| Previous Section | Index | Home Page |
6.24 pm
Mr. David Borrow (South Ribble) (Lab): In view of the time, I shall be brief. I should like to make a few general comments on issues around taxation and then specifically on the review of local funding.
In 1975, I started my career as a local taxation professional, and I declare an interest as a member of the Institute of Revenues, Rating and Valuation.
In 1976, the Layfield report came out, following the 1973 rating valuation. It raised issues similar to those that we are discussing. The report included all the sorts of issues that are currently being considered; it raised all the problems with local income tax—the nature of raising the money and all the other technical difficulties [Interruption.] If the Liberal Democrats will listen a little longer, I shall deal with certain issues and they may learn a little.
There is no truly fair tax. All a Government can do is try to put together a basket of taxes on different things in the right combination, in the hope that they can tax enough different things to achieve a fair basket. That means taxing property, wealth, income and expenditure. Those are the main sources of taxation on individuals. The way in which that combination is put together is crucial to whether the tax system is fair.
Income tax on its own is not fair, because it ignores wealth. It ignores the fact that, if there is only a tax on income, a working couple with kids, paying off a mortgage and struggling with all the expenses of starting out in life, may have a higher income and so pay more income tax, but not be as comfortably off as a wealthy retired couple with a low income, but £200,000 in the bank and their mortgage paid off. We must recognise that fairness in taxation means looking at it as a whole.
A property tax is essential in any basket of taxes. Because of its very nature—the fact that property does not move—such a tax is easy to collect. Not only in this country, but in many others across the world, it is seen as ideally suited for a local government tax, rather than a national Government tax. That is one reason why, whatever comes out of the review, a local property tax needs to be part of the system that we end up with. Whether it is the only local tax is a different matter, but it needs to be a part.
The existing council tax is unfair, because the bandings are not sufficient. There should be more bands at the top and the bottom. That can be dealt with when the revaluation takes place. We also need to ensure a proper balance between the different bands. At present, those in a low band pay more than they should, and those in a high band pay less than they should, taking the value of the property alone. There is quite a lot of scope to improve the existing system.
If we look at local government funding as a whole, we see that the reason for the current problem with council tax increases is the gearing system, which means that 75 to 80 per cent. of local government income is dependent
on the decisions of central Government. Of that chunk, about a quarter to a third is geared to the nationalised business rate, which is linked to inflation, and the remainder comes as Government grant. So the only bit that councils have any control over is the 20 to 25 per cent. That percentage is higher than it was 10 years ago, but it is a small percentage linked to the council tax. Replacing the council tax with a local income tax would not change that problem, because councils could still control only a small proportion of council income.We need to increase local government's tax base. We need to look again at the localisation of the business rate and restore that to local authorities. One of the matters that Layfield looked at in 1976 was whether it was possible to introduce other forms of local tax in addition to the property tax.
Local income tax may be a possibility, but my view is that it would be complicated and difficult to introduce because of the existing structure of local government, with small shire districts of about 100,000 people such as those that I represent and the two-tier system. Local income tax is possible with a regional system or with much larger local authorities, as in the United States, where local income tax seems to work better.
I was reminded of my hon. Friend the Minister's constituency—Corby—when comments were made about the buoyancy of local income tax. Local income tax is all right when the economy is booming, living standards are increasing and income tax yield is going up every year. However, 10 or 15 years ago, when the steel industry collapsed in Corby and the town struggled for a number of years, those who were running the local authority had to try to deliver all the services although its tax base—the workers—was wiped out at a stroke. To an extent, that happened in my own authority, when Leyland Trucks got into difficulty in the early 1990s. If local income tax is the only tax that local authorities control, they are vulnerable to the ups and downs not just of the national economy but of the local economy. The smaller the local authority, the more vulnerable it is to those changes.
The Liberals need to think again about their policy. I can understand why it is viewed as sexy and the sort of thing that goes into "Focus" across the country, but people move away from it when they consider it. If the Liberals seriously felt that they had a chance of winning the next election, that commitment would disappear from their policy by the time the manifesto was written.
