Tax rules favour mansion owners over council tenants

Published by 24publishing for 24dash.com in Housing and also in Central Government, Communities, Finance

Politicians should make tax and welfare rules fairer, a new report recommends, noting that council tax - an area identified as ripe for reform - is charged at a lower rate on a mansion than on a council flat.

The report said the current system - which sees people in lower value homes pay a higher rate (as a proportion of their home value) than people in more expensive homes - is perverse. 

"We don't charge VAT at a lower rate on a Ferrari than on a Nissan," the report says. "So why do we charge council tax at a lower rate on a mansion than on a council flat?"

The report wants the tax and welfare system to give more support to those on lower incomes.

One of its recommendations is a flat rate of council tax which it says would be both fairer and more efficient.

In the short-term, it adds, additional bands at the top could enable a freeze on council tax for those lower down.

The Government wants to devolve council tax benefit – claimed by 5.9 million people – locally, requiring councils to set up schemes from next April. However, they will have to do it with £500m less, as the Government wants to cut expenditure on the benefit by 10%.

Written by Paul Johnson, director of the Institute for Fiscal Studies, the report insists that the tax-benefit system must do more to ensure work pays for groups who it claims respond to incentives and which will be important to rising living standards.

For parents, cash benefits could be made more generous for younger children and less generous for school-age children when parents are more likely to want to work, whilst the new Universal Credit system could introduce a separate disregard for second earners, allowing them to keep more of the money they earn.

As for older workers, National Insurance Contributions (NICs) could be reduced by either bringing forward the age at which people stop paying NICs to 55 or by increasing the NICs threshold at this age, whilst potentially delaying the age at which Pension Credit becomes available.

The report claims that simply making the current system more generous to those on low incomes will not be sustainable in the long run - reforms to the structure of welfare, VAT and council tax are required.

Paul Johnson, author of the report, said: "Redistribution through the tax and welfare system is always economically costly, but the current system is inefficient and imposes far greater costs than are necessary.

"In the long run if we want a redistributive system then we need to introduce reforms which allow redistribution at lower cost. If politicians are serious about wanting both growth and redistribution they must face up to the need for reform and tackle elements of the tax system which have for too long been in the too difficult box."

Gavin Kelly, Chief Executive of the Resolution Foundation, said: "With money so tight we know that gains in household living standards in the next decade will have to come overwhelmingly from employment rather than big increases in state support.

"Our tax-benefit system and public services will need to do far more to support work – whether for parents held back by lack of childcare or older workers who see little incentive to stay in work."

The report, Fairer by design: efficient tax reform for those on low to middle incomes, is available on the Resolution Foundation website.