This paper is policy orientated and grew out of research funded by the Scottish Socialist Party. The idea of a Scottish Service Tax has been adopted as a key component of their social and economic strategy. Based in the wider debates about land reform and land value taxation, the discussion on the tax was the first independent debate in the Scottish Parliament. Additionally, the authors were requested to make a submission and presentation to the Scottish Executive's local government committee on finance so the paper is informing public debate. At the time of the 2001 Westminster General Election a letter by twelve leading economists in Scotland caused as much controversy as the 'Prescott punch' with their call for fiscal autonomy. They were motivated by the fiscal constraints imposed by Westminster and by the more rigorous application of the Barnett formula (Heald and Geaughan 1999). These restraints and squeezes are restricting the ability of the Scottish Parliament to address the problems in health, education, housing, poverty and jobs. Given the constraints of the devolution settlement, the proposals outlined in this paper for a Scottish Service tax seek to introduce a progressive, redistributive tax system as a way of tackling poverty and under-investment in the public sector with the abolition of the council tax. Whilst this paper is focused on providing a potential solution to the issues of poverty and under-funding in the public sector within Scotland the principles involved will be of relevance to other devolved economies.
The needs: public services and inclusion
Without doubt 2000 uncovered a series of indications that the quality of life in Scotland has suffered from underinvestment for many years. Across transport, health, education, housing and social services it has become increasingly clear that public services need major attention if Britain and Scotland are not to fall even further behind our continental partners. While services have been cut, throughout the public sector there is evidence of worsening skills shortages as the short-term labour market effects of wage restraint are exacerbated by deterioration in working conditions. Long-term problems are now being generated by underinvestment in staff, infrastructure and equipment, made worse by the use of the private finance initiative (PFI) and public-private partnerships (PPP), which will reduce the funds available for re-investment in the future. Additionally, poverty and deprivation in towns, cities and rural communities throughout Scotland have been catalogued as severe and endemic (Scottish Executive 1999a).
The new definition of poverty, in terms of social exclusion, allows the linking of a complex set of associated problems, including unemployment, poor skills, low income, poor housing, high crime environments, bad health and family breakdown. It therefore is affected and defined by the failings in many of these public services which themselves are under great strain. Each of these problems affects many people in Scotland:
* 21,500 people in Scotland have been unemployed and claiming benefit for more than a year
* the poorest districts in Scotland have the lowest activity rates, with poverty concentrated in the large cities and old industrial communities
* as well as the 108,000 claimant unemployed in Scotland in late 2000, a further 216,000 want a job but cannot find one (Labour Market Statistics, ONS, January 2001)
* 4,000 young people leave school every year without any Standard Grades
* 1.2 million people in Scotland, 25% of the population, live in households whose income is less than half the national average
* an estimated 34% of children and 41% of under-5s in Scotland live in such low-income households
* 25% of Scottish houses suffer from dampness and/or condensation.
Additionally, over the last two decades it has been the poorest in the community who have lost out through changes in the tax and benefit systems. The move away from progressive direct taxation to regressive indirect taxation has led to the situation where the people on the lowest income pay a greater percentage of it in tax than those on the highest levels of income (see Table 1). The increase in inequality is illustrated in the following tables.
Since 1994/95, relative poverty has worsened with the proportion of households living below low income thresholds--defined in terms of average incomes--tending to rise as the economy has grown (Households Below Average Income 1994/5 to 1998/9, DSS, 2000). Indeed, the DSS confirm that 'the proportion of the population below half average contemporary income (AHC) was 24 per cent in 1991/92, 1996/97, 1997/98 and in 1998/99'.
As Table 3 demonstrates, the position has not yet shown signs of improving. This suggests that changes made up to 1998/99 had not reversed the increasing inequalities of the previous two decades. Considering this another way, between 1994/95 and 1997/98, the gross incomes of the poorest 10% of taxpayers increased by 14.2%, while the incomes of the top 5% grew by 15.7%, and the top 1% saw their incomes improve by a massive 37%.
