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Compare and contrast the differing approaches to domestically-generated local government revenue

collection. In your opinion, which one best meets the definition of ‘fair tax’?

To the end of the 1980s, tensions regarding taxes, and its consequent effects on society escalated

drastically, causing riots in the streets across England, most symbolically Trafalgar Square. Such radical

actions were direct results of the use and implementation of the Poll tax, being a ‘flagship policy of the

Thatcher Government’ (The Independent, 2010). If current legislation is to continue, it must be reassessed

as to whether the national and local governments are destined for a comparable outcome. In this essay, the

different approaches to domestic taxes will be analysed in the context of history and their current success,

as well as how well each tax refers to and satisfies Adam Smith’s Canons of Taxation. ‘Domestically-

generated local government revenue collection’ is in essence the variety of taxes for the average

homeowner to pay local governments / authorities, which includes; Local Income Tax, Local Sales Tax,

Council Tax and Community Charge.

Local Income Tax is ‘a tax on the income of a person and is therefore a personal tax’ (Trotman-

Dickenson, 1996), debited monthly or annually. Local Income Tax differs from Income Tax, because a

percentage would also be paid to the Local Governments, instead of Central.

The concept of Local Income Tax has many advantages, of which include certainty and convenience,

two key strong points highlighted in Adam Smith’s Canons of Taxation. By using the current system for

collecting Income Tax, Trotman-Dickenson argues ‘the time of tax collection is made well known – weekly

on wages, monthly on salaries’ (Trotman-Dickenson, 1996), suggesting how Income Tax, and

consequently Local Income Tax is very certain, a point satisfying the Canons of Taxation. Furthermore, by

use of the PAYE (‘pay as you earn’) system, Local Income Tax could contribute to the success of a tax and

its consequent convenience. Tax is deducted before income is received, thus reducing and eliminating tax

avoidance, and making the system of tax generally easier for the average individual. Considering the

canons available within the Canons of Taxation, it can be suggested that Local Income Tax is a very fair

tax.

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A differing approach, whilst still linked to Local Taxes, is the use and implementation of the Local

Sales Tax. Local Sales Tax is the tax of purchasing goods and services, in turn making it a regressive tax

because everyone has to pay the same price, meaning a higher percentage out of a lower income salary.

Hypothetically, if an authority were to implement a Local Sales Tax, it could, for example increase the

VAT to 21%, whereby the extra 1% would be transferred to and for the interest of the corresponding Local

Authority.

In relation to Smith’s Canons of Taxation, Local Sales Tax is an indirect tax, in turn making it a very

convenient tax. This is seen as ‘a point of efficiency and effectiveness, they cannot be easily evaded as they

[taxes] are contained in prices of goods and services’ (Lediga, 2014). Furthermore, the implementation of

a Local Sales Tax on top of a National Sales Tax could discourage activities which produce negative

externalities, such as a use of carbon tax within a local authority.

Controversially, the implementation of the above mentioned point could negatively affect the local

authority and further externalities. As argued by Lediga, ‘individuals refrain from engaging in the taxable

transaction’ (Lediga, 2014), possibly suggesting how the domestic house owner could migrate to another

local authority, subsequently starting a “race to the bottom” as to which authority could produce the

cheapest products and taxes. This negative point raised is a direct connection to Smith’s mobility of the tax

base. The regressive nature of the Local and National Sales tax also raises concerns regarding visibility.

When buying, for example a chocolate bar, the VAT’s price is regularly accepted and ignored. However,

when considering where that 20%, and any additional tax for Local Authorities goes, it is hard to

determine. How the revenue generated from VAT nationally and locally is ‘less well known’ (Brown,

2012), making it a very invisible tax.

Council Tax is ‘reminiscent on rates, but featuring some improvements to make it more fair’

(Trotman-Dickenson, 1996). Council tax is the tax paid by the residents of domestic housing ‘based on the

market value of their dwellings’ (Trotman-Dickenson, 1996), whereby a house would be placed into a set

band (A-H) (Oxford.gov.uk, 2014), and accordingly paid annually.

