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rhythmaningThe Scottish Government (nee the Scottish Executive - its legal name) is seeking views about changing local taxation.
Tax is something that, believe it or not, I am quite interested in: the way tax is charged and collected can have a huge impact on society, business and the economy; it can change the way we do things, the way we behave, and how we spend our money.
The Scottish Government’s consultation is actually called “A Fairer Local Tax for Scotland”; in fact, I believe it is anything but fairer – although that may depend on how you define “fairer” (which, as far as I can see, they don’t).
I am actually going to respond to the consultation, and this post is a way of getting my thoughts down before I send in my response. (Should anyone else feel motivated to join the consultation, the deadline is 18 July 2008.)
Local taxes are interesting: the switch from residential (property) rates to thepoll tax community charge in Scotland in the 1989 and later in the rest of the UK lead to large scale riots and public disorder – coupled with organised non-payment; this is one of the issues that lead directly to the ousting of Margaret Thatcher by her own party. Thatcher didn’t learn from the trial of the poll tax in Scotland, where there were mass marches and non-payment campaigns.
Funding local government is problematic. The current system throughout the UK is the council tax, which is based on the value of property, but is paid by the resident, not the owner of the property – as such, it is a bit like a cross between the poll tax and the rates: like the poll tax because it is paid by residents – but not by every resident – and like the rates because it is based on the property. If you live somewhere, you are meant to pay the council tax.
The problem is that council tax is that it doesn’t really fund much council spending: according to the Department of Communities and Local Government , £25bn of council spending in England comes from council tax and a further £70bn direct from central government. This is one reason why council tax can be so contentious: if a council want to increase its spending, the only source under its control is council tax, which therefore takes all the hit.
So the devolved bit of funding for local government doesn’t really fund much of local government. It is also based on property value, rather than either ability to pay or the use of services. (It was trying to align payment to the use of services that made Margaret Thatcher so keen on the poll tax.)
To make local government truly accountable, they should be funded locally. The Liberal Democrats are campaigning for local income tax to achieve this.
The principal of local income tax is one that appeals to me: devolving funding as well as spending, making local councils accountable for their spending, and tying in the charge to the ability to pay – as with national income tax – feels right.
This is what the SNP would like me to think is what they are proposing; but they are not.
Here is a summary of the SNP’s proposals:
There are a lot of difficulties with these:
it will depend of the good nature of the UK tax authorities – HM Revenue and Customs - to collect this tax. I can’t actually see this happening
it will hit businesses’ ability to recruit – high earners, who will bear a large proportion of the tax according to the appendix to the consultation, will simply work elsewhere unless employers compensate them for the local tax
the suggested rate of 3% (chosen, I would guess, because the Scotland Act 1998 enabled the Scottish Executive to vary income tax by 3p/£) is probably a gross underestimate: this paper from the University of Stirling indicates that a 3p tax would raise only 2/3 the necessary funding (revenue of £1.3bn leading to £0.6bn deficit) – and that is if the UK Parliament agrees to pass on the current council tax benefit, which they don’t want to do - without the rebate, there would be a £0.9bn shortfall: a more realistic rate for a fully balance budget would by 5.1p (slide 18 in the Stirling paper) [ I have heard people say that it would actually need from 7% to more than 10% - but I can’t find any references to this – possibly just pub-talk!)
by ignoring investment income (on the basis that it would be far too complex and difficult to calculate and tax), the tax is not based on ability to pay – indeed, this will greatly skew the collection of the tax away from wealthy non-earners to the higher paid.
Interestingly, the consultation doesn’t actually ask about the proposals. Instead, they ask some very specific – and very closed – questions. For instance, they ask
My answer would have to be “too low”, because I think they haven’t costed the budget properly – not because I would be happy paying more. The whole consultation is worded from the premise that anyone responding thinks that the local income tax is a good idea.
Actually, the questions are very badly written. For instance, question 5 asks
but the fixed answers are Yes/No/Don’t know. So if I were to tick Yes, is that “Yes, earned income should be taxed?” or “Yes, earned income should not be taxed”? Just bad questions: they won’t be able to analyse the results. (The answers should be “Tax/Don’t tax/Don’t know”.)
Nowhere is there anywhere to say “actually, I think this is a really bad idea, because you will be making Scottish local government less accountable, you are underestimating the amount of tax, you are ignoring important aspects because it would just be too difficult to work out, you will drive entrepreneurs and higher paid employees away and, anyway, there isn’t a hope in hell that the UK parliament will ever let HMRC cooperate with you.”
It isn’t just me that thinks this: the CBI thinks it would be bad for the Scottish economy (or, alternatively, “savages plan for Scottish local income tax”); a study for Glasgow City Council says the tax would need to by 6p in the pound (although CoSLA narrowly voted in favour of the tax); and the Adam Smith Institute thinks it is completely unfounded, and proposes a local sales tax instead. There are lots of other views, too, as as this blogsearch shows (a lot of them seem to belong to MSPs…).
