Scottish Government

CHAPTER ELEVEN: CONSIDERATION OF OTHER TAXATION SYSTEMS

FAIREST APPROACH TO TAXATION

11.1 The consultation document set out alternative taxation methods which could be put in place of council tax and asked respondents "Which do you feel is the fairest approach to taxation?" and chart 11.1 shows the results from the 418 individuals who replied to the consultation questions.

Chart 11.1
Question 22 - Which do you feel is the fairest approach to taxation?

Base: Individuals (418)

Individual responses

11.2 Local income tax was seen by over half (55%) of individual respondents as the fairest approach to taxation. There were differences by age with regard to this question. While 53% or more of the age groups 18 to 34, 55 to 64 and those aged 65 and over selected this option, 34% of those aged 34 to 44 and 45 to 54 agreed that local income tax is the fairest approach.

11.3 A quarter (25%) of individual respondents viewed council tax as the fairest approach to taxation. This was highest among those aged 34 to 44 (40%) and 45 to 54 (43%) but 12% of the 55 to 64 age group and 5% of those aged 65 and over felt council tax was the fairest option.

11.4 Single people and married couples favoured local income tax as the fairest option (63% and 67%); data from co-habiting couples shows an even split between local income tax and council tax (both 39%).

11.5 Land value tax was favoured by 6% while least favoured was an environmental tax (2%). Nine percent said 'none', while 4% either did not reply or said 'don't know'.

11.6 In examining the free-flowing individual responses, three-quarters (9 of 12) touched on the issue of what constitutes the fairest approach to taxation. Two respondents voiced support for local income tax while one wanted to see a reformed council tax. One respondent criticised the proposals for being inherently unfair for not encompassing all income. Two respondents saw potential difficulties with the proposals on local income tax, with one citing the Burt Report in claiming that such a tax is more effective regionally than locally; another expressing pessimism over the local income tax as proposed. One individual wanted to see the proposals abandoned altogether. Two respondents felt that the proposals would not produce a truly local income tax.

Organisational responses - the fairest approach

11.7 Sixteen organisations from local government or the 'other' organisational category gave their opinion on the fairest approach to taxation as set out in the consultation questionnaire;

• 10 voiced support for a local income tax (2 from local government and 8 'other' organisations);
• 5 supported council tax (3 from local government and 2 'others');
• there was no support for a land value tax;
• there was no support for an environmental tax;
• one 'other' organisation said 'none of the above'.

Organisational responses - support for various forms of taxation

11.8 Many of the organisations providing comments in free-flowing or comprehensive responses looked at each of the possible systems of taxation and provided their assessments of them. It should be noted that while many organisations voiced their views on local income tax, in many cases it was not always obvious whether they supported or opposed proposals. In these cases respondents presented both viewpoints e.g. their assessment of the positive and negative aspects of the suggested approaches to taxation.

11.9 We noted the following instances of specific support or opposition:

• opposed to local income tax (15 out of 86 organisations);
• support for local income tax (14) - 3 made provisos; that there be exemptions for students and that the rate should be set by local authorities;
• concern about the implementation of local income tax as set out in the proposals (14);
• support for council tax (2) or for revising council tax (7);
• not convinced by the proposals (4);
• support for other methods of raising revenue (3).

Local Income Tax

11.10 A number of organisations made positive comments on a system of local income tax. The following quotes summarise their reasons:

" We believe a system that takes peoples' ability to pay into account is intrinsically fairer than council tax, which is regressive."

(equality organisation)

"A local income tax would ensure that all wage earners living in the same household would be contributing to the cost of running local government and this cost would be based on the level of income which they earn. A tax on property does not necessarily reflect the economic wellbeing of individuals living within that property."

(political organisation)

11.11 One local government organisation did however point out that "against the criteria contained in the consultation document, the Scottish Government's conclusion is that local income tax is the fairest approach. In the absence of any firm information as to scope and affordability of the alternatives it is difficult not to agree, although it can be argued that the council tax could be made fairer than it is currently."

11.12 Comments from organisations giving a negative assessment included:

• it would narrow the tax base by removing a significant stock of wealth (e.g. savings and investments);
• it may balance the unfairness from one group to another based on ability to pay;
• it would lead to extensive cuts in services and jobs in local government;
• it would be damaging to the local accountability of councils.

11.13 One organisation discussed income tax in general stating:

"Fundamentally the replacement tax proposed in place of the council tax must not only be socially just to effect a redistribution of income away from the wealthiest towards the less well off. Any income based alternative to the council tax must be progressive with different rates or else it will fall far short of social justice and fail to raise sufficient funds for local government. A flat rate is not equitable as it will inevitably not tax the higher earners at a level proportionate to their income."

(political)

Council Tax - Reform or Review

11.14 The main thrust of the comments received from organisations on this revealed that council tax, reformed council tax, or some form of property tax was the fairest approach to taxation. The general consensus was that attention should be given to the possibility of reform of the existing council tax system:

"We advocate a progressive property based system of local taxation, set and raised locally and based on a reformed council tax."

