‘We cannot have Scandinavian quality public services and an American level of taxes’

Mike Hedges – MS for Swansea East

We cannot have Scandinavian quality public services and an American level of taxes. Taxation exists to pay for public services, it is our entry price to a civilised society.

Too many people believe that we can have the same quality of public services as Scandinavia but have a taxation rate which is more like that of the USA.

When you look at the cost of private education and private health care, it puts into perspective the value for money we get from our taxation system.

It is not by random chance or serendipity that those countries with the highest tax levels have the best public services and those with lowest tax levels the poorest.

It is because taxation is necessary to raise the money to pay for the public services, we all need. There are three ways of raising taxation from individuals. On income (income tax, dividend income and National Insurance), on expenditure (VAT, Petrol, Tobacco and alcohol duty, vehicle excise duty, air transport duty and land transaction tax) and on wealth (Council tax, capital gains tax and inheritance tax).

With an expenditure tax such as VAT the percentage paid by everyone is the same as anyone else living in Great Britain, this is not true for the tax on income.

Take someone earning £30,000 a year. If they are under retirement age, they pay income tax and national insurance. When that person reaches retirement age, they then cease to pay national insurance.

A graduate on the same income will pay back a student loan as well as income tax and national insurance.

Someone who receives their income via dividend will pay a 7.5% tax rate on income over £2000. I do not believe this is fair and that we need a less complicated system to ensure everyone pays their fair share.

This is before any of the many tax reduction schemes are used to reduce the income tax that needs to be paid. The most popular example of tax avoidance is operated by companies where directors receive their income as directors’ loans and then either do not repay such loans to the company or the company write them off at the year-end.

I make the following suggestions: 

1.  The tax rate should be the same however income is derived.
2. National Insurance should be paid by everyone in work who earns above the national insurance threshold.
3. That the same tax threshold should exist for everyone.
4.  That student loan repayment needs reviewing and the interest charges removed.

Council tax is disliked by the rich because there are no accountancy methods to reduce payment, you cannot use any of the techniques used to reduce income tax.

The value of a house as a proxy for relative wealth is a very good method of increasing the tax take from the rich.

Council tax is based upon the value of a property. It replaced the much-disliked poll tax which replaced the rates system based upon the rateable value of a property which is still used to tax businesses.

The council tax bands in Wales based upon the property value was set on 1
April 2003, the value of all properties will have increased, but at different rates depending on where they are situated, since then.

Updates

It is currently proposed that property values are updated and that future updates take place regularly.

Band A is for properties up to £44,000. Band D is for properties between £91,001 to £123,00. Band H is for properties between £324,001 to £424,000.

Council tax is set on band D and all other band payments are based on that. Properties in Band A pay 75% of the amount charged on band D.

Properties in Band H pay 18/9, or twice the amount charged on band D.

A £40,000 house will be charged two thirds of the amount of council tax paid for a £120,000 house despite being a third of the value.

A £420,000 house will be charged twice as much in council tax as a £120,000 house despite being over three times as expensive.

This is unfair because the payment is not proportional to the value of the property. My recommendation is that all houses are revalued, and that council tax is a fixed percentage of the value of the property or if that proves too difficult more bands and narrower bands are created so that payment equates more closely to property value.

There has been calls for a land value tax to replace council tax which whilst superficially attractive would mean there would be no social housing in high land value areas.

The basic idea behind a land value tax is that pieces of land get their value from their location rather than the quality of the development sitting on top of them.

A land value tax is a more predictable way to tax property based on the value of land and not any associated buildings.

Whilst it could bring a tax from land with planning permission there would be pressure not to apply for planning permission prior to being ready for commencing development and there will certainly be an expectation that properties that were under development would get one hundred percent tax relief.

The system would need to include a series of discounts, exemptions, and reliefs, such as the empty property discount which allows properties to remain empty without paying tax for a period of time.