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Scottish Local Income Tax announced

Alex Salmond, leader of the Scottish National Party has long advocated a Local Income Tax instead of the Council Tax and has now announced that it will be included in the next legislative programme. The belief is that it is based on “ability to pay”. That notion is a delusion (see below). It has been widely condemned, for example in this article which appeared in The Scotsman in September 2007 and shows how it would have a particularly adverse effect on the Scottish economy.

The reasons why it would be especially bad for Scotland are so blatantly obvious that one wonders why the Scottish Nationalists are so determined to push it through. It wll be interesting to see how it fares on its way through parliament? If it reaches the statutue book, how will it work? The Campaign has always opposed Local Income Tax and has had to set out the arguments against it over and over again. Although the Liberal Democrats have been clamouring for LIT for the past twenty years, the Scottish Nationalists are the first party to have a change to put it into effect. What the Scottish Nationalists are going to do is to take advantage of their ability to vary income tax by 3p in the pound, so is not a local income tax at all, but a national surcharge that will be distributed to local authorities by the central body. In other words it leaves the Scottish local authorities wth no revenue raising powers of their own, which will make them unaccountable to their electorate and in due course will turn them into agencies of central government.

With luck, the Scottish debate might ensure that the proposal is buried once and for all. For a summary of what is wrong with Local Income Tax…

Income tax is claimed to be related to ‘ability to pay’. In practice it is not. Avoidance and evasion are rife. The system is riddled with loopholes which enable those who can afford to pay for the necessary expert advice to reduce their liabilities. Furthermore, ‘ability to pay’ is a spur to dishonesty and idleness. The Campaign takes the view that taxation should be based on the ‘benefit principle’.

The cost of supplying basic services to a residence – such as fire fighting and police cover – varies little with the numbers in a household, or whether they are earners. Even the cost of refuse collection is only marginally affected by the size of particular households, as the major expenses of providing the service are fixed.

Consider three similar houses on three similar plots in one street. In the first are four adults, perhaps parents and grown-up children, all working and paying taxes. They make little demand on council services, having little time to use facilities such as libraries, parks, leisure centres or adult education classes. In the second are two adults who do not work but make full use of all of these facilities. In the third are two adults and two grown-up children, all claiming benefits and supplementing them by casual cash-in-hand work and criminal activities. Where is the fairness of a local income tax as it would apply to these three instances?

It would be necessary to maintain an accurate register of taxpayers’ addresses, and it would, indeed, be necessary to establish a definition of what constitutes residence.

Experience with the Community Charge showed that there are problems in linking taxation to place of residence. The total amount of tax payable could differ substantially across local authority areas. This would provide an incentive to avoid and would also give rise to problems of ensuring compliance. In addition, therefore, to the problems that already arise in connection with avoidance and evasion of income tax, the extra tax could be vulnerable to avoidance through the use of “addresses of convenience”, for example by registration where the rate of tax was lower.

Complications would arise when taxpayers live in one tax area and work in another. Income tax is often deducted by employers, at source, through the PAYE system. Provision would have to be made for employers to identify by home address the appropriate income tax rate for every employee, make deductions accordingly and ensure that the Inland Revenue was correctly paid, whilst the latter would have to remit the correct amount to the appropriate local authority. Any conceivable administrative procedure will be clumsy and costly in relation to the sums involved.

Unincorporated businesses would contribute, but incorporated businesses would not, as the tax would not provide for direct contributions to local revenue from companies, especially national organisations, nor for dividend interest. This would discriminate against sole traders, partnerships and small businesses not registered as companies, whose profits are distributed as wage income rather than dividends.

Non-domiciled residents, who may be very wealthy, enjoy partial exemption from UK income tax.

The decline of regular full-time employment and self assessment impose growing strains on the income tax system. Its long-term future must be in doubt.

Differential tax rates within different parts of the United Kingdom would influence where people chose to live and work, with consequent effects on regional economies. Property values would eventually come to reflect these differential tax rates, and so a local income tax would in effect act as a property tax at one remove, as the difference in tax liabilities will ultimate be reflected in house prices on the two sides of the boundary.

The tax would be ‘lumpy’: small variations in the tax rate would produce large variations in yield, causing problems for local authority treasurers when setting budgets. The yield would be unpredictable as incomes within a local authority area cannot be forecast accurately as tax is paid on past incomes; the failure of a major employer could lead to a large shortfall in revenue.

Because earnings per head in many local authorities are relatively low, the yield would inevitably be restricted and those administrations would need more substantial government grants.