department of economics 1 local income tax or council tax? options for scotland david bell...

Department of Economics

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Local Income Tax or Council Tax?Local Income Tax or Council Tax?Options for ScotlandOptions for Scotland

David BellDavid Bell

University of StirlingUniversity of Stirling


StructureStructure

• Discussion of Property Taxation in the Discussion of Property Taxation in the UKUK

• Mechanics of LITMechanics of LIT• Microsimulation ModelMicrosimulation Model• Distributional Effects of LIT/Council TaxDistributional Effects of LIT/Council Tax• Demography and LIT ProposalsDemography and LIT Proposals• Alternative Mechanisms for Funding Alternative Mechanisms for Funding

Local GovernmentLocal Government2


Taxing propertyTaxing property• In FavourIn Favour

• Immovable – difficult to shiftImmovable – difficult to shift• Reasonable approximation to wealthReasonable approximation to wealth• Encourages investment in other assetsEncourages investment in other assets• Revenue predictableRevenue predictable

• AgainstAgainst• Does not reflect service usageDoes not reflect service usage• Adverse effects on asset-rich income-poor Adverse effects on asset-rich income-poor

householdshouseholds

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Taxing IncomeTaxing Income• In favourIn favour

• Reasonably predictableReasonably predictable• Current income a good indicator of ability to payCurrent income a good indicator of ability to pay• Should be inexpensive to collectShould be inexpensive to collect

• AgainstAgainst• Tax may be “shifted”Tax may be “shifted”• Disincentive effects on labour supply – migration Disincentive effects on labour supply – migration

and withdrawal from labour marketand withdrawal from labour market• Not so easy to “localise” as property taxNot so easy to “localise” as property tax

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Department of Economics Property Taxes in the UKProperty Taxes in the UK

• Council tax Council tax • Levied on 1991 valuation of propertiesLevied on 1991 valuation of properties• Banded A to H Banded A to H • Ratio of 1 to 3 between Band A and Band H propertiesRatio of 1 to 3 between Band A and Band H properties• Collection rate highCollection rate high• Council tax benefit payable to those on low income Council tax benefit payable to those on low income

(worth £359m in 2006/07)(worth £359m in 2006/07)• Revenue in 2006/07 = £1.8bn + £0.36bn Council Tax Revenue in 2006/07 = £1.8bn + £0.36bn Council Tax

BenefitBenefit

• Stamp dutyStamp duty

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Stamp DutyPurchase price of property

Stamp Duty Payable

Up to £125,000 0

£125,001 to £250,000 1%

£250,001 to £500,000 3%

£500,001 plus 4%

UK revenue now £6.4bn. Increased 140% in five years to April 2007. UK revenue now £6.4bn. Increased 140% in five years to April 2007. Scotland £500m?Scotland £500m?

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Property Taxes in the UK (cont.)Property Taxes in the UK (cont.)

• Inheritance taxInheritance tax• Chargeable at 40% on excess value of estate above Chargeable at 40% on excess value of estate above

£312,000 (£624,000 for couples)£312,000 (£624,000 for couples)• Worth £3.9bn in 2007-08Worth £3.9bn in 2007-08• Scotland £200m?Scotland £200m?

• No taxation of imputed rent No taxation of imputed rent • ““In the UK imputed rent makes up as much as 9% of In the UK imputed rent makes up as much as 9% of

total income in 1993 as well as in 1998”total income in 1993 as well as in 1998”• ONS estimate for 2001 = £73bnONS estimate for 2001 = £73bn

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No Taxation of Imputed Income

• Income, as conventionally measured in household surveys, is an inadequate measure .., as it often excludes some types of capital income (capital gains, imputed rents on owner occupied housing).

• Private wealth accumulated during working life, such as housing and financial assets, provides an important buffer in the event of unforeseen shocks, such as long-term illness, disability, or widowhood.

(OECD: AGEING WORKING PAPERS Maintaining Prosperity In An Ageing Society: the OECD study on the policy implications of ageing)

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Average Rate of Real Increase in Average Rate of Real Increase in Value of Housing Stock 1970-Value of Housing Stock 1970-

20062006

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Figure 1: Average Rate of Real Increase in Value of Housing Stock 1970-2006

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

GER

MA

NY

SWIT

ZERL

AN

D

JAPA

N

SWED

EN

FIN

LAN

D

NO

RWA

Y

ITA

LY

USA

DEN

MA

RK

CAN

AD

A

FRA

NCE

AU

STRA

LIA

NEW N

L

BELG

IUM

IREL

AN

D

SPA

IN GB

Ave

rage

Per

cent

Rat

e of

Rea

l Inc

reas

e in

Val

ue o

f Hou

sing

Sto

ck

Source: Bank for International Settlements


Value of Housing Stock v Value of Housing Stock v GDPGDP

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Proposed Local Income Tax

• Local Income Tax• “We propose that people pay 3% on

all their income (except income from savings and investments) over the personal allowance.”

