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Local income tax would have a narrow tax base. Some boroughs would have few income tax payers. Either they would become increasingly dependent on central Government funding or the few income tax payers left in some poor boroughs would pay massive amounts of local income tax. They would bear a swingeing burden. It has already been said that hard-
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working husbands and wives, with heavy responsibilities, would be worse off. I do not know whether the Liberal Democrats propose to do something to help them.
The real problem with local income tax is that the administration is so difficult. First, unlike in some other countries, people in this country do not pay income tax where they live but where their employers are based. Local authorities that wanted to collect local income tax would have to find out where residents' employers were based. They would have to apply through the employers to the tax office to find out those residents' incomes. It is no good the Liberal Democrats claiming that it can be done through the tax code; it cannot. The tax code gives information only about a person's allowances, not a person's income. Unless the local authority knew the income of each tax-paying individual in the local district, it could not calculate the product of a local income tax. It would be flying in the dark. Officials at the town hall would need to know the income of every resident in the area.
David Howarth: The fallacy in the hon. Gentleman's point is the assumption that the local authority would need to know anything about taxpayers' affairs. As in other countries, the system would be prepared through the national tax authorities. All they have to know is where people live. They already know that; otherwise, how would we receive our tax notices?
Sir John Butterfill: There we are. We revert to the point that the tax would be nationally based and subsequently redistributed. It would be a central tax. The hon. Gentleman is right that that is exactly what happens in Germany, where a national tax is distributed to local authorities. That gets rid of the independence of the local authority. Local authorities would need to know the income of people who lived locally; otherwise they could not set a rate. A huge administrative burden would be placed on local tax offices.
The biggest problem with local income tax, however, is that it creates ghettoes of the rich and poor. I shall explain how that works. If we take the two London boroughs of Lambeth and Wandsworth, we can already see the effect that has been created just through the council tax. Relatively poor Lambeth has relatively high rates of local taxation and substantial Government subvention, whereas relatively prosperous Wandsworth has become more prosperous because it has a very low rate of council tax.
If that is true in the case of council tax, how much more true would it be if a local income tax were introduced, and people were to have their money directly plundered by the Liberal Democrats? The rich would vote with their feet. They would move from areas of high local income tax into areas of low local income tax. They would be able to afford to do so, but the poor would be trapped in areas of high local income tax as they would not be able to afford to move.
The only way in which that problem could be overcomeI am anticipating what the hon. Member for Kingston and Surbiton (Mr. Davey) is going to say about thiswould be to have even larger Government grants to the areas with high rates of local income tax. That would create even more dependency, as well as
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taking away from the poor areas the very autonomy that the Liberal Democrats profess to want for them. This is a lunatic system that could only have been developed by the Liberal Democrats. Only they could be so silly as to propose something like this. In the ghettoes that they would create, there would be huge numbers of people who would vote for better and better local services in the certain knowledge that they would not have to pay for them, and that somebody else would.
Mr. Davey: I am sure the hon. Gentleman has studied the way in which local income tax works in Sweden, Finland, Norway, Denmark, Switzerland, Japan and many states in the US, where there is more decentralisation and more money raised locally. None of those systems has any of the features that he has just mentioned. Would he like to study the systems in those countries, because that is where they are working in practice?
Sir John Butterfill: I am grateful to the hon. Gentleman for raising that point; I was just coming to it myself. I have read the study produced by Cardiff university on the very paragons that he has just mentioned. It criticises local income tax in Scandinavia for having the following disadvantages: its base is limited by options decided at a higher level; it is not very transparent, in that local tax policy and national tax policy are difficult to separate, as I am sure the hon. Gentleman would happily confirm; and the joint nature of the tax means that central Government are involved in setting the base and the rate of tax,
And, as I pointed out earlier, the system in Germany involves a percentage of central income tax being handed out. The same applies in Austria. Moreover, Scandinavia, about which the hon. Gentleman is so enthusiastic, does not have a graduated system; it has a proportional system that is extremely regressive. Is that really what he wants to introduce in the United Kingdom? Perhaps it is. If so, we are glad that we are being told that that is what the Liberal Democrats want.
We could, however, refine the existing system in the ways that my hon. Friend the Member for Meriden (Mrs. Spelman) has outlined. I would go a little further. One of the inequities of the present council tax system is that it does not take sufficient account of the composition of a household. It makes some recognition of it, but there are many households, in my constituency and everywhere else, with a large number of people of working age who do not effectively make an adequate contribution to local taxation. Yet there are others with a single person or a pensioner couple that are effectively paying more than their fair share for the services that are provided. If we are to reform the council tax system, I suggest that we adjust the council tax more adequately to reflect the composition of households. That would not be difficult; the necessary information is available from the census data or through voter registration details. It could therefore easily be done, and it would create a much fairer system than the complete dog's breakfast proposed by the Liberal Democrats.
Mr. Nick Raynsford (Greenwich and Woolwich) (Lab):
I followed with interest the speech of the hon. Member for Bournemouth, West (Sir John Butterfill),
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which started very well. It was particularly good when he was demolishing the Liberal Democrat case for a local income tax, which he did with considerable skill and accuracy. Unfortunately, he spoiled the good effect by veering in the last minute of his speech into a return to the poll tax. It is one of the extraordinary features of today's Conservative party that it remains absolutely wedded to the belief that if it could get itself back to where it was in the 1980s, all would be well. Political parties that are obsessed with the past rarely command the confidence of the public. Thinking that it can find a solution to local government finance by going back to the kind of principles that generated the poll tax seems to be a delusion that is sadly typical of today's Conservative party.
Sir John Butterfill: I fear that the right hon. Gentleman does me an injustice. I was opposed to the poll tax when it was introduced, and I proposed an adjusted rating assessment, because the big attraction of the rating assessment, and the council tax, is that it is collected simply from the head of household. All that I was suggesting is that council tax ought to take household occupation into account more than at present.
Mr. Raynsford: I hear what the hon. Gentleman says, and I will not pursue that, as there are points of principle that I do wish to pursue. Any attempt to move back towards a flat rate tax related to the numbers of people living in a household would be a profound mistake, as the country rightly and overwhelmingly rejected the whole ethos of the poll tax that characterised the Conservative party in the 1980s and early 1990s.
One of the curious features of today's debate is the extent to which the two Opposition parties have been vying with each othersomething on which other contributors have commented. It is strange that they should attach more importance to the short-term interests of the Cheadle by-election than to the long-term interests of developing a credible system of local government finance for this country, which is what we need. Let me consider some of the serious weaknesses in both their positions before concluding with a few thoughts about what should guide the way forward.
The Conservatives have been advancing the extraordinary proposition that one can have a system of taxation based on property values without the need for revaluation. The hon. Member for Meriden (Mrs. Spelman) recognised, I think, that that is completely untenable. She then proceeded to say that they were not totally opposed to revaluation, although the motion in her name and that of the Leader of the Opposition talks about cancelling plans for a council tax revaluation, which indicates pretty clearly that they are opposed to revaluation. She acknowledged that there was a need to take some account of values, but advanced the preposterous suggestion that because of some degree of convergence between property values in different parts of the country, there would currently be no need for a revaluation.
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