Time for redistribution of income: the case for a Scottish Service Tax.

1. Introduction

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.

2. 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.

3. Who pays?

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.

4. 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 economy, and the role for local spending.

5. Legitimacy of intervention

The sort of devolution of powers granted to Scotland in 1999 is a new departure in the arrangement of government structures in the UK. There is no obvious economic history within this country to call on, therefore, to guide possible policy interventions. And yet, there must be a series of initiatives to tackle these problems if the full potential of the Parliament is to be realised. To determine the impacts the Scottish Parliament could be making to alleviate these public services problems, beyond what the Scottish Office has traditionally achieved, it is necessary to draw upon economic theory and experiences elsewhere.

A number of economists (Newlands 1997 and 1999, Musgrave 1959 in particular) have examined the legitimacy for government intervention in the economy. Three uncontested neo-classical macro-economic functions for government can be identified as stabilisation, allocation and distribution, to which can be added a fourth: the growth function. Newlands (1999), for instance, argues that the focus of debate and the evaluation of how well the Scottish Parliament has intervened in the economy should be directed towards its role in promoting sustainable growth and development. Internationally informed research in recent years, (see, Kellermann and Schmidt, 1997; McGregor et al, 1997; King, 1984; Laramie and Mair, 1997) confirms that growth through a balanced budget expansion of the 'regional' economy is possible, and also beneficial for the wider 'national' level.

A review of this literature (Danson and Gilmore, 2001) suggests that there could well be lessons for Scotland: growth and development can be enhanced by a small open economy in a global market place with few of its own multinational enterprises. The example of 'The Celtic Tiger', Ireland, is a case in point. Since the mid-1980s, the Irish economy has doubled in size so that the GDP per person is now higher than in Britain, and exceeds the EU average (Tansey 1998). It continues to grow at rates greater than anything achieved in Scotland outwith wartime. However, this economic miracle has failed to address poverty and social divisions and to create a sustainable growth, and many commentators argue that if the economy is to keep on developing then there will have to be more attention paid to the needs of the poor and others on low incomes (Tansey 1998, Sweeney 1998). Further, redistributing income can lead to an expansion of the economy more efficiently than tax cuts for the better off (McNicoll, 1992).

7. Finance and forms of intervention

At present, the Scottish Executive does not plan to expand the Scottish economy through increased public expenditure. Although there is to be growth in the Scottish Budget, this follows automatically from increases at Westminster and not from any Keynesian, socialist or interventionist philosophy of the Scottish Government, rather the changes result without any positive actions from the Executive. It also, until the publication of the Comprehensive Spending Review, had not been proposing to increase expenditure in real terms on health, education, housing or local government services.

Following the Chancellor's Comprehensive Spending Review, the Scottish budget has been improved, with subsequent proposals to expand expenditure in some areas. The recent publication of the Government's spending plans for the next few years affords some comparison with the recent past.

So expenditure on health, enterprise and lifelong learning, and local government will all have increased in real terms by 2003-04 compared with 2000-01. However, taking tables 6 and 7 together does suggest that grant support for Local Government will be no more in real terms than in 1996-97, expenditure on enterprise and lifelong learning will have fallen slightly, while health spending will have expanded by 25%. With ever higher demands on the health services from an ageing population and a spiralling drugs budget, even the NHS growth should be qualified. In the areas where local authorities and other agencies are most active, providing the human capital investment and infrastructure for the economy and society, there is significant cause for concern. Against the needs identified above and the imperative to restore relative salaries in the public sector, this is inadequate to meet the expectations of the population in terms of health, education, and other public services.

