Friday, April 08, 2005

Local Income Tax Grab

Voters in the Lib Dems' target seats across the Southeast should familarise themselves with the proposed Local Income Tax (LIT), and how it would impact them.

Vince Cable and others keep telling us that LIT would be 'fairer' than the Council Tax, gainers would outnumber losers, and the average family would be better off. But that is the national picture. In London and the Southeast the outcome would be very different.

Nationally, the IFS estimates that 49 per cent of families would gain, 27 per cent would lose, and 24 per cent would remain broadly unchanged. As you might expect, most of the losers are in the top quartile of the income distribution. But not all of them. Surprisingly, given all that pious stuff about 'fairness', 1.5 million of the loser families are on incomes below the median. They would lose because they currently receive Council Tax benefit, which the Lib Dems would abolish.

Overall, the IFS estimates a small average net gain of £1.37 per week. Although Cable likes to crow about this, it's nothing to do with the magic of LIT: it arises solely because the Lib Dems would contribute an additional £2.3 billion from general taxation to soften the switch to LIT, thus ensuring gainers outnumber losers. £2.3 billion amounts to half the additional revenue they reckon would flow from their new 50 per cent top income tax rate. So while presenting the net gain as an attraction of LIT, all they're actually doing is to reduce one tax by increasing another.

Bribing us with our own money to accept their pet scheme.

And these are national figures. The big problem for voters in the Southeast is that many of their incomes are significantly above the national average, so many more than 27 per cent would lose out. According to ONS's Regional Trends, average household income in London and the Southeast is about 30 per cent higher than the national average (and before anyone says they don't care about rich bastards in the stockbroker belt, remember that the cost of living is also much higher- housing costs are about 40 per cent above the national average).

Take Guildford. In 2001, the Lib Dems ousted the Tory MP for the first time since 1428, and they are doing their damnedest to retain the seat.

Yet the average household income in Guildford is more than ten grand above the national average- a gap of 35 per cent which puts the average for Guildford in the top quartile nationally (eg see here).

Now, the IFS and others reckon the LIT would need to be charged at an average rate of about 3.75 per cent. So with their higher incomes, the average household in Guildford would be paying about £400 pa more than the national average. And more than their £1300 average Council Tax, which is in itself way above the national average.

Of course, in theory, the point of LIT is that it's a local tax, so given their higher tax base, the local authorities in Guildford would have scope to set a lower rate. Hmm...that hasn't worked with Council Tax, and it's unlikely with LIT. Central government controls the big purse strings, and routinely 'equalises' tax resources between authorities by allocating rate support grant away from affluent areas like Guildford. There's no reason to think a Lib Dem government operating LIT would be any different.

No, whatever the national picture may be, that average hard-working family in Guildford would be worse off under LIT. As would the average family in Maidenhead, Newbury, Reading, and a host of other Tory/Lib Dem marginals across the Southeast.

There is no doubt.

It's just that somehow we have to get it across without making voters nod off.