Boris is right on tax: local decision-making is better decision-making

Boris Johnson’s London Finance Commission today launched its bid to wrest control of a range of taxes from central government. Tony Travers of the LSE, chair of the commission, said that the whole suite of property taxes should be devolved: full control of Council Tax, Capital Gains Tax on property, Stamp Duty Land Tax on homes and business premises and Business Rates.

This move to a greater degree of local decision-making on tax will lead to some politicians making bad decisions and the commission’s call for entirely new taxes and borrowing powers are a cause for concern, but international evidence shows a strong correlation between decentralised decision-making and efficiency so that overall it should lead to an improvement. The OECD noted in a 2011 report that:

There is a general view that more tax competition leads to more efficiency in the public sector, both by making public providers more responsive to consumers’ tastes and by raising the quality and lowering the cost of publicly-funded services. Tax autonomy provides voters with an additional lever in shaping the public sector, namely to decide on tax levels, making them more aware of public service outcomes.

The fact that devolution on both spending and tax decisions leads to greater efficiency is one of the three most relevant points to be drawn from the extensive review of literature in the 2020 Tax Commission’s The Single Income Tax. The second point is that government spending holds back economic growth and lower government spending leads to faster growth. The third point is that transaction taxes such as Stamp Duty on homes are among the most destructive of taxes and should be abolished. So it was good news that the Mayor of Hackney, Jules Pipe, said at the launch event today that he would be quoting the TPA in future, with reference to local decision-making. Good news too that Mr Johnson acknowledged the problems Stamp Duty causes in London and signalled his intention to see the rates cut. And when Mr Travers said “the TaxPayers’ Alliance might take the view that lower rates would lead higher revenues”, the Mayor responded robustly: “I take that view!”.

As Matthew Sinclair, Chief Executive of the TaxPayers’ Alliance, said:

Boris Johnson's London Finance Commission is right to say that more tax powers should be transferred from the Chancellor to the Mayor. The current situation where local politicians are responsible for spending money but not for collecting it through taxation encourages irresponsible behaviour.

London faces particular issues with property taxes. Stamp Duty on homes is a fundamentally flawed tax that causes significant problems in London and should be abolished. Handing tax powers down from the Treasury should be seen as an opportunity to cut rates, not an excuse to fleece Londoners for even more cash. The Mayor's progress in cutting his share of Council Tax shows what can be achieved and international evidence certainly shows that devolution leads to better local government and lower overall taxes.
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