The logic of the Musgrave (1959) and Newlands (1999) analysis, and the legacy of 25 years public expenditure constraints is that the Scottish Parliament should be seeking to change the budget priorities and should expect to be able to influence the allocation of resources productively within Scotland. This should have real positive effects on the levels of growth in the Scottish economy and on the provision of public services. To achieve these benefits, however, will require positive interventions in the economy (as demonstrated by the fiscal federalist literature) and an increase in Scottish public expenditure, as we shall argue below. To do this will require an increase in taxes in Scotland, given the effective Barnett formula restrictions on the block grant coming to Holyrood (Mackay, 2001; McLean, 2001). The current debate surrounding the Barnett settlement have been covered elsewhere and are not of direct relevance to this paper (for example see Mackay 2001; McLean 2001; Morgan 2001; Midwinter 2002)

To address the need for such finance, economists at the Fraser of Allander Institute at the University of Strathclyde (McGregor et al 1997) have demonstrated that the imposition of higher direct taxes in Scotland could lead to an expansion both in the number of jobs and in output in Scotland, with no adverse effects on the Scottish balance of payments, unemployment or inflation. They conclude that in the long run a 'tartan tax' of 390 million [pounds sterling] would raise GDP and employment by 0.45% and 0.42%, respectively, with unemployment falling by 0.72%.

The assumptions underpinning their analysis are not unduly restrictive and recognise that Scotland has a very open economy, as admitted above. The critical conditions to achieve this range of benefits are not that stringent and would not be alien to the politics of the 1960s and 1970s, nor critically to many other member states of the EU. Simply they require that the Scottish workforce does not seek to regain their immediate real standards of living through higher money wages when faced with an increase in direct taxes. In other words, to invest in Scottish public services taxes on incomes must be developed while there needs to be recognition by government and the country of the benefits of redistribution and investment.

The need for a new consensus on the priorities of Scotland must include all social partners, and especially the trades unions. The stronger the belief in the benefits of enhanced public investment, the higher the long-term impacts on public services and social inclusion.

10. A local income tax: a Scottish Service Tax

In an attempt to redress the identified problems within Scotland it is suggested that a form of local income tax is required to replace the Council Tax. This would be progressive, based on ability-to-pay and would be set at marginal rates sufficient to increase the revenues raised to permit an expansion in public investment. It would be established at the Scottish level, with revenues distributed across local government areas according to needs. The Scottish Service Tax would be dedicated to local government expenditure and the expansion of budgets, particularly in Scotland's poorer areas, would lead to significant improvements in the health, education and housing conditions of Scotland's citizens. Such an improvement in essential service provision across Scotland delivers the name of the new tax proposal: The Scottish Service Tax.

Previous research on the possible introduction of a local income tax cumulated in the findings of The Report on Local Government Finance (Layfield Committee) (2) which considered a local income tax a 'serious candidate' for financing local authority expenditure.

The accepted criticisms of Layfield, according to the Scottish Parliament Information Centre (SPICE August 1999), are that a local income tax would:

* add to the present burden of income tax collection and assessment both for the Inland Revenue and for industry and commerce

* increase the costs of operation

* establish a change in circumstances in which income tax is used as a tool of central economic management

* introduce a need for special measures to make it identifiable within the individual tax-payer's total local and national income tax

* require a five year setting up period

* be dependant upon a number of simplifications being made within the national tax system.

The government of the day rejected Layfield's main recommendations, citing similar reasons to SPICE.

In light of these comments from Layfield, it would appear that for a Scottish Service Tax (SST) to comply with the principles of a good tax it would have to address three major criticisms: fiscal flight, which would violate the need for fiscal neutrality; costs of administration; and it would compromise the impact of UK fiscal policy in terms of demand management.

Fiscal flight: Because the tax is to be levied throughout Scotland, the problems associated with fiscal flight will be minor, with any avoidance introduced through taxpayers removing their place of residence to England. Additionally it will ensure that residents benefiting from the services provided by Scotland's major towns and cities, many of who are suburban commuters into these centres will contribute to the provision of these services.

Costs: The costs of administration would be minimal for earned income by utilising the current PAYE system, though complications do arise in assessing total income. With the introduction of self-assessment in the 1990s, taxpayers with more complicated income streams are already required to fill in individual tax returns, so that this problem has been largely overcome necessitating a simple change in tax codes. In preparation for a 'Tartan Tax', the Inland Revenue also already have inputted a code for all Scottish income tax-payers, so minimising many of the costs of introducing a SST.