The progressive tax carries many advantages and disadvantages in relation to Smith’s Canons of

Taxation. As referenced clearly in the ‘Housing, Planning, Local Government and the Regions’ Report,

some advantages include that the tax complies with the Canons of Taxation effectively, as seen by ‘it was

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simple to calculate; transparent; easy to collect; and as the principle form of property tax that it widened

the national tax base’ (Office of the Deputy Prime Minister, 2004). All of the above mentioned points refer

to the notion of a Council Tax being; simple, certain, and visible. In relation to visibility, the average

domestic house owner receives a breakdown letter as to how much they, as well as others spend and where

the local authority has put the money, a much more visible tax then Local Sales Tax and arguably Local

Income Tax. Furthermore, Council tax is progressive, making it very equitable, whereby ‘every person

should pay to the government depending upon his ability to pay’ (Akrani, 2010). Considering the above

points, it is fair to assume how Council Tax is in fact a very fair tax, especially in relation to the above two

taxes.

However, it is impossible that a tax completely satisfies all of Smith’s Canons of Taxation. Council

Tax is ‘regressive in that the tax rate falls as the house price rises, to which some object’ (Policy

Exchange, 2013), arguably making it non-equitable past a certain house size bands. Furthermore, the tax is

not buoyant, whereby ‘revenues do not automatically increase with economic growth’ (Office of the

Deputy Prime Minster, 2004), suggesting how as UK economic potential grows or reduces, Council Tax

expenditure and revenue collected is in turn effected indirectly, acting as a strong negative in relation to

Smith’s Canons of Taxation. Public consultation also suggests a disliking for such a present tax, as seen

within the Governments Report, ‘most of them suggested that council tax could be reformed’ (Office of the

Deputy Prime Minister, 2004). This implies how the existence of Council Tax is not flawless and

consequently inferring how a tax that complies with a large majority of the Canon’s of Taxation still needs

amendment.

Community Charge (Poll Tax) is the predecessor to Council Tax, created in Thatcher Government in

England and Wales in 1990. The analogy behind the concept refers to a regressive approach, likewise to

Sales Tax, ‘with a flat rate charge paid by every adult’ (Wilde, 2011), whereby each person pays a

constant, fixed price for the Local Authority’s services.

By analysing a research blog written by Wadsworth, it can be seen that Community Charge in fact

carries many disadvantages as opposed to any advantages. Some advantages include that ‘it is not a tax on

income and therefore does not have dead weight costs’ (Wadsworth, 2011). Dead weight costs are the

external effects produced from an action, for example income tax will directly finance Central and Local

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Governments however, the reduction in annual incomes from the tax will consequently reduce consumer

expenditure, indirectly effecting the national economy and in turn, causing negative externalities for the

Government in the foreseeable future.

However, Poll Tax carries many disadvantages, suggesting how the concept of a regressive tax in

certain instances is a weak concept in relation to Smith’s Canons of Taxation. Poll tax is ‘politically

unpopular and there would be a massive evasion by people simply not registering their addresses’

(Wadsworth, 2011), suggesting how Community Charge is not certain or equitable. Furthermore, there is a

lack of incentive to pay for such services, as seen by ‘[no] correlation between the amount paid and the

value of any benefits received’ (Wadsworth, 2011), further suggesting how the poll tax is not a strong

concept for local government revenue collection as it is not a fair tax. Finally, the Poll Tax is not equitable

or fair from the concept it is regressive, as highlighted by ‘a poll tax raising £280 billion a year from

working age adults works out at about £12,000 each a year’ (Wadsworth, 2011), implying how more

deprived households must pay a percentage of their income for the same services as a higher income

household, in turn making Poll Tax an unfair taxing system.

