Monstrous and Unique

by Ken Gibb

In a recent piece in the Financial Times [A Fiscal Fix for a Pecuiarly Flawed Property Tax], John Muellbauer continues his long term campaign to improve the working of the housing market. His belief is that fiscal levers could play a more coherent role and could on the one hand improve economic efficiency and productivity, while at the same time increasing fairness of tax outcomes.
The piece is about the ‘monstrous and unique’ council tax system of local taxation. Muellbauer provides a clear case in favour of reforming rather than replacing council tax. This short paper is, to my mind, the clearest and strongest defence of such a strategy and is consequentially worth closer scrutiny. What does he say, are the consequences and how does this play into the ongoing Scottish local tax commission?

Muellbauer begins with an increasingly familiar litany of council tax problems: the failure to have regular general revaluations and the fact that banding (and weighting the bands to dampen tax payment differentials) means that households in low value properties pay more as  proportion of their property value than do high value property owners [indeed, measured against current income, the Burt Review evidence in 2006 suggested that Scottish council tax payments were straightforwardly regressive over large parts of the income distribution]. He also criticises the council tax reduction system which through the 10% reduction in support, has brought many low income households into paying the tax for the first time (shades of the poll tax) and has created a forest of different local means tests into the bargain. As he notes, council tax debt now exceeds credit card debt as the most common debt-related problem according to the Citizens Advice network.

John Muellbauer argues that, instead, council tax could be more progressive. He would make the first £40,000 of property value free of tax taking ‘hundreds of thousands out of the poverty trap’. At the same time he would add a higher band for properties over £5 million. He recognises that a key problem with property taxes is the asset rich but cash poor household. He argues for offering all council tax payers a tax deferral in return for a government equity share in the property (1% per year) with a small discount for continuing to pay in cash.

From an economic point of view, Muellbauer argues that this would increase the efficient use of the housing stock. More revenue from council tax could be used to reduce reliance on stamp duty (following the Mirrlees Review agenda of seeking to cut stamp duty), and capitalisation effects would raise house prices in areas of low value and reduce them at the upper end of the market. Overall, this would reduce expected capital appreciation which is argued to be better for younger households, economic performance and the wider housing system. It might also deter speculative foreign investment in high value property.

Clearly, the author is writing a polemical piece aimed at pushing council tax reform into the election debate. However, the ideas regarding the tax free allowance and the deferral/equity stake are of genuine interest. I think to fill the idea out as a policy option, we would need to know:

– How regular general revaluation would take place and be enforced?

– What would the bands look like after the reform and would there be a re-weighting of the bands relative to D?

– Would council tax reduction continue to work in essentially the same way, net of the tax allowance? How would it interact with the deferral?

The proposal involves a further element of nationalising council tax with the government rather than councils operating the deferral system (although councils would receive a cash sum equivalent to the deferred payment each year). This does not really do anything to increase local democratic accountability or to help councils raise more revenue locally. Along with pressure to continue with council tax freezes, it does not reverse the process of centralisation of local government finance that goes back to the 1980s.

In previous writing John Muellbauer has argued in favour of a new national property tax to take on some of the ideas described here. New taxes and a reconfiguration of existing ones can be revenue neutral and need not increase overall tax burdens. They can reallocate resources more efficiently and I can see the in-principle case for better local property taxes more related to current property market values alongside a national tax on land values. This could shift taxes away from more productive activities like work and investing, it might reduce taxes on mobility like stamp duty and/or reduce marginal rates of tax while widening the tax base, thereby reducing revenue risk.

The tax free allowance and the deferral/equity stake ideas are interesting and useful for the Scottish local tax commission. Inevitably, talk of reform raises important wider questions for local government, accountability and autonomy. While this might not be strictly part of the remit of the commission it does remind us that successful policy reform has to be credible to its key stakeholders and that includes local government and advocates of more local democracy and responsibility.