Department of Economics 1 Local Income Tax or Council Tax? Options for Scotland David Bell University of Stirling

Department of Economics Structure Discussion of Property Taxation in the UKDiscussion of Property Taxation in the UK 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 Local GovernmentAlternative Mechanisms for Funding Local Government 2

Department of Economics Taxing 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 householdsAdverse effects on asset-rich income-poor households 3

Department of Economics Taxing 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 shiftedTax may be shifted Disincentive effects on labour supply – migration and withdrawal from labour marketDisincentive effects on labour supply – migration and withdrawal from labour market Not so easy to localise as property taxNot so easy to localise as property tax 4

Department of Economics Property Taxes in the UK Council taxCouncil tax Levied on 1991 valuation of propertiesLevied on 1991 valuation of properties Banded A to HBanded 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 (worth £359m in 2006/07)Council tax benefit payable to those on low income (worth £359m in 2006/07) Revenue in 2006/07 = £1.8bn + £0.36bn Council Tax BenefitRevenue in 2006/07 = £1.8bn + £0.36bn Council Tax Benefit Stamp dutyStamp duty 5

Department of Economics Stamp Duty Purchase price of propertyStamp Duty Payable Up to £125,0000 £125,001 to £250,0001% £250,001 to £500,0003% £500,001 plus4% UK revenue now £6.4bn. Increased 140% in five years to April Scotland £500m? 6

Department of Economics Property Taxes in the UK (cont.) Inheritance taxInheritance tax Chargeable at 40% on excess value of estate above £312,000 (£624,000 for couples)Chargeable at 40% on excess value of estate above £312,000 (£624,000 for couples) Worth £3.9bn in Worth £3.9bn in Scotland £200m?Scotland £200m? No taxation of imputed rentNo taxation of imputed rent In the UK imputed rent makes up as much as 9% of total income in 1993 as well as in 1998In the UK imputed rent makes up as much as 9% of total income in 1993 as well as in 1998 ONS estimate for 2001 = £73bnONS estimate for 2001 = £73bn 7

Department of Economics 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) 8

Department of Economics Average Rate of Real Increase in Value of Housing Stock Figure 1: Average Rate of Real Increase in Value of Housing Stock Source: Bank for International Settlements

Department of Economics Value of Housing Stock v GDP 10

Department of Economics 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. 11

Department of Economics Single Person LIT and Income Tax 12

Department of Economics Single Person LIT 13

Department of Economics Two Earner Household 14

Department of Economics Microsimulation Model simulate the effects of a policy on a sample of economic agents (individual, householdssimulate the effects of a policy on a sample of economic agents (individual, households based on representations of the economic environment of individual agents,based on representations of the economic environment of individual agents, their budget constraints andtheir budget constraints and possibly their behaviourpossibly their behaviour

Department of Economics 16 Data for Microsimulation Family Resources Survey Family Resources Survey individuals (2800 households) in Scotland.4500 individuals (2800 households) in Scotland. Scotland has 15.5 per cent of FRS respondents because the Scottish Executive paid for an extension to the Scottish sampleScotland has 15.5 per cent of FRS respondents because the Scottish Executive paid for an extension to the Scottish sample FRS has detailed information on individual incomes (earned and unearned, gross and net), on benefits received, and on council tax band.FRS has detailed information on individual incomes (earned and unearned, gross and net), on benefits received, and on council tax band.

Department of Economics 17 Gross EarningsCouncil Tax Band House Price Working Families Tax CreditCouncil Tax BenefitHousing Benefit National InsuranceIncome Tax Child Tax Credit FRS Data Council Tax BillTake Home Pay Property Tax Household Structure Model Structure Scottish Assessors Data FRS Data Council TaxLocal Income Tax

Department of Economics Aggregate Revenue LIT and CT 3p LIT raises £1.3bn3p LIT raises £1.3bn If Council Tax Benefit recouped, shortfall = £0.6bnIf Council Tax Benefit recouped, shortfall = £0.6bn Need to increase rate of LIT to 4.3pNeed to increase rate of LIT to 4.3p If Council Tax Benefit not recouped, shortfall = £0.9bnIf Council Tax Benefit not recouped, shortfall = £0.9bn Need to increase rate of LIT to 5.1pNeed to increase rate of LIT to 5.1p 18

Department of Economics Higher Rate Would Significantly Affect Contributions to LIT 19

Department of Economics Replacement of Council Tax: Number of Households in Poverty Poverty Line £ Per WeekHouseholds in Poverty Council Tax ,767 3p , p , p ,377 20

Department of Economics Council Tax and LIT: Distributional Effects 21

Department of Economics Households in Poverty by Household Type 22

Department of Economics Households in Poverty by Age 23

Department of Economics Numbers of Winners and Losers with LIT 24

Department of Economics Change Structure of Council Tax? Variety of experiments tried:Variety of experiments tried: Change council tax benefit taperChange council tax benefit taper Increase progression of council tax bandsIncrease progression of council tax bands Property TaxProperty Tax Hybrid taxHybrid tax 25

Department of Economics 26 Change the Structure of Council Tax? CT BandABCDEFGH Ratio H to A Ratios Between Bands Current House Prices 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

Department of Economics Northern Ireland - Property Tax Government announced intention to introduce a capital value rating system based on individual valuation assessments in April 2007.Government announced intention to introduce a capital value rating system based on individual valuation assessments in April Capital value system based on individual valuation assessments likely to result in a fairer distribution of the rating burden than any of the alternatives such as the current system based on rental values or a banded capital value system.Capital value system based on individual valuation assessments likely to result in a fairer distribution of the rating burden than any of the alternatives such as the current system based on rental values or a banded capital value system. 27

Department of Economics Hybrid Tax? 28