A fair tax system for local service provision

Introduction

Much is made of inequalities in the Council tax system.  Invariably it seems commentators, lobbyists and politicians focus on the fact that people with more valuable properties pay less than those in less valuable properties.  Ostensibly this appears unfair yet this approach fails to recognise that what is actually important is what share of income is taken by council tax or any other value based tax.

 

Another feature of British policy is that it invariably results in complicated systems that are bureaucratic and costly. Council tax is a good example, where to mitigate the defects in a regressive system support in terms of Council Tax Benefit and Single person discounts are introduced.

 

A fairer and simpler approach would be to base charges on peoples earnings. What would be advantages of such a system?  These are set out below.

 

A new system

A system based on earnings would aim to meet a number of criteria:

It should be -

Progressive namely fair to those paying;

Ensure all adults contributed to local service provision;

Easy to understand;

Straightforward to collect.

 

Charges based on income would be progressive (*1), thus ensuring that people on lower incomes would not pay more than their fair share unlike the current and alternative value based options. It would also end the complexity of the current approach of reductions for single person households and Council tax benefit. 

 

Charges could be determined by a percentage surcharge on the amount of income tax paid. The money would be collected via the current tax system whether PAYE or on self-assessments. Changes in family circumstances would be immediately reflected in the amount of tax charges, falling if for say someone became unemployed.   Funds collected would be passed to central government and distributed to local authorities.  It would therefore be straightforward to collect. It would not need any assessments or valuations of property values or details of members of a household.

 

Other reforms

Other reforms could make a difference to charges for local government services. For example, the cost of dealing with waste and recycling could be met through charges on products so that consumers pay at the point of purchase rather than through charges at the local level.  Social care could be partly/wholly funded through the tax system rather than at the local level. 

  

Results

The change would create a fairer system of charging for local services; it would be responsive to changes in earnings and have the advantage of not requiring a new system of bureaucracy. Those on higher earnings would pay more than those on lower earnings.

  

Conclusion

Basing charges for local services on house values is clearly unfair.  Households in areas with lower incomes pay more council tax as a share of income than those on higher incomes, while single person households pay even more. It also underestimates the likely low share of income of those with sources other than employment earnings.  The new system would be fairer, less bureaucratic and flexible in its operation and effects.

  

Notes

*1 To ensure the income tax system is more progressive requires introducing higher rates on high earnings; incorporating much of the funds derived from National Insurance into the income tax system.  Together this would result in a fairer system with all earnings whether from employment, investments or property being taxed at the same rate.