UK demand management: In discussing the problems associated with a local authority setting a rate of local income tax at variance with the approach of the UK Treasury, and thus upsetting their macroeconomic objectives, file Layfield Committee commented:

   It would be essential to reduce this potential variation to
   form a firm basis for local authority budgeting. One way
   would be for the local taxable income base to be estimated
   in advance and for local authorities to set their LIT rates
   and receive income from the Exchequer on this basis.
   Alterations could then be made in a subsequent year to
   adjust the estimated yield to the actual tax payments.
   (Layfield, 1976)

The report continues: 'Alternatively, the taxable capacity on which the area would receive income from the Exchequer could be regulated as part of the redistribute process of the block grant payments' (SPICE 1999). Any compromising of the demand management capacity of the UK government not only should be recognised as inevitable with devolution but also, as described above, there are considerable benefits which can accrue to Scotland through a devolved approach to fiscal policy.

11. Issues of legal competency 

Devolution saw the setting up of a Scottish Parliament with tax raising powers.

It would appear from the White Paper on devolution (3) that the Scottish Parliament has got the authority and legitimacy to alter the form of taxation for local authority spending, given that it has the responsibility for determining the form of local taxation.

However, according to SPICE:

   the legal position on whether the Parliament has the legal
   competency to legislate for the introduction of a specific
   local income tax is not so clear. Schedule 5 of the Scotland
   Act 1998 sets out reserved matters that are not within the
   legal competency of the Parliament.

   Reservations

   Section AI Fiscal, economic and monetary policy,
   including the issue and circulation of money, taxes and
   excise duties, government borrowing and lending, control
   over the UK public expenditure, the exchange rate and
   the Bank of England.

   Exception

   Local taxes to fund local authority expenditure (for
   example council tax and non-domestic rates).

      No further definition of 'local taxes' is given therefore
   this exception alone does not specifically rule out local
   income taxes as long as the revenue raised is used 'to
   fund local authority expenditure'.

The practical issues of administering a Scottish Service Tax have been dealt with already in the mechanisms for handling the changes to the Income Tax Acts necessitated by an implementation of the Scottish Parliament's tax varying power. The Scottish Service Tax would specifically and exclusively fund local authority expenditure. In our opinion, it is therefore legally competent for the Scottish Parliament to implement such a proposal under the terms of the Scotland Act.

12. Non-domestic tax

A criticism of the proposals to implement the Scottish Service Tax could be that even more of the local control over raising of local authority finance was being removed. This argument on democratic accountability necessitates the return of non-domestic tax policy and rate levels to local authority control in the immediate term and a recognition that expenditure decisions and priorities also are legitimate areas for the electorate to discriminate between parties. Local authorities already bill and collect non-domestic rates and this return of control therefore creates no problems in relation to the mechanisms required. The amount of finance raised in each area would be taken into account in the new distribution formula applied, which would be weighted much more towards tackling deprivation and meeting needs than is currently the case. Beyond this immediate change, it can be argued that the development of a betterment tax or other form of land value taxation proposal should begin forthwith, with serious consideration of exemptions being made available to small businesses with a low turnover and low profit level. A sensible and fair rebate scheme would assist the small business sector, and would be in keeping with the business start-up and aftercare programmes of the Executive, Scottish Enterprise and local government for small and new businesses (Danson et al, 2000), while the betterment tax concept would ensure that appropriate revenue is raised from larger enterprises and from land speculation activity.

13. A Scottish Service Tax: proposed levels

In the research conducted for this potential tax, a number of conditions were incorporated into the proposed Scottish Service Tax. In particular, it was proposed that it should: increase revenues beyond the levels of the Council Tax; provide exemptions for certain groups; meet the classical criteria for a local tax and be progressive.

There are a number of problems with the data at the level of Scotland required to establish the operation and rates of the Scottish Service Tax:

* There are no comprehensive figures available which combine all forms of income, disaggregated into income groups.

* The most recent reliable income statistics are only available for 1997-98.

* There are no comprehensive data on the incidence of Council Tax, disaggregated into income groups.

