Local variable income tax

There’s an article today in the print edition of The Scotsman by a guy called Tom Miers from Policy Institute about why he doesn’t think it’d be a good idea to replace council tax with a local income tax.

Many of his points are valid, but he’s clearly disregarding one option wrongly. He writes:

A variable local income tax would, in theory, avoid these problems. But a sufficiently flexible scheme is hard to imagine in practice. Can we really expect firms to levy PAYE at, say 23.84 per cent on their employees who live in Dundee but 23.87 per cent on those from Angus?

Yes, we can really expect firms to do that. That’s exactly how it works in Denmark, and it’s not causing any problems. Councils determine how many percent income tax they need to get from people having their primary address within their area and send this percentage to the employers. Yes, it means an employee can save money by moving to another council area, but that’s not different from Scotland today.

Speaking of local income tax in Denmark, it’s interesting to note that by far the largest share of income tax goes to the councils – income tax to the state is very low (typically 0% for people earning less than £30k if I remember correctly). The reason why council tax is so low in Britain is because most of the councils’ incomes come as a block grant from the state, and the council tax only covers a few extras. If the councils were to cover all their expenses from a direct tax, council tax (or local income tax) would have to rise dramatically, but at the same time the income tax to the state would drop a lot.

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