Here's an interesting article about the Labour-controlled Glasgow Council rejecting the SNP's plans to replace Council Tax with a Local Income Tax.
The SNP are supposed to be the economically clued up party! We can ignore the maths of this - the fact that HM Treasury is happy to pay Council Tax Benefit but would not pay 'Local Income Tax Benefit' - there is a more fundamental point:
Imagine a landlord who lets out properties in Glasgow. Tenants' total housing budget (rent plus Council Tax) is set by the market, so the actual rents that a landlord collects is the tenants' total housing budget less Council Tax. In economic terms, the Council Tax is borne by the landlord. There's a good Wiki article about the economic incidence of taxes here; the relevant chart is the one headed 'Inelastic supply, elastic demand'.
Further, in practice, housing is a 'normal' good, in other words, it is a fairly fixed proportion of people's disposable incomes.
Let us assume for sake of argument that tenant households have an average gross income of £40,000 and a net income of £30,000; average Council Tax is £1,000; and tenants allocate one-third of their net incomes to their housing budget. In this case, the average housing budget would be £10,000; £1,000 is paid in Council Tax and the rent paid to the landlord is £9,000.
If Council Tax were replaced by a Local Income Tax of 2.5%, the tenant household's average net income would fall to £29,000 so this depresses their total housing budget slightly to £9,667. But without Council Tax, the landlord can now increase the rent to £9,667.
So who would benefit most from a 'Local Income Tax'?
Friday, 20 June 2008
"Glasgow against local tax plan"
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6 comments:
If - contrary to your assumption - it is assumed that the tenant views his disposable income as income after ALL tax (ie including council tax) then in both cases the landlord would receive the £9,667 as "housing expenses" of the tenant. If, as you assume, the tenant assigns all the CT to "housing expenses" then the landlord gets £9,000.
The paradox depends on how the tenant views Council Tax: is it part of "tax" or part of "housing expenditure"?
It is part of housing expenditure.
There was a street in London, half of which was/is in a high-tax council and half in a low-tax council. Rents and house prices were higher in the half in the low-tax council.
Same goes for business rates. Heseltine thought it would be a wizard wheeze to exempt Docklands from business rates (nominally payable by tenant, but economically borne by landlord) - all that happened was rents went up.
"It is part of housing expenditure"
I'm only arguing the arithmetic here but it depends on how the tenant views his disposable income: post IT + CT or post IT only.
Far be it from me to say the tenant or house owner is "wrong" to view one way or the other but what I think you're saying is that depending on how the tax on the tenant/householder is levied (rather than on its economic incidence) depends the level of rent/house price.
U, that is a perfectly valid point, but this is economics, not psychology. It has to do with elasticity of supply and demand.
If Council Tax were replaced with a Poll Tax, then of course tenants would see the Poll Tax (quite rightly) as a personal tax, but as there is some relation between the size/value of a property and Council Tax, a canny tenant would always add in the Council Tax bill when comparing different flats.
Taxes on land, or subsidies to land, always flow straight through into lower or higher land values/rents. I could do a list of real life examples, but it would take me ages (and for each example, there are always other factors at play, it is impossible to 'prove' one way or another).
I think we're actually in agreement.
However, I would say that psychology cannot be totally divorced from economics. I agree that Council Tax is viewed as tax on housing and poll tax and general income tax as a taxes on the individual. However, a local income tax has a locational aspect. In other words you would pay a higher local IT in Haringey (of course!) than in Hammersmith. As the view (or psychology) concerning the tax varies with its perceived impact (and its perceived application) so the economics of the impact of the tax changes.
Coming back to the question on your original post "So who would benefit most from a 'Local Income Tax'?" the answer depends in part on how it's viewed by the punters: if it's viewed as part of household expenditure - the landlord will benefit; if it's viewed as not connected with household expenditure the landlord doesn't benefit. My view - from my reasoning above about the locationality (?) of a local IT - is that the landlord will benefit but not by as much as your assumptions would imply.
Agreed, my example was simplified and unscientific, the benefit to landlords may well be much less than I calculated, but there will be some benefit nonetheless.
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