In the following analysis, data from the Inland Revenue (4) have been applied, and it has been assumed that (a) the distribution of Scottish unearned income relative to the UK as a whole is the same as the relative distribution of earned income; in effect Scots receive less in terms of both earned and unearned income, and so for both PAYE and taxed investment income; (b) within each income band, incomes are evenly distributed around the average; (c) the Treasury increases the Scottish Block Grant by the equivalent of the Council Tax Benefit foregone with the movement from Council Tax to the Scottish Service Tax. In 1997-98, this benefit appears to have amounted to 260m [pounds sterling] (5) and it would be unacceptable for the Treasury to remove the equivalent of Council Tax Benefit from the aggregate of public expenditure in Scotland just because a different way was being used to raise the finance for local authority services. Protecting this element of the Social Security system would have no adverse effects on the UK Exchequer, while the monies would continue to be dedicated to Scottish local authority expenditure.

It has been assumed that the threshold at which the Scottish Service would apply would be 10,000 [pounds sterling]; this would ensure that in effect all those existing on basic pensions alone or with modest occupational pensions, on state benefits, those paid less than 192 [pounds sterling] per week (in 1997-98) and students would be exempt, and where applicable they would have been released from paying the Council Tax.

In the current year, the direct costs of collecting Council Tax are of the order of 33.5m [pounds sterling] (6), with some 35m [pounds sterling] spent on administering Housing and Council Tax Benefit (7). These sums have been fairly stable in recent years, suggesting that they would continue at these rates in the near future.

The Inland Revenue in collecting the new tax would incur additional costs, and it is suggested that these would be met from the Scottish Budget centrally. According to estimates collated by Jackson (8), this would be a relatively small amount of 15m [pounds sterling] annualised, with perhaps the same again for companies. This would be deducted from the block grant estimate for the Council Tax Benefit equivalent, and would be renamed a 'deprivation or social exclusion grant', it would be calculated annually using the Council Tax Benefit assumptions and mechanisms. As explained above, it would be politically unacceptable and, from the arguments following from the fiscal federalism literature earlier, economically disadvantageous for the Treasury to retain the Benefit because of a change in the system of funding local authorities in Scotland.

Applying these assumptions, Table 8 shows that the Scottish Service Tax would have raised about 1.109bn [pounds sterling] in 1997-98. This compares with actual Council Tax revenue (excluding Council Tax Rebate grants, from the DSS of 260m [pounds sterling]) of 1.070bn [pounds sterling] (9), and suggests a gain of about 40m[pounds sterling] would have been realised. These figures are for illustration only given the lack of access to comprehensive statistics on Scottish income taxpayers. However, they demonstrate that the actual tax raised would be at least of the same order as Council Tax revenues, would be raised on grounds of ability-to-pay, and could be levied at marginally higher but not penalty rates to increase the income for local authorities.

Projecting forward to the following financial year, and applying a modest 4% wage growth in 1997/98-98/99, would have realised over 1.2bn [pounds sterling] in 1998-99; against an estimated Council Tax collection of 1.154bn [pounds sterling] (10) (assuming Council Tax Rebate grants from the DSS remain at 260m [pounds sterling]); an improvement of about 50m [pounds sterling]. It is interesting to note that the Treasury benefited from increased revenues in 1999 by 9%, due to higher than expected wage rises, bonus payments in the City and higher sales of drink and tobacco. This has continued and these budget surpluses suggest an availability of tax revenues to meet the modest Courted Tax Benefit obligation, while the advantages of an automatic stabiliser in the Scottish economy could be significant.

14. A Scottish Service Tax: impact

In general, the winners under the Scottish Service Tax would be those on low incomes. This would include those on basic pensions and benefits who would no longer face means testing to prove they were entitled to a reduction through Council Tax Benefit and those who failed to claim this benefit. The employed on low wages would be in an improved position, with most part-time workers and the bottom ten percent of full-time male workers and thirty percent of full-time female workers exempt altogether and almost all of those on wages below about 22,500 [pounds sterling] in 1997-98 would see a reduction in their contribution to the taxation necessary for local government. Further, even for those on high levels of Council Tax Benefit, there would be the advantage of not having to be means tested. The problem of relatively low proportions of the elderly claiming their rightful levels of this benefit would be overcome by the move to the Scottish Service Tax.

