|Sir George speaks out on Local Income Tax
10 Feb 2004
This is the text of the speech Sir George made in the House:
Sir George Young (North-West Hampshire) (Con): It is pleasure to follow my hon. Friend the Member for Mole Valley (Sir Paul Beresford) and the hon. Member for South Ribble (Mr. Borrow), who have spoken with authority and brevity, and I will certainly seek to match them on brevity.
The Liberal Democrats, who have made this proposal, need to stand back and look at the overall structure of taxation. There are taxes on income, on expenditure and on capital or assets. They propose to abolish a tax on capital or assets—council tax is almost exclusively a tax on home ownership—and to replace it with a tax on income. They assert that that will be fairer, but I remain to be convinced.
A number of residential properties in my constituency are owned by companies or trusts and a substantial amount of council tax is levied on them at the moment. That could be lost, to be made good by a rise in income tax on the average punter. Other substantial properties are owned not by companies, but by individuals who are not domiciled in this country and may legitimately pay no tax in the UK. Their contribution would also be lost. Finally, some properties are owned by wealthy individuals who are domiciled in this country but have so arranged their affairs to make ingenious use of tax allowances that they pay little or no income tax. They live off their capital, and I am sure that they will be interested in the Liberal Democrat proposal to reduce their tax burden at the expense of those who are less well off.
I have looked at the website, and the Liberal Democrats make it clear that they want to abolish the council tax and replace it by Inland Revenue and pay-as-you-earn measures. That would not capture a range of people, and that lost income would have to be made good. So some arguments of principle need to be addressed before reducing taxes on capital and replacing them with taxes on income, and there are some important practical and distributional consequences, as well as possibly an impact on incentives. If 3p in the pound were added to the basic rate of income tax, it would help to make this country less competitive internationally and add to the incentive to take tax avoidance measures. I do not put too much emphasis on this, but related to that is the view of some economists that house prices will rise if a tax on houses is abolished. The Government have tried to damp down buoyancy in house prices by using stamp duty. It follows that if the tax on houses is reduced, prices may go up, with consequences for marginal first-time buyers.
I have considered the impact of the proposals on my constituency. At the moment, the average council tax bill in Test Valley is £1,042 a year. To raise the same amount of money would require a local income tax of 4.3 per cent., yet a household with one person on average male earnings and another on average female earnings would end up paying a yearly local income tax bill of £1,670; so having got rid of the council tax, that couple would pay £628 a year more. I know that the Liberal Democrats keep saying, "We expect 70 per cent. of households to be better off", but I remember my Government saying that about the poll tax. The reality is that it is not households who vote, but voters. I do not believe that 70 per cent. of my constituents would be better off.
I shall touch on one or two specific issues in the time available. Let me start with what I call visibility. How visible would the new tax be? At the moment, I receive a bill in April from Test Valley borough council setting out how much I must pay. I have a standing order for 10 months, which I see on my statement, so I know exactly how much money has gone where. That keeps me focused on the cost of local government and allows me to compare my band with those in other local authorities. Under one of the Liberal Democrat proposals, there would simply be less visibility. A flat sum would be deducted from my pay each month, along with my national income tax, national insurance, contributions to the Members' fund, give-as-you-earn, and all the rest. The tax would be less visible, which would reduce the accountability of local government and the transparency of its costs. It would get lost in my transactions with central Government, instead of being a stand-alone transaction with local government. There would be a complicated settling-up process at the end of the year, although which tax year's return would be used as the basis for the settling up is not quite clear.
There is a further point that has not been mentioned in the debate. How would my town hall know what the tax base would be when setting the rate at the beginning of the year? At the moment, it knows with some certainty how much in the pound a certain amount of council tax will raise—it has a fixed, immovable tax base. Under the Liberal Democrat proposal, it would not know how much it would raise from a specific rate of tax. I suspect that councils would aim high so that they would have a margin.
What percentage of the tax would be collected? Some 96 per cent. of council tax is collected at present. Do the Liberal Democrats really think that local authorities would get the same return from central Government?
Mr. Edward Davey: Will the right hon. Gentleman give way?
Sir George Young: I shall, but the time will come out of the hon. Gentleman's colleague's winding-up speech.
Mr. Davey: As in other countries, the Inland Revenue would tell local authorities their income tax bases at the beginning of the year and guarantee that from the Exchequer.
Sir George Young: But how would the Inland Revenue know whether I would stay in that area for the whole year? How would it know what my income would be? The Inland Revenue might have an idea about how much I will earn in the current year, but I have to tell the hon. Gentleman that it is quite often wrong. Under his proposal, the tax would not have the same fixed base on which it could be levied as the council tax. I listened attentively to his opening speech, but he did not begin to address that point. Under the system, there would be questions of where I lived and whether I would have to pay twice. At the moment, the Inland Revenue is relatively relaxed about the address from which I send off my tax return, as long as it gets one. Under the new system, it would be vital that the address was right.
The hon. Gentleman said that an advantage of his proposal was that it would provide a buoyant source of revenue. I am not sure that I want local government to have a buoyant source of revenue. [Hon. Members: "Ah!"] No, I want authorities to have a threshold through which they must go each year before they put up the council tax. I want them to justify their increases year in, year out. The hon. Gentleman wants local government to have a buoyant source of tax revenue so that it does not have to answer the difficult questions that are asked at the moment. I consider what the Liberal Democrats see as an advantage to be a disadvantage.
The real problem at the moment is that too much weight is put on the council tax. It was invented some 14 years ago when the average amount paid was around £500. It could bear that amount of traffic without too
much damage to its structure—it is like a bridge with a weight restriction. However, many of my constituents are now paying four-figure, not three-figure, amounts.
The hon. Member for Kingston and Surbiton (Mr. Davey) asked at the start of his speech what could be done. I would keep the council tax and complement it with another tax, perhaps a variable vehicle excise duty, for the sake of argument. That would be a much better response to the challenges facing local government than those that he proposed. The debate has shown that the House does not want to axe the tax; it wants to axe the Liberal Democrats.