Distributional Issues in Local Taxation

Abstract

The introduction of the Community Charge, a poll tax, in place of the local tax on domestic property ('domestic rates') in Britain has highlighted important issues of both equity and efficiency in local government finance. The Government's own analysis, set out in a Green Paper issued at the start of i986,2 stressed the efficiency objectives of the package of reforms. The previous system, in the Green Paper's words, had been one in which the 'accountability' of local authorities had been weak because of 'differences ... among those who vote for, those who pay for, and those who receive local government services'. Taken together, the two major reforms introduced in England and Wales in April io990,3 the ending of local control over business rates and the introduction of the Community Charge, aimed to ensure that the full cost of local spending at the margin would in future be borne entirely by the local electorate. A second group of important issues about the Community Charge centres on the question of equity. The new arrangements for local government finance have involved a significant redistribution of the burden of local household taxation, both between different household types and between areas. The pattern of gains and losses has attracted considerable interest, although the complexity of the reforms has made it difficult to pin down responsibility for particular changes in taxation levels. The lump sum character of the new tax has been a more specific focus of discussion. Is it fair for local government to be financed by a poll tax or, at the very least, is the new system fairer than the old one? This paper addresses these issues in three sections. The first presents some basic information about the distributional characteristics of domestic rates and of the new Community Charge. Section III considers a number of arguments about how equity considerations should affect the choice of taxes for local government. Finally, in Section IV, some possible reforms, which would relate local taxes more closely to household incomes, are briefly examined.