Analysis: Scrapping Council Tax, not tweaking Income Tax, should be the progressive test of next week’s Scottish Budget

Ben Wray

CommonSpace editor Ben Wray looks ahead to the Scottish Budget next week, and finds a choice for Finance Minister Derek Mackay – take wealth inequality seriously and scrap the Council Tax, or continue with the “don’t scare the middle classes” government-by-tweak politics

SINCE the devolution of Income Tax, there is now a common dynamic in the run-up to a Scottish Budget, which will be announced by Finance Minister Derek Mackay next Wednesday [12 December].

First the UK Government in its Budget or Spending Review announces tax cuts (which invariably help the better off most). Then the Scottish Tories say that if the Scottish Government does not reciprocate, Scotland will be a hellish nightmare for taxpayers. Then the Scottish press follow in the Tories footsteps, producing figures showing how much ‘worse off’ the ‘middle class’ will be in Scotland every year compared to the rest of UK. This article in The Scotsman – “SNP signals further tax hikes for middle class Scotland” – is exemplar.

It’s intensely boring, but one of the few boons of the endless Brexit debate is that most of the press corps are too distracted to get excited about the minutiae of income tax rates. Thank heaven for small mercies.

Indeed, the Budget coming one day after the UK Parliament vote on the Withdrawal Agreement means that it is likely to pass the vast majority of the public by altogether, with the fall-out from May’s inevitable defeat in the House of Commons likely to dominate the news cycle.

READ MORE: 4 things the Fraser of Allander report tells us about @ScotGov’s Budget challenges

Nonetheless, the Budget does matter, and could have major consequences for Scottish politics and public services for some time to come.

We reported after the UK Budget that “Mackay is going to have nearly £1 billion more to play with than previous Treasury projections had anticipated, a significant boost, but still a relatively small change to the overall situation for Scotland’s public finances (less than 1 per cent shift).”

Once protected budgets are taken into account (the most important by far being healthcare), that still amounts to cuts to all other budgets without a significant increase in taxes to raise revenues.

IPPR Scotland has published a report this week arguing that a freeze on the higher rate income tax in Scotland would raise up to £210 million per year, and could lift 40,000 children out of poverty by 2021-22 if it was spent on welfare benefits. The higher rate already starts at a lower income level (43,430) than in the rest of UK (50,000 from 2019/20).

Obviously, it’s a good thing to make the income tax rate more progressive than the rest of UK, and to raise a little bit more revenue for welfare benefits, but it remains firmly within the framework of government-by-tweak. Our ambitions have to become a little higher than ‘one notch to the left of whatever the UK Government’s doing’.

READ MORE: Analysis: Will the threat of a teachers’ strike force Derek Mackay to rethink his budget plans?

The reality is that focusing the tax debate on income tax is fiddling while Rome burns. Rome, in this case, is Scotland’s runaway wealth inequality, which stands at nearly twice as great as income inequality in Scotland, according to a 2018 report by the Resolution Foundation.

That report found that a person’s inheritance is more likely to be a better indicator of their standard of living than their income in Scotland. No society which determines your life chances by the wealth of your parents can possibly be considered socially just.

The Resolution Foundation produced another report this week, this time UK-wide but it reflects Scottish trends as well, which found that young people with parents who have property wealth are now three times as likely to be homeowners by the age of 30 than those from families without property. That 3:1 ratio is up from 2:1 in the early 2000’s.

“Our housing crisis is so big that what your parents own is becoming as important as how much you earn when it comes to owning your own home,” Stephen Clarke, senior economic analyst at the Resolution Foundation, said.

IPPR, in its groundbreaking UK-wide commission on economic justice published earlier this year, argued that the UK economic model was fundamentally broken because it no longer improved living standards and is heavily skewed towards producing wealth for those who already have it. It called as part of a number of reforms to tackle wealth inequality for “fairer forms of wealth and corporate taxation”. This debate has not properly reached Scotland yet in any serious way, even though it is one of the major economic questions of our time, highlighted to the world in Thomas Piketty’s globally renowned work Capital in the 21st Century.

READ MORE: Scotland’s richest 1% have more wealth than bottom 50% put together

Unlike Income Tax, the Scottish Government actually has full control over a tax on wealth – the Council Tax. Shamefully, more than a quarter of a century after Margaret Thatcher resigned, we are still using her replacement for the hated poll tax in Scotland. We are still basing that tax on 1991 housing valuations, when properties in Band H were worth 8 times as much as Band A. Today, they are worth 15 times as much. So the Scottish Government is using a Tory tax that is twice as regressive as when the Tories introduced, using a system which calculates 57 per cent of homes in the wrong band because the system is so old.

As the Scottish Government established Commission for Local Tax Reform pointed out: “Many reasons can be advanced for taxing property rather than, or alongside income, but in the case of the present Council Tax, the evidence shows that the amount being charged is simply too disproportionate to income to be justified. Paying Council Tax bills costs middle income households 4 per cent of their income on average, compared to 2 per cent for the average highest income households.”

That Commission argued that the Council tax had to end as currently constituted, which is not what anyone could describe the government-by-tweak changes which the Scottish Government made to the Council tax in 2016, making a regressive tax slightly less regressive.

READ MORE: Threats, debt collectors and nervous terror: the reality of Council Tax in Scotland

The fact is that Scotland is a good place to be to accumulate unearned wealth, and that is partly because we don’t have a tax system which makes putting money into existing assets like land and property unattractive. This has perverse effects on the economy – if the rate of return that can be accrued from sitting on land is greater than building houses on it or using it for productive business investment, then why not be a land speculator rather than a house builder or a entrepreneur?

While most of the media focus has been on income tax, the Scottish Greens have made reform to local tax a red line for support for the Scottish Budget. They want a tax on land/property that is controlled locally. A tax levied on land values and property prices would be much more equitable, would potentially raise a lot more money and would help stem the scourge of asset price inflation, where the value of things that have already been made rises faster than incomes. House prices at least need to level off, if not fall gradually, to start to tackle the roots of Scotland’s housing crisis. Any government that takes inequality seriously has to be serious about tackling inequality of wealth.

So Mackay has an opportunity to do something that will ensure his Budget is actually delivered, raise money for public services, remove a major scar on Scotland’s poorest communities in the form of Council Tax debt and be commended as someone who is serious about tackling inequality. Or he can play along with The Scotsman’s sermon – ‘thou shall not upset middle class taxpayers’ – and think that doing something one notch to the left of the Tories is somehow the barometer of progress.

Picture by the Scottish Government