THE COUNCIL TAX: THE DISTRIBUTIONAL IMPLICATIONS OF RETURNING TO A TAX ON PROPERTY

DOIhttp://doi.org/10.1111/j.1467-9485.1992.tb00623.x
AuthorKenneth Gibb
Publication Date01 Aug 1992
Porrish
Journol
of
Poliricol
Eronoinv.
Vol.
39.
No.
3.
August
1992
1992
Scottish
Economic
Society
THE COUNCIL TAX: THE DISTRIBUTIONAL
IMPLICATIONS
OF
RETURNING TO A TAX ON
PROPERTY
KENNETH
GIBB
Centre for Housing Research
University
of
GIasgo
w
I
INTRODUCTION
Arguments in favour of property taxes look to the beneficial effects of taxing
housing assets and also emphasise, to a lesser extent, support for a wealth tax
(Atkinson and King,
1980;
Gibb,
1988).
Property taxes, however, are rarely
justified in terms of their relationship to current incomes. At best, these issues
are mitigated in debate by the role
of
the tax system as a whole (and local tax
rebates, administered by the housing benefit system), taking the view that
it
is
the progressivity of the tax system in toto that is significant and not one tax
in
isolation (Foster,
1986).
These issues have resurfaced with the Government’s
decision to abolish the community charge and replace it with a banded form
of property tax (Department of the Environment,
1991).
This paper confronts these issues by simulating, on current incomes and on
housing tenure, the impact
of
the new council tax,
a
property tax, based on
capital values.
It
should be emphasised that the case for a property tax rests
on more than questions of fairness: the feasibility, accountability and housing
market aspects of the tax are also important elements in what is a multi-faceted
argument (Muellbauer,
1990;
Maclennan, Gibb and More,
1991).
Nonetheless,
it is in terms of fairness that much of the debate on local taxation takes place
and it is these questions of the burden of the property tax that remain at the
heart of this paper.
Section I1 looks in more detail at the arguments
for
and against property
taxes. In Section 111, the techniques used to develop
a
data set with which to
analyse the distributional effects of the new tax are laid out. This section
explains how property values were estimated and how local tax rebates were
*
I
would like
to
thank Professor Duncan Maclennan, the editor of the Scottish Journal
of
Political Economy and two anonymous referees
for
their comments on an earlier draft.
I
am
also grateful
to
all of the participants at a seminar held at the Centre for Housing Research
in June
1991.
All
other errors and opinions are my own sole responsibility.
Date of receipt of final manuscript: 14th January
1992.
302
THE
COUNCIL
TAX
303
simulated. Section
1V
sets out the nature and the effects of
a
council tax on a
representative data set for five cities in England and Scotland. Section
V
presents results based on a revenue-neutral property tax (a tax based on a fixed
percentage of capital value that yields the same revenue
in
total as the council
tax) and Section
VI
concludes.
PROPERTY TAXATION, LOCAL GOVERNMENT
AND
THE
HOUSING MARKET
The incidence of a tax on property can be examined
in
two different ways
(Mieszkowski,
1972).
Within an individual local government, the property tax
has traditionally been viewed as an excise tax and one incident on the factor
land (since
it
is the inelastic factor supplied). Following on from the work of
Harberger
(1962)
which considered corporation tax in a general equilibrium
framework, a ‘new view’ of property tax incidence emerged with Mieszkowski
interpreting the tax, operating among a
series
of local governments, as a
general tax on capital. According to this approach,
it
is owners of capital who
now face the burden of the tax,
in
the form
of
a lower post-tax rate of return
on (all) capital. Regardless of whether analysis examines a series of local
governments (the new view)
or
a specific example (and uses the partial
equilibrium
or
old view excise tax), the implication is not of a tax positively
related to current income (although landowners may be expected to be at the
top end of the income distribution).
Britain had a property tax, domestic rates, for several centuries, and govern-
ment and academic research into the impact of the tax
in
the last thirty years
(Allen Committee,
1965;
Layfield Committee,
1976;
Department of the
Environment,
1981; 1986;
Foster, Jackman and Perlman,
1980;
Hughes,
1982)
provides a detailed critique of rates. The rates were based on an imputed com-
petitive net annual rental value and a locally set poundage (tax rate) with which
to levy the tax. Rate bills, therefore, depended on (i) the level of local revenues
that had to be raised, that is, the nature
of
grants-in-aid; (ii) the level of local
government expenditure; (iii) the distribution of rateable values around the
mean; and,
(iv)
the frequency and consistency of revaluation.
The Allen Committee
(1965)
found
gross
rates to be poorly related to income
and this led to the introduction of rate rebates. Criticism of the tax base has
generally turned on two critical points: first, that the private rented sector is the
wrong point of reference as it houses a tiny minority of households; and
second, that there is in-built political inertia when
it
comes to ordering periodic
revaluation. England was revalued
in
the late
1930s
and then not again until
1963.
There has been no revaluation of domestic property in England since
1973
and this is despite movement in regional house price relatives in the sub-
sequent period (Holmans,
1990)
and revaluations in Scotland in
1978
and
1985.
Domestic rates has come to be perceived as a tax with very poor account-
ability characteristics (Department of the Environment,
1986).
Fundamentally,

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