The losers would be higher income groups, with those more able to pay faced with greater increases. The importance of promoting social justice through the introduction of a more progressive tax is borne out by these changes. In 1997-98, those on the highest incomes, which overwhelmingly tend to be from unearned sources, would have marginal rates of i5% applied to their incomes over 70,000 [pounds sterling]. This would still mean the proportion of incomes paid in the new Scottish Service Tax would be only about 12.5% on incomes of 105,000-110,000 [pounds sterling], depending on circumstances. Together with the existing income tax rates, these suggest combined rates of tax of under 50% for all but those on incomes over 75,000 [pounds sterling], the top 0.2% of earners.

When combined with the highest current UK income tax rates of 40%, this suggests maximum marginal rates of 60%; this can be compared with the rates applied by the Conservative Government in 1987-88, i.e. eight years after their election victory, when taxable incomes over 41,200 [pounds sterling] were taxed at 60%. The savings to the individual from reduced Council Taxes would also be weighed against this.

The deepening spatial divide in Scotland, with the poor increasingly trapped in the cities and old industrial towns, would be addressed directly by the SST. The tax would redistribute incomes automatically away from commuting suburbs and prosperous towns, and towards the communities of the poor. This would reduce the need to load the rate support grant with the major job of redistributing resources between local government areas to address concentrations of poverty.

A further impact, which should be noted, refers to distribution in kind. What has been argued in this section is that some redistribution will occur due to the proposed changes in cash benefits and some redistribution will arise because of the proposed increases in expenditure at the local authority level. These increases in distribution in kind will also lead to benefits to higher income earners. This situation arises due to the fact that higher income earners have a higher take-up rate of public services than lower income earners. However, the' alternative to universal provision is means tested benefits, which is not a policy we would advocate.

15. Conclusions and recommendations

A replacement of the regressive Council Tax with a more progressive Scottish Service Tax is feasible and appears to be legally competent. Increased revenues could be raised by such a tax without a significant danger of fiscal flight, disincentive effects, or unacceptable costs. However, more detailed work is needed to evaluate the full impacts of such change in the taxation system, data inadequacies make more comprehensive analysis impossible here. A range of options is available to policymakers, with different exemptions having implications for the revenues raised and/or the marginal rates to be imposed.

To address the evolving situation with regard to social exclusion, poor housing, city region imbalances, and other problems introduced by local government reorganisation and fiscal flight from the poorer areas, a new needs assessment is required for local government. In particular, it can be argued strongly that the grant aided expenditure distributed to councils on the basis of the 'client group assessment' more closely reflects social inclusion than simple population aggregates.

To improve accountability and to improve the march between the local costs of providing services to businesses and the revenues raised from those businesses, a return to a local system of setting business rates should be explored.

As a series of first steps, there seems no reason why taxation of sporting estates should not be reintroduced, with the revenues being retained by the local councils involved. With the abolition of sporting rates in 1995, land in Scotland attracts no tax burden for the first time in a millennium (11) and this anomaly requires redressing.

Similarly, there is a need to ensure that rural communities are compensated for the additional costs imposed on them by the presence of second homes. It is suggested that such accommodation should continue to have a Council Tax imposed, with the local council setting the rate to be levied, and being relieved of the duty of having to reduce the Council Tax billed by 50%. The regulations in England were changed in this regard last year and there is no rationale for a continuation of the reduction, given the services provided for such dwellings.

The Scottish Service Tax has the potential to increase local authority expenditure with the positive consequences of increased employment improved local services and a raising of standards of education, health and housing across Scotland. The academic literature, based on experiences around the world, also points to the positive multiplier effects on the poorest communities, the regions and also the wider national and UK economies which can be realised by such expansion.

Critically, the Scottish Service Tax is progressive and re-distributive. It places income redistribution at the heart of service provision and delivery, and taxes citizens according to ability to pay. The Scottish Service Tax would raise the standard of life for many of the poorest in Scotland, particularly pensioners and the low paid. Their level of disposable income would be increased by the abolition of the standard Council Tax and its replacement by the Scottish Service Tax. The multiplier effects are enhanced by targeting financial assistance on low-income groups (McNicoll, 1992) with consequent expansionary effects on the Scottish and UK economies. Moving the tax and benefits system in Scotland towards the mainstream continental practice.

