The Community Charge, Rates and Tax Reform

Proposals for a poll tax should be abandoned, says John Muellbauer, Fellow at Nuffield College, Oxford, in the latest issue of Lloyds Bank Review

Mr Muellbauer's argument concentrates on an analysis of the economic implications of such a tax. He starts from a list of desirable characteristics for a reformed housing tax system: narrowing of regional house price differentials; efficient utilization of the housing stock; reduced speculative overshooting of house prices; removal of tax bias against rented accommodation and tax distortion of saving-investment and labour supply decisions; and low costs of administration and tax collection.

Using this list, Mr Muellbauer points out the shortcomings of a poll tax. First, it would tend to raise house prices, and raise them by more than the five per cent figure suggested in the Green Paper on 'Paying for Local Government'. It would also raise prices most in London and the South East. Removing residential property from the tax net altogether would be worse than the current system as far as efficient utilization of the housing stock is concerned, argues Mr Muellbauer. It would also make it more attractive to engage in speculative hoarding of housing, he suggests.

A community charge would be expensive to collect, argues Mr Muellbauer, not only because of an increase in the number of individuals who would have to pay tax, but also because of the difficulty and expense of catching those who evade the tax.

Instead of the poll tax, Mr Muellbauer suggests a broadening of the Inland Revenue's income tax base by incorporating an imputed rent based on current capital values of housing at a rate of, say, three per cent. Capital values could be assessed at relatively low cost by taking the historical market price for property and raising it by the increase in the regional mix-adjusted house price indices produced by the DoE since 1968. More detailed methods of assessing capital values are also suggested by Mr Muellbauer.

Mr Muellbauer argues that such a reform would pass the tests of desirability suggested by him. It would however take some time to implement. Meanwhile, Mr Muellbauer suggests as a first step, mortgage interest tax relief should be restricted to the basic rate of income tax. An early announcement of the dropping of the poll tax and a move to a system of taxing imputed rent would also discourage speculative house price increases.
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