This blog is by John Muellbauer, Professor of Economics at Nuffield College, University of Oxford and senior fellow at INET Oxford. This is the unedited version of a piece published in the Financial Times on 6 April 2015 (alt pdf here).

By John Muellbauer

The UK’s Council Tax system is monstrous and unique. No advanced country has such an unfair property tax, and none uses the UK’s broad value bands. A family at the bottom of band H, where homes are on average worth perhaps £1.2m in 2015 (£320,000 in 1991) pays one quarter of the tax as a percentage of value compared to a family at the top of band A where the average home costs around £120,000 (£40,000 in 1991). A family in a £2.4m home pays only one sixteenth of the rate faced by a band A tax payer in a £60,000 home in the same local authority, while tax rates faced by plutocrats are derisory. Council tax relief, a sticking plaster to soften the burden on the poor, traps many in poverty.

From April 1 2013 hundreds of thousands of people became liable for council tax for the first time, after the government decided to cut by 10 per cent the amount available for relief and gave local authorities the power to set their own eligibility criteria. According to Citizens Advice, “Council Tax has overtaken credit cards as the most common debt problem in Britain” (FT Feb.16).

Labour’s only significant reform in 13 years in office was to make the 50% discount on second homes optional from 2004. In 2014 Labour took up the earlier Liberal Democrat policy of a Mansion Tax on homes worth £2m or more, while the Lib Dems now instead want to add higher tax bands. These proposals have generated many letters to the UK press. For every fifty shedding crocodile tears on behalf of cash-poor widows in expensive homes, perhaps one has expressed sympathy for the disproportionate burden borne by band A or band B tax payers. And it remains a mystery why the UK is uniquely attached to value bands that applied in 1991 when, in most countries, property taxes are just based on recent market values. Most owners can easily value their properties from Land Registry information processed by Rightmove, Zoopla and others.

Introducing an element of progressivity into Council Tax is simple enough, by borrowing features of income tax: an allowance for the first £50,000 of value would take hundreds of thousands out of the poverty trap. A higher tax rate for the excess of value above £5m would tap a little of the taxable capacity of the plutocrats.

At the nub of a successful reform is overcoming the lack of ability to pay of the cash-poor and asset-rich. Labour’s proposed means-testing of tax deferral is intrusive. There is a much better way, offering tax deferral for everyone for an equity stake, which would also make the single person discount redundant. Those able and willing to pay cash would be offered a small discount since managing deferral incurs costs, though these costs would be offset by the saving of not having to value the homes of the deferrers. Suppose the tax rate was 1%. For those choosing deferral, the government would register a 1% gross equity stake in the property to be paid out at the next transfer of ownership. After 10 years of deferral, the government would own a 10% equity stake. The combination of the discount and the prospect of having to share future capital gains with the government (i.e. other tax payers) would ensure that many would choose the cash option.

Such a property tax would encourage down-sizing, which with ageing and other reasons for turnover, would ensure that a regular supply of properties came on the market, generating tax revenue, though in the first few years revenues would be below their long-term levels. Central government should take tax deferrals on its balance sheet and supplement the annual rate support grant, which provides the great bulk of local authority revenue, with the annual cash equivalent of the deferred tax payments for that year. There is no reason why bond markets would increase the government’s cost of borrowing as a result of this property tax reform.

For the economy multiple benefits would follow. At the bottom of the market where pockets of negative equity and repossession risk remain, house prices would rise. At the upper ends of the market, prices would fall, inducing a temporary decline in the UK house price indices, making housing a little more affordable for the young. With lower prospective returns, many of the tens of thousands of empty up-market homes currently owned by foreign investors would either be sold or brought into rental occupation to restore returns. Upward pressure on rents in London would moderate. As some foreign speculators pull out, Sterling should fall, improving the balance of the UK’s recovery a little towards exports and away from consumption. More efficient use of the housing stock raises UK productivity.

 

1 Comment

  1. Our daughter pays the same council tax as us difference is she is in a small 2 bed flat we are in a 6apt. house with garage plus large garden

    Council Tax has been kept too low for too long cutting essential services, this based on valuation made in the mid 19 90’s.

    A tax would be based on size of property possibly worked on a sliding scale with a minimum amount payable to ensure lower income households are not paying or pay a minimum % of income

    How this could work for lone residents who are property rich cash ‘poor’ i’m not sure.

    Other parts of this conundrum are commercial/manufacturing premises ,agriculture, country estates local authority property etc. Could that be a Land tax base

    Looking at our near neighbour in Europe how do they fund local amenities. Too much is controlled by central government.in UK

    I would not be in favour of a local income/sales tax, this would have to be collected and passed on by small businesses who struggle in this present economic time.

    Demographics have shown that we will have a large elderly population at this time many calling on and needing local services. but it would appear that little thought has been given to this by previous governments.
    Why was no provision made for a National Fund from the income off north sea oil? and sales of nationalised utilities?
    More should be done to get multinational companies and other very rich tax avoiders to pay up.

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