Table 1: Proportion of income taken in all taxes, UK, 1983-1999/2000

Income group              1983      1995   1999/2000

Poorest fifth              27%       39%     41%
Richest fifth              41%       36%     35%

Source: Economic Trends 1998, 2001

Table 2: Share of total income by the top and bottom 10% of income
groups, 1979 1995/96, 1998/99, Great Britain

Income group        1979 (%)   1995/96 (%)   1998/99 (%)

Bottom 10%             4.0        2.2          3.0
Top 10%               21         27           27
Bottom 50%            32         25           27
Top 50%               68         75           73

Source: DSS Households Below Average Income, 1979-1996/7 and 1998/99,
Government Statistical Service, 1998 and 2000

Table 3: Share of total income received by individuals below and above
various percentiles of the income distribution, Great Britain

Income group                           1994/5    1997/8    1998/9
Income Before Housing Costs            Share of total income (%)

Bottom 10% of the income distrubution   3.1       3.0       3.0
Bottom 20% of the income distrubution   7.9       7.6       7.5
Bottom 30% of the income distrubution    14        13        13
Bottom 40% of the income distrubution    20        20        19
Bottom 50% of the income distrubution    28        27        27
Top 50% of the income distribution       72        73        73
Top 40% of the income distribution       63        64        64
Top 30% of the income distribution       53        53        54
Top 20% of the income distribution       41        41        42
Top 10% of the income distribution       26        27        27

Source: Family Resources Survey: Table A3, Households Below Average
Income 1994/5 to 1998/9, DSS, 2000

Table 4: Percentage changes in real income between 1979 and 1995/96 by
decile group, Great Britain

Decile group     Income before housing costs  Income after housing costs

First (bottom)              12                      -9
Second                      18                       5
Third                       21                      12
Fourth                      24                      23
Fifth                       30                      31
Sixth                       34                      36
Seventh                     38                      41
Eighth                      41                      46
Ninth                       49                      54
Tenth (top)                 62                      70
Total population            42                      44

Source: DSS Households Below Average Income, 1979-1996/7, Government
Statistical Service, 1998.

Note: Some figures are of less certain accuracy due to sampling error or
the choice of equivalence scales

Table 5: Percentage changes in real income by decile group 1994/5-1998/9

Decile group     Income before housing costs  Income after housing costs

First (bottom)              (4)                     (17)
Second                       6                       6
Third                        7                       9
Fourth                       8                       9
Fifth                        8                       9
Sixth                        7                       9
Seventh                      8                       9
Eighth                       8                       9
Ninth                        9                      10
Tenth (top)                 12                      (13)
Total population
    (median)                 7                       9
    (mean)                  10                      12

Source: Family Resources Survey: Table A1, Households Below Average
Income 1994/5 to 1998/9, DSS, 2000

Table 6: Scottish public spending, millon [pounds sterling] current
prizes

Year                         1996-97   1997-98   1998-99

total budget                 14910     14772     15341
   nominal increase                     99.1     103.9
   index 1996-97=100          100       99.1     102.9

local authority support       5520      5384      5396
   nominal increase                     97.5     100.2
   index 1996-97=100          100       97.5      97.8

health                        4240      4356      4615
   nominal increase                    102.7     105.9
   index 1996-97=100          100      102.7     108.8

enterprise & lifelong         1799      1813      1806
learning
   nominal increase                    100.8      99.6
   index 1996-97=100          100      100.8     100.4

inflation 3% pa                         103      102.0

Year                          1999-00   2000-01   2001-02

total budget                  16213     16702     17443
   nominal increase           105.7     103.0     104.4
   index 1996-97=100          108.7     112.0     117.0

local authority support        5586      5679      5824
   nominal increase           103.5     101.7     102.6
   index 1996-97=100          101.2     102.9     105.5

health                         5076      5246      5558
   nominal increase           110.0     103.3     105.9
   index 1996-97=100          119.7     123.7     131.1

enterprise & lifelong          1856      1875      1986
learning
   nominal increase           102.8     101.0     105.9
   index 1996-97=100          103.2     104.2     110.4

inflation 3% pa               106.0     112.0     115.4

Source: Spending Plans for Scotland, Scottish Executive, 1999b

Table 7: Scottish public spending plans 2000-01 to 2003-04 (real terms)