Overall, it can be seen above how each tax, Local Income Tax and Local Sales Tax, Council Tax and

Poll Tax, offer many advantages and disadvantages. One must assess the current economic situation and

stagnation before deciding which tax system should be allocated in Local Government legislation. By

assessing differing approaches, it can be suggested that the most equitable, fair and legitimate form of tax

will be one which is progressive, buoyant (yet principally on deflation of the economy, as opposed to

inflation), simple to understand from clarity of communication and visible, in turn applying a high number

of Adam Smith’s Canons of Taxation. A tax that is none of the above raises concerns regarding the

legitimacy and effectiveness of the tax from domestic household opposition. To conclude, the current

system of Council Tax is the tax that best meets the definition of ‘fair tax’.

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Appendix:

Domestic Definition: Of or relating to the family or household (TheFreeDictionary.com, 2014)

Local Government Definition: The administration of a particular county or district, with representatives

elected by those who live there (Oxforddictionaries.com, 2014).

Government Revenue Collection:

- Revenue Definition: The amount of money that a company (government) actually receives during

a specific period (Investopedia.com, 2009)

- Revenue Collection Definition, See also – Tax: An involuntary fee levied on corporations or

individuals that is enforced by a level of government in order to finance government activities

(Investopedia.com, 2009)

- Local councils are funded by a combination of central government grants (48%), Local Taxation

(Council Tax: 25%), Business Rates, whereby occupiers of premises pay the council to occupy a

space, as well as user charges, such as rents, publications, home care charges.

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Bibliography:

Akrani, G. (2010). What is tax? Definition - Adam Smith's Canons of Taxation. [Blog] Kalyan City Life. Available at: http://kalyan-city.blogspot.com/2010/12/what-is-tax-definition-adam-smith.html [Accessed 17 Oct. 2014].

Brown, M. (2012). Just where does all your tax go? Express. [Online] Available at: http://www.express.co.uk/news/uk/297810/Just-where-does-all-your-tax-go [Accessed 15 Oct. 2014].

Definitions.uslegal.com, (2014). Local Income Tax Law & Legal Definition. [Online] Available at: http://definitions.uslegal.com/l/local-income-tax/ [Accessed 15 Oct. 2014].

The Independent, (2010). The Battle of Trafalgar Square: The poll tax riots revisited. [Online] Available at: http://www.independent.co.uk/news/uk/politics/the-battle-of-trafalgar-square-the-poll-tax-riots-revisited-1926873.html [Accessed 14 Oct. 2014].

Investopedia, (2009). Revenue Definition. [Online] Available at: http://www.investopedia.com/terms/r/revenue.asp [Accessed 14 Oct. 2014].

Investopedia, (2009). Taxes Definition. [Online] Available at: http://www.investopedia.com/terms/t/taxes.asp [Accessed 14 Oct. 2014].

Lediga, C. (2014). Direct and Indirect Taxes and Smith’s Four Canons of Taxation. [Online] Academia.edu. Available at: http://www.academia.edu/5750563/Direct_and_Indirect_Taxes_and_Smiths_Four_Canons_of_Taxation [Accessed 17 Oct. 2014].

Office of the Deputy Prime Minister, (2004). Housing, Planning, Local Government and the Regions Ninth Report. London: House of Commons.

Oxforddictionaries.com, (2014). Local government: Definition of local government. [Online] Available at: http://www.oxforddictionaries.com/definition/english/local-government [Accessed 14 Oct. 2014].

Policy Exchange, (2013). Reducing housing demand or increasing housing supply. Taxing Issues? London: Policy Exchange, p.21.

TheFreeDictionary.com, (2014). Domestic. [Online] Available at: http://www.thefreedictionary.com/domestic [Accessed 14 Oct. 2014].

Trotman-Dickenson, D. (1996). Economics of the public sector. 1st ed. Basingstoke: Macmillan.

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Wadsworth, M. (2011). Council Tax, Poll Tax, Local Income Tax and Land Value Tax. [Blog] YPP. Available at: http://markwadsworth.blogspot.co.uk/2011/09/council-tax-poll-tax-local-income-tax.html [Accessed 18 Oct. 2014].

Wilde, R. (2011). Community Charge / Poll Tax. [Online] About Education. Available at: http://europeanhistory.about.com/od/ukandireland/p/prpolltax.htm [Accessed 18 Oct. 2014].

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