The Scottish Local Income Tax

The Scottish National Party have moved to replace council tax with a Local Income Tax.  That policy has come under considerable fire north of the border.  The Scotsman, in particular, has printed "25 reasons why Alex should drop local income tax".

One of the biggest problems with council tax as a way of raising revenue is that it hits the vulnerable elderly particularly hard.  Pensioners who own their homes outright and live on a much lower income than someone living in a similar-sized home and paying their mortgage pay high rates of council tax relative to their income.  This leads to real hardship and some pensioners having to forgo other essentials or face being dragged through the courts for non-payment.

Plenty of ordinary families, and particularly the elderly, will breathe easier for not having to pay council tax each month.  Unfortunately, a Local Income Tax is little better.  It hurts the incentive to work, improve your income and get off benefits.  There are 1.9 million people, on low incomes, who lose 60 per cent of each additional pound they earn to a combination of higher taxes and withdrawn benefits.  Taking 3 percentage points off the 40 per cent or less of their income they have less would significantly reduce their incentives to earn more and rely less on handouts.

Beyond that, companies trying to attract talent will have to spend more to attract them to Scotland.  This will make Scotland a less attractive place to do business and hurt prosperity.

There are two better options:

1)  Introduce a Local Sales Tax.  This would replace Value Added Tax, could free councils from the grip of central government and would avoid either destroying people's incentives to work or trapping pensioners in poverty.

2)  Cut the tax.  The best tax is no tax.  If councils were run more efficiently, some ideas for cuts are set out in the 10 Per Cent Challenge (PDF), then we could pay less tax and any one of the options set out above would be much less painful.