Sector                          2000-01   2001-02   2002-03   2003-04

Total                           18334.3   19743.9   20912.8   22074.8
index 2000-01 =100                          107.7     114.1     120.4
local government                 5527.6    5707.2    5935.2    6030.7
index 2000-01 =100                          103.2     107.4     109.1
health                           5556.2    5836.8    6120.5    6368.7
index 2000-01 =100                          105.0     110.2     114.6
enterprise & lifelong learning   1926.4    2047.3    2047.0    2061.5
index 2000-01 =100                          106.3     106.3     107.0

Source: Making a Difference for Scotland: Spending Plans for Scotland
2001-02 to 2003-04, Scottish Executive, 2000b

Table 8: A Scottish Service Tax 1997-1998: Illustration of tax payable
by individuals and tax raised across Scotland

Range of total         No. of        Marginal   Average
income of  the         taxpayers     SST rate   SST paid by
individual             (thousands)              an individual
([pounds sterling]s)                            ([pounds sterling]s)

less than 5000          84             0              0
5000-9999              716             0              0
10000-14999            567             4.50%          112
15000-19999            420             5.50%          362
20000-24999            266             6.50%          662
25000-29999            140             7.50%          1012
30000-39999             92             8.50%          1625
40000-49999             42             9.50%          2525
50000-69999             20             10.00%         4000
70000-99999             22             15.00%         7250
over 100000              6             20.00%         12409
                      2375
                             Total revenue  1109469.75 [pounds sterling]

Range of total         SST paid               Income
income of  the         by this                paid in
individual             income                 SST (%)
([pounds sterling]s)   group
                       ([pounds sterling]s)

less than 5000              0                    0.00
5000-9999                   0                    0.00
10000-14999             63775                    0.90
15000-19999            152238                    2.10
20000-24999            176216                    2.90
25000-29999            141745                    3.70
30000-39999            149496                    4.60
40000-49999            106048                    5.60
50000-69999             79999                    6.70
70000-99999            159498                    8.50
over 100000             80454                   11.20

Revenues realised from SST rates illustrated

1997-1998
Scottish Service Tax     Revenue      1.109bn [pounds sterling]
Council Tax Collected    Revenue      1.070bn [pounds sterling]

1997-1998
Scottish Service Tax
Council Tax Collected      gain with new tax 39m [pounds sterling]

1998-1999
Scottish Service Tax     Revenue       1.200bn [pounds sterling]
Council Tax Collected    Anticipated   1.154bn [pounds sterling]

1998-1999
Scottish Service Tax
Council Tax Collected      gain with new tax 50m [pounds sterling]

Notes

(1.) Social Security 1999.

(2.) 'Layfield Committee of Enquiry into Local Government Finance', HMSO [CMND 6453], 1976

(3.) Scotland's Parliament, The Scottish Office, HMSO, [CMND 3658] July 1997.

(4.) Inland Revenue Statistics 1999.

(5.) Public Expendure Statistical Analyses 1999-2000, HM Treasury, March 1999.

(6.) Section 4(II), Rating Review: Estimates of Income and Expenditure 1999-2000, CIPFA, August 1999.

(7.) Table I, Benefits, Finance and Housing 1998/99, Accounts Commission for Scotland, 2000.

(8.) 'Tax varying powers: the watchdog that will not bark', in J McCarthy and D Newlands, 1999

(9.) Table 3, It Pays to Pay: Improving Council Tax Collection in Scotland, COSLA Scottish Executive Committee, 2000,

(10.) Scottish Executive Provisional Outturn figures for 1998-99, Scottish Local Government Financial Statistics 1997-98 Scottish Executive, March 2000.

(11.) Scotland: Land and Power. The Agenda for Land Reform, A Wightman Luath Press, 1999.

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Mike Danson works in the department of Economics & Enterprise, University of Paisley, Scotland.

Geoff Whittam works in the department of Economics & Enterprise, University of Paisley, Scotland.