“As long as the status quo with council tax, stamp duty and business rates remains in place, the UK will be a more unequal, less productive, and lower revenue-raising country.”
Britain’s inefficient and unfair property levies need reform
In this article by the FT Editorial Board, the authors delve into the shortcomings of Britain’s property tax system, touching upon the principles of taxation set forth by Adam Smith and emphasizing the need for reform to address issues of fairness, certainty, convenience, and efficiency. The article references “Fairer Share” in proposing solutions to these problems.
The current system of property taxes in the UK, including council tax, stamp duty, and business rates, is criticized for failing to align with the four principles advocated by Adam Smith. These taxes collectively generate substantial government revenue, close to 9 percent of the total, but they are considered poorly designed and detrimental to both economic equality and productivity.
Council tax, a tax based on property values from 1991, is highlighted as regressive due to significant changes in house prices since then. This tax places a disproportionate burden on residents, with those in the north-east and south-west regions paying the highest percentages of their wages. In contrast, residents in London, where incomes and property values are higher, pay significantly less in proportion to their income.
The article suggests replacing council tax with an annual proportional property value tax based on current house valuations, with local councils retaining access to the revenues. Tax rates would be adjusted to ensure each authority raises a similar amount as it did with council tax, and central funding to local authorities would be modified accordingly. The transition would be phased in to prevent abrupt changes in bills, and safeguards such as caps, reliefs, and deferred payment options would be implemented to support those in vulnerable financial situations.
The discussion then turns to stamp duty, a transaction tax that discourages property owners from downsizing and hinders the fluidity of the housing market. This, in turn, affects labour mobility and exacerbates skill shortages in various regions. The article proposes a gradual reduction and eventual elimination of stamp duty, potentially replaced by a 0.5 percent tax on current property valuations, as proposed by us, while maintaining revenue neutrality.
The article acknowledges the political challenges and resistance to these reforms, emphasizing the inertia within the current property tax system due to potential winners and losers from change. It calls for a phased approach, cost mitigation measures, and planning reforms to incentivize development. The central message is that maintaining the status quo with council tax, stamp duty, and business rates will result in a more unequal, less productive, and lower-revenue-raising UK, ultimately benefiting no one.
Click here to read the full article.