Tax is something that, believe it or not, I am quite interested in: the way tax is charged and collected can have a huge impact on society, business and the economy; it can change the way we do things, the way we behave, and how we spend our money.
The Scottish Government’s consultation is actually called “A Fairer Local Tax for Scotland”; in fact, I believe it is anything but fairer – although that may depend on how you define “fairer” (which, as far as I can see, they don’t).
I am actually going to respond to the consultation, and this post is a way of getting my thoughts down before I send in my response. (Should anyone else feel motivated to join the consultation, the deadline is 18 July 2008.)
Where we are at the moment…
Local taxes are interesting: the switch from residential (property) rates to the
Funding local government is problematic. The current system throughout the UK is the council tax, which is based on the value of property, but is paid by the resident, not the owner of the property – as such, it is a bit like a cross between the poll tax and the rates: like the poll tax because it is paid by residents – but not by every resident – and like the rates because it is based on the property. If you live somewhere, you are meant to pay the council tax.
The problem is that council tax is that it doesn’t really fund much council spending: according to the Department of Communities and Local Government , £25bn of council spending in England comes from council tax and a further £70bn direct from central government. This is one reason why council tax can be so contentious: if a council want to increase its spending, the only source under its control is council tax, which therefore takes all the hit.
So the devolved bit of funding for local government doesn’t really fund much of local government. It is also based on property value, rather than either ability to pay or the use of services. (It was trying to align payment to the use of services that made Margaret Thatcher so keen on the poll tax.)
To make local government truly accountable, they should be funded locally. The Liberal Democrats are campaigning for local income tax to achieve this.
The principal of local income tax is one that appeals to me: devolving funding as well as spending, making local councils accountable for their spending, and tying in the charge to the ability to pay – as with national income tax – feels right.
This is what the SNP would like me to think is what they are proposing; but they are not.
The SNP’s proposals…
Here is a summary of the SNP’s proposals:
- A tax free personal allowance that matches the UK personal allowance levels
- A 3% rate applied to the income that is subject to basic and higher rates of UK income tax
- Collection that complements the existing national system of collection through Pay as You Earn (PAYE) and self assessment
- Exemptions for savings and investment income
- A tax for second homes, which will be subject to local requirements, and broadly comparable to the current council tax on second homes.
My criticisms…
There are a lot of difficulties with these:
- it won’t be a local income tax: it will be a Scottish income tax: local government funding will be distributed by the Scottish Government
- it will reduce local government accountability – the same charge will apply to everywhere in Scotland
- so whoever forms the local council will get the same amount of money – at the Scottish Government’s discretion, making my vote for local government useless, at least in fiscal terms
- I would pay the same amount wherever I lived in Scotland, which would not be related to the actual cost of running the local council
- so whoever forms the local council will get the same amount of money – at the Scottish Government’s discretion, making my vote for local government useless, at least in fiscal terms
What the consultation asks…
Interestingly, the consultation doesn’t actually ask about the proposals. Instead, they ask some very specific – and very closed – questions. For instance, they ask
Do you think a flat rate of 3% is too high, too low or about right?
My answer would have to be “too low”, because I think they haven’t costed the budget properly – not because I would be happy paying more. The whole consultation is worded from the premise that anyone responding thinks that the local income tax is a good idea.
Actually, the questions are very badly written. For instance, question 5 asks
Among the following, which should or should not be taxed as part of Local Income Tax?
a. Earned Income / Wages?
b. Income from Pensions?
c. Income from Savings? and so on…
but the fixed answers are Yes/No/Don’t know. So if I were to tick Yes, is that “Yes, earned income should be taxed?” or “Yes, earned income should not be taxed”? Just bad questions: they won’t be able to analyse the results. (The answers should be “Tax/Don’t tax/Don’t know”.)
Nowhere is there anywhere to say “actually, I think this is a really bad idea, because you will be making Scottish local government less accountable, you are underestimating the amount of tax, you are ignoring important aspects because it would just be too difficult to work out, you will drive entrepreneurs and higher paid employees away and, anyway, there isn’t a hope in hell that the UK parliament will ever let HMRC cooperate with you.”
It isn’t just me that thinks this: the CBI thinks it would be bad for the Scottish economy (or, alternatively, “savages plan for Scottish local income tax”); a study for Glasgow City Council says the tax would need to by 6p in the pound (although CoSLA narrowly voted in favour of the tax); and the Adam Smith Institute thinks it is completely unfounded, and proposes a local sales tax instead. There are lots of other views, too, as as this blogsearch shows (a lot of them seem to belong to MSPs…).
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A taxing issue
Date: 2010-07-16 10:28 am (UTC)Income Tax India (https://myitreturn.com)