The Guardian today carries a story that the Liberal Democrats are to soften their stance on replacing Council Tax with a local income tax. Similar to William Hague’s strategy with regard to the Euro, Vince Cable – the Lib Dem economics spokesman – has suggested that the party will wait a parliament before implementing any changes to the Council Tax system.
What used to be a cornerstone of Lib Dem policy, triumphantly used by former leader Charles Kennedy, seems now to have been shelved – which is good news for taxpayers.
All a local income tax would do is shift the burden of tax. It wouldn’t provide an incentive for Councils to root out waste and inefficiency and lower the tax burden on all. After all there's no game the unreconstructed, populist Left are better at than attacking the 'rich' to pay 'their fair share'.
Whilst providing some tax competition, for instance those with higher incomes would move to different areas with a lower local income tax, it wouldn’t go as far as pressuring Councils to streamline and provide genuinely lower taxes.
Taxpayers will need assurances that local taxes will fund local government. Central government’s unfair granting mechanism is quite clearly used as a redistributive tool to hike taxes in richer areas and have them squandered in poorer ones.
Those seeking a sounder solution should note Douglas Carswell's excellent paper on a local sales tax that would replace VAT and wholly fund local councils. No more playing politics with granting formulae. Simply where you spend your money, you contribute to the services of that Council.
For example, if you buy a loaf of bread in Thurrock, and it’s cheaper in Havering, you’ll go to Havering next time. Havering gets its money that goes towards service provision, Thurrock doesn’t. There’s then the incentive for Thurrock to lower its sales tax in order to attract the custom because if people aren't buying in Thurrock, businesses suffer and leave town. To compete, therefore, it needs to sort out its services, sack the non-jobbers and get its priorities in order so it can lower its sales tax. Clearly the rationale is there for Councils to cut out the waste whilst providing a frontline service. It isn’t that difficult a task, though you’d be hard pressed to believe it with the wasteful attitudes of some Councils.