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Local Income Tax or Council Tax? Options for Scotland

Local Income Tax or Council Tax? Options for Scotland. David Bell University of Stirling. Structure. Discussion of Property Taxation in the UK Mechanics of LIT Microsimulation Model Distributional Effects of LIT/Council Tax Demography and LIT Proposals

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Local Income Tax or Council Tax? Options for Scotland

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

  2. Structure • Discussion of Property Taxation in the UK • Mechanics of LIT • Microsimulation Model • Distributional Effects of LIT/Council Tax • Demography and LIT Proposals • Alternative Mechanisms for Funding Local Government

  3. Taxing property • In Favour • Immovable – difficult to shift • Reasonable approximation to wealth • Encourages investment in other assets • Revenue predictable • Against • Does not reflect service usage • Adverse effects on asset-rich income-poor households

  4. Taxing Income • In favour • Reasonably predictable • Current income a good indicator of ability to pay • Should be inexpensive to collect • Against • Tax may be “shifted” • Disincentive effects on labour supply – migration and withdrawal from labour market • Not so easy to “localise” as property tax

  5. Property Taxes in the UK • Council tax • Levied on 1991 valuation of properties • Banded A to H • Ratio of 1 to 3 between Band A and Band H properties • Collection rate high • Council tax benefit payable to those on low income (worth £359m in 2006/07) • Revenue in 2006/07 = £1.8bn + £0.36bn Council Tax Benefit • Stamp duty

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

  7. Property Taxes in the UK (cont.) • Inheritance tax • Chargeable at 40% on excess value of estate above £312,000 (£624,000 for couples) • Worth £3.9bn in 2007-08 • Scotland £200m? • No taxation of imputed rent • “In the UK imputed rent makes up as much as 9% of total income in 1993 as well as in 1998” • ONS estimate for 2001 = £73bn

  8. 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)

  9. Figure 1: Average Rate of Real Increase in Value of Housing Stock 1970-2006 Average Rate of Real Increase in Value of Housing Stock 1970-2006 Source: Bank for International Settlements

  10. Value of Housing Stock v GDP

  11. 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.”

  12. Single Person LIT and Income Tax

  13. Single Person LIT

  14. Two Earner Household

  15. MicrosimulationModel • simulate the effects of a policy on a sample of economic agents (individual, households • based on representations of the economic environment of individual agents, • their budget constraints and • possibly their behaviour

  16. Data for Microsimulation • Family Resources Survey 2005-06 • 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 sample • FRS has detailed information on individual incomes (earned and unearned, gross and net), on benefits received, and on council tax band.

  17. Model Structure FRS Data Scottish Assessors’ Data House Price Gross Earnings Council Tax Band Income Tax National Insurance Property Tax Take Home Pay Council Tax Bill Child Tax Credit Working Families Tax Credit Housing Benefit Council Tax Benefit Household Structure Local Income Tax Council Tax FRS Data

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

  19. Higher Rate Would Significantly Affect Contributions to LIT

  20. Replacement of Council Tax: Number of Households in Poverty

  21. Council Tax and LIT: Distributional Effects

  22. Households in Poverty by Household Type

  23. Households in Poverty by Age

  24. Numbers of Winners and Losers with LIT

  25. Change Structure of Council Tax? • Variety of experiments tried: • Change council tax benefit taper • Increase progression of council tax bands • Property Tax • Hybrid tax

  26. Change the Structure of Council Tax? 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

  27. Northern Ireland - Property Tax • Government announced intention to introduce a capital value rating system based on individual valuation assessments in April 2007. • “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.”

  28. Hybrid Tax?

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