The Guardian has reported:
Labour is to consider radical options on devolution that would include giving local authorities some power over VAT and income tax, a shadow minister for communities and local government has said.Steve Reed said there was a clear financial case for faster devolution of powers, including greater local control over taxation.
In a speech to the Local Government Association, Reed said Labour would look at devolution of education, welfare, housing, health, and infrastructure. But, more significantly, the party would examine devolving further fiscal powers, including a “need to look at localising elements of VAT and income tax”.
The MP for Croydon North also said the party had to “look too at a land use tax” to encourage owners to use land for socially beneficial purposes and put a stop to speculative land banking.
Let me be clear, I am delighted that Labour is looking at the use of land value taxation. That is overdue by any party.
But proposals to devolve income tax and VAT to localities is a nightmare. I hope, very soon, to publish a technical explanation for my concerns about tax devolution but let me just address these suggestions now.
First, to suggest we have room for regional variation in VAT is absurd. That's partly because VAT is EU law, in essence, and has to work within EU agreed parameters.
Second it is because VAT is thought to be a transactions tax, but actually only works as a system as a whole. The right of a trader to reclaim the VAT charged to them is fundamental to the system. It is already complicated when the UK has got standard, reduced, zero and exempt rates. Add in local variation and the cost to business of administering VAT will sky rocket.
Then there is the issue of tax abuse. We have already seen the Channel Islands used in the recent past to exploit VAT loopholes. And there are extensive questions about whether Amazon and eBay comply with UK distance selling laws on VAT. Add in local variations and each time goods move into and out of an area as small as a county with its own VAT rate important export considerations might arise. And, as a matter of fact, most tax abuse takes place at boundaries, whether real ones as in goods crossing them, or artificial ones, as in so called distance selling by the likes of Google, or wholly taxation ones created by changing tax rates that give tax abusers the chance to arbitrage tax arrangements. Local VAT would be the perfect way to provide endless opportunity for such abuse. It is a nightmare in the making.
And the local VAT offices that would be required to undertake many more checks to ensure such schemes might work are all being closed. Technically the capacity to deliver such variations is being destroyed by HMRC.
The same nightmares exist with local income taxes. I have reservations about varied income and corporation tax rates in Northern Ireland and Scotland. Introduce that more widely and you deliver, in the first instance, the opportunity for Kensington and Chelsea to seriously reduce the top rate of income tax for some of the wealthiest people in the country.
Second, you again open massive game playing opportunities for tax abusers.
Third there will be complexity beyond imagination.
Fourth, there will be no local resources or expertise to check all this.
And last tax competition will become rampant at potential cost to the very services this is meant to help.
I really do think a lot of politcians should be reading The Joy of Tax so they understand why tax systems have to stand or fall as a whole; second why they aren't even the revenue raising mechanisms most think they are as they are actually really tools of macroeconomic policy and third why, in that case, localisation does, with regard to many taxes, make no sense at all.
And that is, if anything, most especially true of VAT and income tax rates.
If Labour is really thinking about this I have some advice: say the consultation is closed now and they are not going to do it.
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Surely local taxation should be Conservative rather than Labour policy, since those areas with the greatest need, would be those with the least ability to raise revenue.
Precisely
Isn’t already implicit in Conservative policy? The result would surely be zones of utter deprivation cheek by jowl with ‘gated’ wealth -or is that too dystopian a vision?
No that isn’t too dystopian a vision unless there is real change in the UK and worldwide in the near future…..the “Hunger Games Society” is a frighteningly real possibility unless there is amssive reset within the next five years!
I am not convinced
Yet
I can, however, see where Labour are coming from. Our local Labour council is forced to implement massive and highly unpopular cuts to services. Their alternative is to refuse and to be replaced by even more draconian outside administrators. Having some control over their income must seem very attractive, though mistaken. It is not wonderful to have your entire income dependent on the whim of another body that has no interest in helping you and would like you to fail.
But it is the poorest councils who will have to do the biggest tax rises, increasing overall UK inequality
That makes no sense at all
And that Manchester will be given £6bn to manage health and social care. I feel this is so dangerous, not only because it adds to the further breakup of a national health service, but that the government are offloading massive problems such as PFI debt, each region will be fighting for a bigger share. We are a small country and elect our governments to govern with local views certainly taken into consideration.
Big countries like America are a different ball game. You can get from top to bottom of the U.K. In not too many hours, what is their game?
I am bemused by Labour on this one
Does anyone really want this outside a few local politicos?
“Does anyone really want this outside a few local politicos?”
Got in one.This stokes the ego’s of local politicos, providing an opportunity to build local fiefdoms and act as Parish Guardians.
It was the same with EC regeneration funding, with politicos of all parties jumping into bed together to grab the money and devolve control, rather than democracy, down to the lowest level.
William the Bastard would have recognised this for what it is and would have been most comfortable with it.
Of course the American system produces Detroit and Camden NJ with Cities being ‘allowed’ to go bankrupt-Imagine a City like Manchester having its water supply stopped because it couldn’t pay the Water Company!