(local government)

"Property based taxation is particularly well suited to local tax gathering; it being easy to identify those liable for payment and being hard to avoid. Property taxes remain the most common form of local taxation within Europe, because of the need for balance in a fair system of taxation and the obvious link between one's home and local government."

(trade union)

"The [organisation] believe that the fairest approach to local taxation would be a reformed property based tax taking into account the ability to pay. This could be achieved through a significantly overhauled council tax system."

(local government)

"Council tax was widely welcomed when introduced as fairer than either the Poll Tax or rates which preceded it. Public awareness of council tax is high, and it is transparent. Council tax has also demonstrated a flexibility to deal with changes in circumstances - for example, when introduced, council tax covered 65 local authorities rather than 32 as at present." (political)

11.15 In contrast, one equality organisation was of the opinion that this question hinges on the meaning of the word 'fair'. They explain, "In the context of local taxation, [organisation] have always taken the word to imply that a system of taxation takes into close account the ability to pay. In this sense, council tax is inherently unfair as it taxes households on the value of their home and is a regressive tax." A different equality organisation felt that while income taxes are less predictable and less easy to budget for than property based taxes "albeit they are fairer".

Land Value Tax

11.16 A small number of organisations discussed Land Value Tax. This consisted of one representative group who suggested there might be arguments for Land Value Tax to be applied to land occupied by non-domestic occupants, such as businesses. Although, for ordinary residents Land Value Tax is "open to the same fundamental objections as council tax - namely, that the value of your land may bear no more relation to your income (or other disposable assets) than the value of your house." One tax, pay or finance organisation said "it is likely to be relatively easy to adapt the system for collecting Council tax to one for the collection of Land Value Tax". Another tax, pay or finance organisation was of the view that the introduction of land value taxation would be a severe blow to investment in Scotland and particularly so in the current market.

Environmental Tax

11.17 Few organisations discussed the implications of Environmental Tax.

11.18 Although not discussing this type of tax in the context of fairness, the importance of protecting the environment was recognised, however opinion was that Environmental Taxes should not be a major source of local government funding (representative group). One local government organisation noted:

"Environmental taxes can be argued to be, by their nature, unfit for purpose as taxes. Environmental taxes have as their purpose the reduction or limitation of some environmentally undesirable activity, not the raising of income for the provision of essential services."

11.19 One tax, pay or finance organisation thought that unless the taxes are aimed purely at households, there would be an overlap with national environmental taxes, imposing further environmental taxes on Scotland-based businesses which could impact on competitiveness with businesses south of the border.

A WEALTHIER SCOTLAND

11.20 Question 23 asked "Which approach do you feel will provide a more wealthy Scotland?"

Chart 11.2
Question 23 - Which approach do you feel will provide a more wealthy Scotland?

Base: Individuals (418)

Individual responses

11.21 Chart 11.2 shows that 40% of individuals thought a local income tax would provide a more wealthy Scotland. Again, the 34 to 44 and 45 to 54 age groups and co-habiting couples, felt that council tax would provide a wealthier Scotland.

11.22 Twenty-one percent felt that council tax would provide a wealthier Scotland, 6% said land value tax and least favoured was, again, an environmental tax (2%). Eighteen percent said 'none' while 13% said 'don't know' or did not reply.

11.23 Four of the individual free-flowing responses commented; 2 underlined the possibility of fiscal flight as a response to local income tax. One of these respondents also expressed anxiety over the possibility of financial shortfall with the intended removal of council tax. Another respondent felt that none of the recommendations would make for a wealthier Scotland, arguing that many other factors needed to be considered. And finally, one individual conceded that Scotland might well benefit, yet there remained the risk of dampening effects upon pre-tax income and, by extension, Scotland's national income.

Organisational responses

11.24 Nine out of 86 organisations gave a direct answer to the consultation question on which approach would provide a more wealthy Scotland, with 2 local government organisations selecting council tax. One local government and 6 'other' organisations felt a local income tax would provide a wealthier Scotland.

11.25 Most organisations did not provide a definitive answer to question 23. However, the wealth of Scotland has been addressed by organisations as part of question 12 'In your opinion, will the introduction of a local income tax have positive economic impacts for Scotland?

11.26 Only a few organisations (5) provided a specific comment in relation to this question. This consisted of 4 local government organisations and one political organisation. Opinion was that the consultation document did not provide sufficient information in relation to this question (local government); that the question is subjective and the answer depends on the definition of a wealthier Scotland (local government) and that it is not wholly obvious why any one of the tax alternatives would make Scotland a wealthier place. One political and one local government organisation made comments similar to:

"Assuming the total amount of revenue to be raised is not intended to vary, then there would be minimal impact on the net wealth of Scotland. There would certainly be a redistribution for certain groups which may increase disposable income for certain groups. There are however risks that it could impact on some groups who currently are in receipt of benefit or council tax exemptions."

(political)