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Department of EconomicsSingle Person LIT and Income Single Person LIT and Income

TaxTax

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Single Person LITSingle Person LIT

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Two Earner HouseholdTwo Earner Household

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Microsimulation ModelMicrosimulation Model

• simulate the effects of a policy on simulate the effects of a policy on a sample of economic agents a sample of economic agents (individual, households(individual, households• based on representations of the based on representations of the

economic environment of individual economic environment of individual agents, agents,

• their budget constraints and their budget constraints and • possiblypossibly their behaviour their behaviour


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Data for MicrosimulationData for Microsimulation

• Family Resources Survey 2005-06Family Resources Survey 2005-06• 4500 individuals (2800 households) in 4500 individuals (2800 households) in

Scotland. Scotland. • Scotland has 15.5 per cent of FRS Scotland has 15.5 per cent of FRS

respondents because the Scottish respondents because the Scottish Executive paid for an extension to the Executive paid for an extension to the Scottish sample Scottish sample

• FRS has detailed information on FRS has detailed information on individual incomes (earned and individual incomes (earned and unearned, gross and net), on benefits unearned, gross and net), on benefits received, and on council tax band. received, and on council tax band.


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Gross Earnings

Council Tax Band

House Price

Working Families Tax Credit

Council Tax Benefit

Housing Benefit

National Insurance

Income Tax

Child Tax Credit

FRS Data

Council Tax Bill

Take Home Pay

Property Tax

Household Structure

Model StructureModel StructureScottish Assessors’ Data

FRS Data

Council TaxLocal Income Tax


Aggregate Revenue LIT and Aggregate Revenue LIT and CTCT

• 3p LIT raises £1.3bn3p LIT raises £1.3bn• If Council Tax Benefit recouped, If Council Tax Benefit recouped,

shortfall = £0.6bnshortfall = £0.6bn• Need to increase rate of LIT to 4.3pNeed to increase rate of LIT to 4.3p• If Council Tax Benefit not If Council Tax Benefit not

recouped, shortfall = £0.9bnrecouped, shortfall = £0.9bn• Need to increase rate of LIT to 5.1pNeed to increase rate of LIT to 5.1p

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Department of Economics Higher Rate Would Significantly Higher Rate Would Significantly

Affect Contributions to LITAffect Contributions to LIT

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Department of Economics Replacement of Council Tax:

Number of Households in Poverty

Poverty Line £

Per Week Households in Poverty

Council Tax 188.1 641,767

3p 193.5 617,473

4.3p 191.7 616,778

5.07p 190.7 613,377

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Council Tax and LIT: Distributional Effects

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1 2 3 4 5 6 7 8 9 10

<-- Poorer Income Decile Richer -->

Per

cen

t o

f N

et H

ou

seh

old

Inco

me

bh

c

3p

4.3p

5.07p

Ctax

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Households in Poverty by Household Type

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Households in Poverty by Age

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Numbers of Winners and Losers with LIT

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Change Structure of Council Change Structure of Council Tax?Tax?

• Variety of experiments tried:Variety of experiments tried:• Change council tax benefit taperChange council tax benefit taper• Increase progression of council tax Increase progression of council tax

bandsbands• Property TaxProperty Tax• Hybrid taxHybrid tax

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Change the Structure Change the Structure of Council Tax? of Council Tax?

CT Band A B C D E F G H Ratio H to A

Ratios Between Bands

Current 0.67 0.79 0.89 1 1.22 1.44 1.67 23

House Prices 0.25 0.5 0.75 1 1.63 2.25 2.88 3.514

Does not produce a marked redistribution of the burden of council tax – because not many households in the upper council tax bands

Same argument applies if new higher bands council tax introduced


Northern Ireland Northern Ireland - Property Tax- Property Tax

• Government announced intention to introduce Government announced intention to introduce a capital value rating system based on a capital value rating system based on individual valuation assessments in April 2007. individual valuation assessments in April 2007.

• ““Capital value system based on individual Capital value system based on individual valuation assessments likely to result in a valuation assessments likely to result in a fairer distribution of the rating burden than fairer distribution of the rating burden than any of the alternatives such as the current any of the alternatives such as the current system based on rental values or a banded system based on rental values or a banded capital value system.”capital value system.”

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Hybrid Tax?Hybrid Tax?

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department of economics 1 local income tax or council tax? options for scotland david bell...

Documents

total income

behaviour slide

againstagainst tax

low income worth

bn council tax benefitrevenue

uk council taxcouncil

uk imputed rent

uk revenue