it is much smaller than I would have liked.

5 thoughts on “Reforming council tax”

  1. Once they have income tax data in their hands, they will be able to see what effect various changes would have.

    1. But they would still have to get the UK Treasury to make adjustments to the financial settlement for Scotland as the current one is based partly on there being local taxes. So far they have refused to do so under both Labour and Tory governments, so do not hold your breath.

  2. All changes to our tax system means some people pay more and some less. The only criteria should be on whether those changes increase overall efficiency.

    I say “should”, because in reality it’s all about plucking feathers with the least pain. Fair, equitable and efficient economic outcomes seem to have little to do with it.

    Take the adage that taxation should be based on peoples ability to pay. Why? When we pay for any other goods or services prices are not set by our income or wealth levels. Imagine the terrible distortions and chaos if they were! Yet we think such a system of paying for public services perfectly reasonable. And then we are surprised why economies perform so badly and people are poor or without a job.

    All because we are afraid of upsetting Poor Widows in Mansions, the human shield of bankers, landlords and the idle rich.

    If the downside of Land Taxes are their visibility, then instead of making them a yearly or even monthly deduction, make them weekly, and part of payroll deductions like National Insurance.

    As for the Poor Widow, she can be offered roll up and deferment.

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