söndag 21 oktober 2007

Observer Journalist advocates Local Income Tax

William Keegan has been writing for the Observer for too long. He is an unreconstructed Keynesian, which means that while he is very good at putting his finger on economic problems, he almost never has anything useful to say about what should be done about them.

Today, he wrote a piece in support of the Liberal Democrats' proposal to fund local councils by means of a local income tax. Now, such taxes do exist elsewhere, so they are not completely impracticable. But the pages of technical papers like Computer Weekly report constant problems over computer software and large scale mistakes, and tax systems need to be simplified, not made more complicated. The tax system already costs about £25 billion a year to run, about 6% of what is collected, to say nothing of the £130 billion of lost production annually that results due to the way it kills off economic activity.

The administrative problem is this. Most people work for an employer, who will have staff working in different local authority areas. Under a system of local income tax, the PAYE system would become more complex as employers would have to deduct tax at different rates and the correct amounts would somehow have to be remitted to the different local authority areas. This means that somebody would have to keep track of people's addresses, to ensure that the were living where they said they were and not in some fictitious address where local tax was low. This is one of the problems that killed off the poll tax.

It gets worse. Apparently, investment income cannot be taxed in this way, and so it would not be related to ability to pay. And how would second homes be taxed? Or wouldn't they?

Advocates of local income tax never answer these questions. Which will not prevent some stupid politicians from persisting with the notion.

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