Taxing the Untaxable
Nigel Williams, 31 January 2013
On 31st January, the Resolution Foundation released a report No Clear Benefit examining the increase in hardship that will be caused by reductions in Council Tax Benefit. They include some remarkable findings, not least the number of working claimants whose marginal rate of taxation or loss of benefit will stand at 81 per cent of any additional earnings (page 4).
They don’t stress that Council Tax Benefit is unusual among benefits for existing solely to counteract the effects of taxation. If that tax were not levied on people deemed too poor to pay, there would be no need for any benefit yet no net loss of revenue. Reducing Council Tax Benefit means that councils are being asked to raise revenue from people previously deemed too poor to pay it. They are taxing the untaxable.
In 2011-12, the bill for Council Tax Benefit amounted to almost £4.83 bn, and was similar in magnitude to Jobseekers Allowance (£4.91 bn) and Incapacity Benefit (£4.94 bn) but where these put money into people’s pockets, CTB merely stopped it being taken away. The Local Government Finance Act that introduced it in 1992 allowed the Secretary of State to authorize reductions in liability, having regard for ‘the circumstances of, or other matters relating to, that person’.
The existence of Council Tax Benefit allowed for the minimum levels of the tax to be set higher than would otherwise have been possible. People could be made liable for taxes beyond their means but the benefit could reimburse them. Although the Council Tax was credited for taking some account of ability to pay, unlike its predecessor the Community Charge, the banding system made the tax close to flat. Dwellings were classified into eight bands according to their capital values but the taxes charged were much closer together than the property values they were based on. Within a local authority, the ratio between the taxes on a family in a house of limitless value and on a single occupant of the smallest possible property was no more than 4:1. Without the single-occupancy discount it would be only 3:1, between a Band H house valued in 1992 above, maybe far above, £320,000 and a Band A property, valued below £40,000. This ratio implied that local councils could not tax anyone more than four times what the poorest non-means-tested householder could afford. Without Council Tax Benefit at all, the limit would come down to four times what any householder could afford, means-tested or not.
One of the selling points of the new Universal Credit is to reduce effective marginal rates of taxation on the working poor, calling them MArginal Deduction Rates (MDR). It is a reasonable ambition. The 2011 budget gives some examples in Table A.2
Note the small print underneath: “Assumes no Council Tax Benefit entitlement.” Not all gains in the illustration have a positive advantage from the Universal Credit. No Clear Benefit suggests that many of the gains will be substantially smaller after changes to Council Tax Benefit.
So where could that nearly £5bn be raised instead? £5bn is enough for the whole of CTB, not just the 10 per cent cut demanded of councils in 2013. Spreading out the ratios between Bands is the obvious answer. I would make the Council Tax less regressive. Housing is a scarce resource, so it is not unreasonable that people making use of more of it should be charged more in one form of taxation. There are enough dwellings in Bands E to H that an extra £45 on E, £115 on F, £215 on G and £725 on H would approximate to the total for CTB. Those sums are the differences between £5 bn distributed in proportion to the values at the bottom of each band and the same sum distributed following the current, compressed and somewhat arbitrary proportions. Some people sharing larger houses would be worse off than they are at present but not to the extent that they need to be given benefits to be taken away immediately in taxation.