Tom Spencer is an associate contributor with Young Voices and a Don Lavoie Fellow at the Mercatus Center.
When looking at the history of taxation, it isn’t hard to see that legislators are worthy of ridicule. We have a history of taxing everything from dogs to windows, helping accidentally to trigger dramatic events from the signing of the Magna Carta to the Protestant Reformation. Yet these mistakes are not behind us. The tax follies of the past, as excellently described in Slemrod and Keen’s Rebellion, Rascals & Revenue, mirror those of today.
No tax makes this quite so clear as Council Tax, which was rushed through Parliament to try to excuse the Major Government from the Poll Tax fiasco. This tax, banded locally, is based upon property valuations conducted 30 years ago. This means that homes which have had the highest amount of price growth will be paying based on an undervaluation of their property. And, of course, those in areas of poor growth end up paying based on a gross overvaluation.
Effectively, this means the rich are getting a free pass and those on low and middle incomes are getting a rough deal. After all, the areas with high price growth over the last 30 years all happen to be the richest areas.
Take the example of a £8,000,000 townhouse in Westminster and a home in Middlesbrough valued at £150,000: you’d expect the former to pay a lot more. That’s not the case. The house in Middlesbrough ends up paying £142 more council tax every year.
The failures of the council tax aren’t new: it’s actually like a much older tax imposed on windows between 1697 and 1851. As Jean Baptiste Say, the tax led to less enjoyment in one’s home (through the decreased natural light when people bricked up their windows) without yielding any benefits to the Treasury. Yet the silly look of a bricked-up window and the loss of light is only part of the issue.
The problem, as observed by Adam Smith in the Wealth of Nations, was that “a house of ten pounds rent in a country town may sometimes have more windows that a house of five hundred pounds rent in London; and thought the inhabitants of the former is likely to be a much poorer man than that of the latter, yet so far as his contribution is regulated by the window-tax, he must contribute more to the support of the state”.
This anachronistic attempt to tax wealth, based on the assumption that those with more windows must therefore be wealthier, manifested in outcomes that were regressive, and unfair. And yet, it seems unfair to call these mistakes a consequence of historic stupidity when one looks at the consequences of council tax. Just as in times past we undertax those in the wealthy cities, and overtax those everywhere else.
The most popular alternative, as advocated by at least eight Tory and nine Labour MPs as well as such think tanks as the Institute of Fiscal Studies, IPPR and Bright Blue, is a proportional property tax.
Instead of letting each council impose the tax at a different rate based on valuations older than this author, this will use modern technology to revalue properties annually, and tax everyone equally at 0.48 per cent based on the valuation.
Whilst this will mean some people would have to pay marginally more tax, the increases would hit only the richest people, would be capped at £1,200, and 75 per cent of people would see a tax cut. Upon closer inspection, these figures should make interesting reading for both Labour and the Conservatives in the run-up to the next general election, with 80 per cent of households in swing seats seeing lower bills. In Batley and Spen, the scene of Labour’s recent by-election hold, some 99 per cent of of households would see tax cuts under the proportional property tax.
Mark Twain famously said that “history doesn’t repeat itself, but it often rhymes”. The folly that is council tax famously echoes past mistakes we’ve made as a country, and previously rectified. If the Government wishes to be remembered as the reformers who ended this folly (and also secure more votes), then it must abolish council tax in favour of the proportional property tax.