Sort of micro TTIP ?
Trickle feeding ideas into the public domain is never a good idea because without understanding the big picture of what they are considering it just makes politicians look like second hand car salespeople who don’t really understand what they are talking about (which sadly some probably are).
The devolution bandwagon has obvious public attraction to the public and local councils fed up of being dictated to by Westminster, which is no doubt why all the main parties have jumped on it. But I agree that there needs to be absolute clarity of thinking and a documented plan of what is best done centrally and what is best done locally. I haven’t seen such a concise plan from any party yet, just lots of soundbites which make little or no sense in isolation (such as this one!).
Even a non-economist can see the pitfalls of raising money locally in a country with massive regional differences. I’m somewhat shocked that this idea is even being considered by the Labour party?
I am shocked too
A policy for Kensington and Chelsea I call it
or Westminster, these people are nutz.
Some look like Used Car Salesmen! Flipping heck. They must be the creme de creme. The Leader of one Council I know of runs a chip shop! Delusions of grandeur.
It presents a nightmare scenario along the lines of school catchment areas with low taxation areas becoming housing hotspots.
I would certainly agree with Land Value Tax (LVT) as a definite replacement for Council Tax and Business Rates. Those two taxes currently raise about £57 billion. Local Government historically spends about a quarter of general government spending. This year that will be about £175 billion out of a total spend of £755 billion. About £122 billion of the £175 billion, comes from central government via a truck load of funding formulas.
England in particular, is too small and too densely populated to set County or District versions of some current national taxes. Driving back and forth over County or Unitary boundaries for less VAT on fuel or a bottle of Jack Daniels, could get a bit silly. LVT is my best answer.
Have a read of the OBR http://budgetresponsibility.org.uk/pubs/BriefGuide_EFO_November2015.pdf and perm your own local taxes. If you want more detail of tax receipts see http://budgetresponsibility.org.uk/economic-fiscal-outlook-november-2015/
PS. To raise the full £175 billion of LG spending, LVT would have to average 72 pence per square meter across the UK ; but it would work out a lot fairer if it was calculated on a volume basis; plot area times the hight of any structure, built or having planning permission to be built. All land pays all the time particularly if it is being banked for capital gain.
I fail to see the issue. Scandinavia and Germany would be considered by most as far more progressive than the UK, and they have very strong local government with tax raising powers.
What is wrong with giving local councils complete power over health, education, welfare, transport, planning etc. with tax raising powers to pay for it? For the reasons you state, I don’t think VAT could be devolved and probably not corporation tax either, so there would still be some redistribution. But income tax, national insurance, excise duties and property taxes could be. To avoid duplication of administration taxes could still be collected centrally by a single taxing authority applying different local rates. The alternative is the continued domination of the UK by London which is fundamentally unhealthy.
First we have too many local authorities covering too small an area
Second, we have no such tradition and no expertise
Third, we have a tax administration being reduced massively in size
Fourth, this creates destructive tax competition
Fifth, it undermines redistribution
I could go on
If you introduce local taxes they need to have some redistribution built into them. For example if introducing a local income tax that local authority should receive the equivalent percentage of the average household income across the country with any surplus or deficit returned to central government funds. This allows local areas to decide their level of taxation but avoids a situation where it is trivial to raise funds in wealthy areas and almost impossible to raise funds in deprived areas.
Glad to see your blog, Richard. I was very concerned when I read about this this morning. Local income tax is an administrative nightmare. Local property taxes, in particular, are terribly regressive, witness Council Tax in Weymouth compared to Westminster. I do have a bit of sympathy with LVT for London, which could be a bellwether for the country. I’d encourage Sadiq Khan to take a look at Herbert Morrison’s Site Value Rating for London Bill, 1939 (before Labour lost the plot on LVT).
Income tax devolution, even of a few percentage points, would have to include some kind of redistributive element within it in order to avoid a poll-tax style reaction, and I doubt that Labour will miss this point in its review.
Is there any real world evidence of intra-state tax competition resulting from devolution of tax powers? Doesn’t this depend on what councils are asked to do with the money? I would have thought that the need for most of them for money would be so inelastic as to prevent any significant competition.
Looks like a case to change the rules on residential council tax to always apply to the owner. This means for rented dwelling the incidence of the tax would move to some combination of owners, rental costs and the overall housing benefit bill. But it would mean councils with high ratios of benefiterati such as Hartlepool would get the full amount of council tax for every dwelling.
And the staff involved administering the various low income reductions could go across to HMRC and take some calls for them.
As has been pointed out comparisons with the USA are insidious even if we wanted to adopt their model. California, the most populous state, has a population of about 40 million or 13 million odd less than England, but occupies three times the surface area.
Andrew James “Scandinavia and Germany would be considered by most as far more progressive than the UK, and they have very strong local government with tax raising powers” – but are much less densely populated and are, I suspect, also populations that are less mobile than England’s. With their different history they are also less likely to resent the ‘postcode lottery’ that is the downside for devolution.
As for excise duties being devolved – there’s already enough smuggling between our EU ‘partners’ in general and the UK in particular without bickering between counties!