Again updating these figures has not been possible directly, but the DSS do provide information (Table 5) on similar statistics. Together with other research, for example from the Institute of Fiscal Studies (IFS, 2000), at best movement towards reversing the growing inequality in Britain has been slow and means tested.
These tables demonstrate the need to redress the balance in British society. At a time when social inclusion is being prioritised, there is a need to review the tax system as a whole to ensure that it does not undermine the position of the poorest even further. Not only have the highest paid seen their incomes rise the fastest since 1979, but the richest now pay a lower proportion of their income in taxes.
In 1987-88 the highest rate of marginal income tax was 60%, with a progression in 5 percentage point steps from 40% beyond the basic rate of 27%. Since then there have effectively been but two rates, giving Britain an even more proportional, rather than progressive, income tax system compared with the position in much of the rest of Europe.
The concomitant shift of taxation onto indirect taxes has had two important impacts: continuously increasing the regressive nature of the system as a whole and introducing means testing to a wider range of groups.
According to the DSS 'Income Related Benefits Estimates of Take-Up in 1998/99' (8/12/2000), the take-up of Council Tax Benefit, in particular, is very low. The rate varies between 75% and 81% by caseload, and between 77% and 84% by expenditure. They suggest these take-up rates have remained virtually unchanged in recent years, and appear to be lowest amongst pensioners when analysed by either caseload or expenditure. Help the Aged argue that 'Take-up levels must be one of the most important indicators of whether a benefit works. Over 500,000 pensioners who are entitled to MIG [minimum income guarantee] do not claim it, that is 1 in 5 of all those eligible for the benefit.' (Help the Aged website, May 2001). Take-up is higher by those living in local authority rented accommodation than by those living in private rented accommodation, while owner occupiers have the lowest rates of claiming their entitlement. Again these suggest unplanned distributional effects across the country.
In summary, given the demands on the Scottish budget, the challenge is to raise finance for public services whilst shifting the burden onto those who have the ability to pay. This means looking at the current system of local government finance as it provides both the greatest problems and also, because of the form of the devolution settlement, the opportunity to introduce a progressive new tax to replace the council tax.
Current political context of local government finance
The findings in Section 3 give an indication of the levels of poverty and inequality to be found in Scotland in the 21st century. Yet, at a local level, the current regressive nature of the Council Tax makes the problem even worse; under the former rating system the ratio of the highest to the lowest rates payable was 14:1, under Council Tax it is 3:1. The large numbers who rely on the means tested Council Tax Benefit in Scotland, 590,000 (1), are testament to the regressive nature of this tax. To address these needs and to improve the nature of the tax system requires an innovative approach. A progressive local income tax can be justified on the grounds of equity and the other characteristics of what makes a good tax. Plus, through a more just distribution formula to apportion rate support grant between Scottish local authorities, it will free up resources to be delivered locally for the benefit of the socially excluded.
In many respects in proposing the replacement of the Council Tax with a progressive Scottish Service Tax nothing new is being argued for. What makes it appear radical is the new political and economic climate regarding fiscal policy, namely that income redistribution cannot be achieved through direct taxation. However, within Scotland the 'Commission on Local Government and the Scottish Parliament' (McIntosh Commission, June 1999) has argued for an overall review of the system of local government finance. These findings echo the long standing campaign by Scotland's local authorities and the Convention of Scottish Local Authorities (COSLA) who have likewise been campaigning for a review of the system of local government finance. The Local Government Committee of the Scottish Parliament have been calling for an examination of the financing of local authorities, and have now introduced an inquiry into local government finance (http://www.scottish.parliament.uk/ official_report/cttee/local.htm).
Having established the scale of the problem, there is a need to restate the rationale for public intervention in the...
Time for redistribution of income: the case for a Scottish Service Tax.
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