TaxPersonal TaxSimpler tax system not the main issue

Simpler tax system not the main issue

Last month, the Department of the Environment published a green paper on local government finance. Depressingly, but not surprisingly, it looks to business to foot an increased proportion of the bill.

The green paper returns to an idea floated a couple of years ago. Local authorities in England will be allowed to charge a supplementary rate, of up to 5% of the national rate of 41.6p in the pound. They will keep this money to spend on additional local services. The national rate, on the other hand, will continue to go into a central pool and be shared out among local authorities in proportion to population.

No-one wants to pay extra tax unless they are satisfied that they will get extra services which are worth the cost. So businesses will want to see that they have enough control over supplementary rates. And this is one area where we need to look very critically at the government’s proposals.

A local authority which wants to charge a supplementary rate will have to set up a partnership arrangement with local businesses. This will not mean a forum in which all businesses attend every meeting. Instead, businesses will select representatives, who will reach agreement with the local authority on how the supplementary rate is to be spent.

Normally, an authority will have to set up a partnership arrangement which local businesses accept. That sounds like the perfect way to ensure adequate business control: if businesses are not happy with the level of control, they will not accept the partnership arrangement and no supplementary rate will be possible. But there is a little problem with the system, and one gaping hole in it.

The little problem is that if a local authority tries and fails to get agreement to a partnership arrangement, it will be able to ask government ministers to approve one anyway. The green paper says that permission will only be granted in strictly controlled circumstances: but how strict will the control be in practice?

The gaping hole is that the partnership arrangement will only decide how the money from a supplementary rate is to be spent. It will not decide whether there is to be a supplementary rate, and if so at what level.

Those decisions will be left to the local council.

The green paper also considers the way in which central government funding for local authorities is worked out. That funding is essential, because some local authorities are poor and couldn’t possibly raise enough money locally to do their jobs. Others are very rich and find it easy to raise more money than they need.

The biggest part of central funding is the revenue support grant. This is set at a level which would allow every local authority to set the same council tax and provide a standard level of services. The cost of the standard services varies around the country. It is worked out using the standard spending assessment.

The SSA is a statistical process, and this bothers the government. Few people understand it in detail. It can therefore lead to feelings of unfairness, where local authorities get less money than they hoped for and cannot understand why.

I am the first to call for simplicity where the taxpayer has to grapple with the system directly, but I do not see that simplicity is so important here. Taxpayers do not have to deal with the SSA. The mathematics is not actually that complicated: there is just a lot of it. Any council which thinks it may be getting a bad deal should be able to find an independent mathematician to explain the system.

While a simpler system than the SSA might look fairer, it might actually be less fair. The system is meant to allocate the right share of the resources to each local authority. To get as close as possible to the right answer, we should take account of all the factors which affect costs around the country. These include population density and the weather. Cutting down on the inputs to the model, or analysing the inputs in less sophisticated ways, will not lead to better answers.

I also worry about the government’s interest in introducing a judgmental element. The idea is to run the SSA model, look at the results and adjust any which look a bit odd.

To my mind, ministers’ gut feel is no substitute for number-crunching.

Richard Baron is deputy head of the policy unit at the Institute of Directors

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