6.31 pm
Sir George Young (North-West Hampshire) (Con): It is pleasure to follow my hon. Friend the Member for Mole Valley (Sir Paul Beresford) and the hon. Member for South Ribble (Mr. Borrow), who have spoken with authority and brevity, and I will certainly seek to match them on brevity.
The Liberal Democrats, who have made this proposal, need to stand back and look at the overall structure of taxation. There are taxes on income, on expenditure and on capital or assets. They propose to abolish a tax on capital or assets—council tax is almost exclusively a tax on home ownership—and to replace it with a tax on income. They assert that that will be fairer, but I remain to be convinced.
A number of residential properties in my constituency are owned by companies or trusts and a substantial amount of council tax is levied on them at the moment. That could be lost, to be made good by a rise in income tax on the average punter. Other substantial properties are owned not by companies, but by individuals who are not domiciled in this country and may legitimately pay no tax in the UK. Their contribution would also be lost. Finally, some properties are owned by wealthy individuals who are domiciled in this country but have so arranged their affairs to make ingenious use of tax allowances that they pay little or no income tax. They live off their capital, and I am sure that they will be interested in the Liberal Democrat proposal to reduce their tax burden at the expense of those who are less well off.
I have looked at the website, and the Liberal Democrats make it clear that they want to abolish the council tax and replace it by Inland Revenue and pay-as-you-earn measures. That would not capture a range of people, and that lost income would have to be made good. So some arguments of principle need to be addressed before reducing taxes on capital and replacing them with taxes on income, and there are some important practical and distributional consequences, as well as possibly an impact on incentives. If 3p in the pound were added to the basic rate of income tax, it would help to make this country less competitive internationally and add to the incentive to take tax avoidance measures. I do not put too much emphasis on this, but related to that is the view of some economists that house prices will rise if a tax on houses is abolished. The Government have tried to damp down buoyancy in house prices by using stamp duty. It follows that, if the tax on houses is reduced, prices may go up, with consequences for marginal first-time buyers.
I have considered the impact of the proposals on my constituency. At the moment, the average council tax bill in Test Valley is £1,042 a year. To raise the same amount of money would require a local income tax of 4.3 per cent., yet a household with one person on average male earnings and another on average female earnings would end up paying a yearly local income tax bill of £1,670; so having got rid of the council tax, that couple would pay £628 a year more. I know that the Liberal Democrats keep saying, "We expect 70 per cent. of households to be better off", but I remember my Government saying that about the poll tax. The reality is that it is not households who vote, but voters. I do not believe that 70 per cent. of my constituents would be better off.
I shall touch on one or two specific issues in the time available. Let me start with what I call visibility. How visible would the new tax be? At the moment, I receive a bill in April from Test Valley borough council setting out how much I must pay. I have a standing order for 10 months, which I see on my statement, so I know exactly how much money has gone where. That keeps me focused on the cost of local government and allows me to compare my band with those in other local authorities. Under one of the Liberal Democrat proposals, there would simply be less visibility. A flat sum would be deducted from my pay each month, along with my national income tax, national insurance, contributions to the Members' fund, give-as-you-earn, and all the rest. The tax would be less visible, which
would reduce the accountability of local government and the transparency of its costs. It would get lost in my transactions with central Government, instead of being a stand-alone transaction with local government. There would be a complicated settling-up process at the end of the year, although which tax year's return would be used as the basis for the settling up is not quite clear.There is a further point that has not been mentioned in the debate. How would my town hall know what the tax base would be when setting the rate at the beginning of the year? At the moment, it knows with some certainty how much in the pound a certain amount of council tax will raise—it has a fixed, immovable tax base. Under the Liberal Democrat proposal, it would not know how much it would raise from a specific rate of tax. I suspect that councils would aim high so that they would have a margin.
What percentage of the tax would be collected? Some 96 per cent. of council tax is collected at present. Do the Liberal Democrats really think that local authorities would get the same return from central Government?
| Next Section
| Index | Home Page |