Whilst the idea of wresting prescriptive London control is attractive, there have to be easier and cheaper ways than taxation by county or even region..
Appropriately said
The US government redistributes vast amounts of public money from the wealthy states to poorer states through its huge military spending on bases and personnel. Without this the USA would probably have broken up long ago or had to take back most states tax and spend ability.
“Whilst the idea of wresting prescriptive London control is attractive, there have to be easier and cheaper ways than taxation by county or even region..”
Then what are they?
And if that’s too difficult a question for a full answer now let’s go ahead with more devolved tax raising powers while we wait for your fully-formed answer, hmm?
Allan
Your answer is aggressive and rude
And what is more you have prevented no evidence
Of course local taxation is costly
And what is the gain? Do you really think there would be one?
Prove it then
Richard
“Aggressive and rude”? Guilty. It’s how people sometimes respond when confronted with ‘I don’t know what to do but don’t do X’ sorts of answers. They maintain the status quo which we all know is over-centralised London control of tax funds.
“And what is the gain?” A lessening of the London stranglehold on funds. Does it need to be done carefully to make sure it doesn’t cause more damage than it aids? Sure. But that’s not impossible to sort out. One solution might be to use at regional level the vast swathes of ex-HMRC personnel who have been ejected over the last few years. Beyond that there are plenty of innovative ways you and I can think of to make it work; I have confidence in us 🙂
“Prove it then.” You know that’s a hypothetical if you’ve disallowed the experience in Sweden and Germany but many reports looking seriously at this issue now are concluding that careful devolution of funding powers could have significant benefits for local economies. Not without problems I grant you but certainly worth considering rather than the dysfunctional status quo.
https://www.thersa.org/discover/publications-and-articles/reports/powers-to-grow-city-finance-and-governance/
I have no problem with regional decision making
But if you think the integrity of a national currency can be maintained without constraints on local action oin tax and borrowing you are seriously mistaken
Agreed. This is nuts!
I’m afraid this is the result of years of managed neglect of the regions and Scotland in the name of ensuring the Masters of the Universe were kept in cocaine and property portfolios . In the end the regions and cities will take any amount of power on offer, regardless of consequence.
The PLP are left chasing after the horse again, too little too late. Tinkering at the edges with proposals like this won’t wash anymore. It smacks of the ‘retail offers’ of the last election, a piddling inconsequential nothingness.
There are two things happening in my opinion, one is the majority of the PLP (and most of the shadow cabinet) will *never* accept Corbyn as leader and have effectively folded their arms and gone on strike until he’s forced out. Secondly the same majority of the PLP are determined to offer similar variations of the previous Blairite manifestos at future elections once they have their machine politician of choice in charge. In their minds it’s business as usual, forever – neoliberalism with a sympathetic face, a red rosette, and the singing of the Red Flag when the leaves start to fall from the trees every Autumn.
The laughable claim is that they are the ‘grown ups’ interested in leadership (with the implicit assertion that the membership are not) when nothing could be further from the truth. Leaders don’t hide their inaction behind opinion polls or ‘public opinion’. They face the difficult questions head on and educate and enlighten. They confuse leadership with the naked pursuit of power.
This devolution offer is just another symptom – a fop to the regions as they intend to pursue the neoliberal nonsense. The majority of the PLP don’t want to face reality, they want to run away to lala land and pretend its 1997 again. James Carville coined the phrase ‘it’s the economy stupid’, but it’s more than that, its the economics stupid as well. Unless you can confidently explain where the money is coming from (PQE, MMT etc) then any discussion about the health of the wider economy immediately defaults to deficits and household analogies.
This is where the real problem in the PLP lies and i’ve said it before – a lack of expertise. Its clear Corbyn and Mcdonnell do not have much of a clue how to present this argument. I’m sure they know the general idea, but i have my doubts as to whether they can accomplish two important tasks if they want to educate the public – firstly could either of them sit down in front of the treasury select committee for 2 hours and explain most of the nuance of a PQE policy without tying themselves in knots after 5 minutes ? Equally could they distill and synthesise the reality of PQE/MMT into something that could be communicated simply to a lay audience? I don’t believe so.
In short a neoliberal PLP may be elected in 10 years time, but we won’t get social justice that way.
I think you underestimate Corbyn and McDonnell. They have been busy behind the scenes for decades. John is doing the necessary work now to get a comprehensive set of economic policies. There’s time to do it properly. I doubt that the backbench treasury committee, chaired by Chris Leslie, will want to hear anything that John has to say to them.
No that isn’t too dystopian a vision unless there is real change in the UK and worldwide in the near future…..the “Hunger Games Society” is a frighteningly real possibility unless there is amssive reset within the next five years!
The concept Local Taxation is so beguiling BUT unless there is massive re-distribution of wealth following a great re-set it will be a con game locking poor regions in the UK into poverty!
We’ll end up with the “Hunger Games Society” ie a reintroduction of feudalism by thos currently in control wishing to lock their and their descendants’ positions at the top of society!