Saturday 21 March 2009

This week's Fun Online Poll - one final example

I'll close this week's Fun Online Poll tomorrow, but here's one final example of a marginal decision that helps distinguish one option from the other.

Putting aside the misconception that "Council tax pays for local services" (it doesn't - it pays for about ten per cent of the cost of local services and similar proportion of the value of local amenities) and the uncontentious fact that local councils waste vast amounts of money on quangocrats etc, let's imagine each local council were allowed to decide whether to replace Council Tax with a Local Income Tax of around 4% (ultimately the same logic applies to replacing Business Rates with a Local Corporation Tax of 4%), here's my handy cut-out-and-keep-guide.

The guide is based on the economic 'laws' that housing is a normal good (hence gross housing costs are a fixed % of net incomes); that the supply of housing is price-inelastic (hence that taxes on properties are borne by the property owner/vendor); and that post-tax returns on capital tends to equalise (because capital leaves low yield areas and moves to higher yield ones).

Or to put it another way, if you decided to move to a different local council area, which one are you more likely to choose, one that keeps Council Tax or one that replaces it with Local Income Tax (assuming it were administratively workable, which it isn't, different topic)?

3 comments:

Witterings from Witney said...

Local Income Tax? - do you not mean a Local Sales Tax?

Tax on income = bad - Tax on sales gives people the choice of where/how they spend their money

Witterings from Witney said...

Whoops - sorry, should have read on!

Mark Wadsworth said...

Sales taxes or turnover taxes (unless designed to cover the cost of a particular externality or public cost - e.g. fuel duties to pay for road building and maintenance) are a) the sneakiest and b) the most economically damaging taxes.

Whether you call it "Value Added Tax" or "Local Sales Tax" makes no difference.