False Economy ran from 2010-2015. This site is no longer being updated, but the False Economy research team continue to report at Sentinel News.
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Council tax – the reform that is needed and the cuts that will actually happen

In this excellent post, Richard Exell explains the gross inequalities of council tax - and the problems that government plans to cut council tax benefit will cause, as highlighted by our September research.

Give the Daily Mail credit – they produced the best coverage of...

THE WORLD’S MOST EXPENSIVE TERRACED HOUSE: One Cornwall Terrace, overlooking Regent’s Park in the middle of London and yours for just £100 million. As the Mail points out, the Council Tax on this house will be just £1,369 a year - “the same as a £320,000 property with Westminster Council.”

This is a story that shines a light on a social injustice that ought to have us shouting out every year when we get our Council Tax bills.

I’ve blogged before about the way the tax and benefit systems make this a fairer country and the difficulty of reducing inequality without raising taxes and benefits.

But if that’s going to be more difficult for years to come, we should pay more attention to ways we could improve the existing system – and reforming Council Tax must be a leading contender.

For the most part, direct taxes are progressive (that is - they help reduce inequality). If you divide the population into fifths (“quintiles”), the richest quintile pays 23.6 per cent of their gross income in direct taxes and the poorest just 10.5 per cent.

But the exception to this is Council Tax:


Council tax benefit graph image


In this chart, you can see that income tax and (to a lesser extent) National Insurance are progressive - the richer you are, the higher the proportion of your income you pay.

But Council Tax moves in the opposite direction – the poor pay a higher proportion.

This is partly reversed by Council Tax Benefit for the poorest (and I’ll come back to this in a moment), but the rich pay much less than people on middle incomes.

This is the result of the structure of Council Tax which, as Paul Johnson says, is “designed deliberately to be regressive”. Council Tax is related to the value of your house, but the amount of tax you pay doesn’t rise proportionately as the value of your property rises.

As Paul points out,

Properties in band H were (in 1991) at least eight times as valuable as those in band A, but the tax levied on them was only three times as much. Today, this ratio of house values would likely be significantly higher.

Ultimately, a land value tax would be a rational replacement, but there are steps we could take now to make Council Tax fairer, such as introducing an I and J band at the top.

£100 million houses would still be under-taxed, but the tax would be a bit more than 0.0014 per cent.

A Mansion Tax would be a substantial improvement.

Unfortunately, that isn’t where the government is going.

Instead, we have the Coalition’s desperately unfair abolition of Council Tax Benefit. I pointed out just now that CTB ameliorates the impact of Council Tax on the poorest. The government plans a 10 per cent cut in the grant it pays local authorities to provide Council Tax Benefit, which will be replaced by “localised schemes” in which Councils decide “who should pay less council tax and how much less they should pay”.

The Government says that local authorities’ plans must protect pensioners, but other vulnerable groups are still threatened by this change.

The Institute for Fiscal Studies has revealed that the cut in funding will hit the poorest authorities hardest:



(IMD = Index of Multiple Deprivation)

This means that the authorities where the poorest people live will find it hardest to make up the difference by using other council resources.

Very few intend doing this. A survey by False Economy in September revealed that local authorities’ plans for the replacement for Council Tax Benefit included an average 20 per cent cut in support for the poorest families.

False Economy found that unemployed people, disabled people and lone parents with young children would all lose out and some local authorities planned to count income from Child Benefit and maintenance when calculating eligibility for support.

One local authority planned to halve support for unemployed people while another planned to abolish it for under-25s.

Councils fear a re-run of the poll tax, as they face a choice between lost revenue and pursuing the poorest people through the courts for relatively small sums.

The Local Government Association and dozens of individual councils have written to the Department for Communities and Local Government, asking them to withdrawn the proposals.

Last month, a panicked Eric Pickles produced a last-minute £100 million fund to support Councils whose schemes limit net Council Tax liability to 8.5 per cent for people who previously qualified for 100 per cent support. This will still leave local authorities chasing poor people for even tinier sums and the fund will only last for one year.

So, the scandal of a tax that was deliberately designed to take disproportionate amounts from the worse-off goes unaddressed, even though one of the coalition parties has quite a good plan for addressing it. Instead, they are committed to tearing apart the benefit that goes some way to remedying its worst effects.

Of course, whoever buys One Cornwall Terrace won’t have to worry about all that.

From Richard Exell's touchstone blog.


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