Replace council tax with 1% property levy - NIESR
Ashley Seager
Guardian
Friday January 27, 2006

The government should scrap council tax and replace it with a 1% tax on
the value of property, a leading thinktank proposes. Releasing its
latest quarterly economic forecasts, the National Institute of Economic
and Social Research, admitted that its idea would hit owners of
expensive properties harder than a council tax would, but said this
would be fairer.

"The people most affected would be those who bought expensive properties
at the top of the market, such as the Blairs," said NIESR director
Martin Weale, referring to the large house the prime minister and his
wife bought in central London.

In 2004, it said, council tax yielded £20bn, whereas a 1% tax on
property values would yield about £30bn, allowing, for example, stamp
duty to be scrapped. Stamp duty inhibits the efficient use of housing by
discouraging trading, it said.

The tax would cost the owner of an average house in Britain, which is
worth about £160,000, £133 a month. Homeowners in the more expensive
parts of the country, such as London, would pay much more. A house worth
half a million pounds would cost its owner more than £400 a month. Mr
Weale said the tax could be phased in over 10 years to prevent
disruption to the housing market. If the government wanted to make the
tax hit rich people harder, it could be set at 4% of the property value
and then added on to the homeowner's annual income tax, he said. Thus
higher-rate tax payers would pay more than those on lower incomes.

The report acknowledged that the plan would hit retired people who live
in large houses and do not want to move. "On one hand, the point of the
tax is to encourage people to use housing more efficiently and thus to
use less [housing]. On the other, as the population ages, so the
political difficulties arising from housing tax reform are likely to
increase."

Sir Michael Lyons is carrying out a review for the government into local
government financing. Mr Weale said that while a property tax would make
good economic sense, a local income tax would be a better way of
financing local government expenditure.

He also said NIESR considered the housing market to be overvalued to the
tune of 20%, and a sharp fall in prices could not be ruled out, despite
the market's recent stabilisation. The market was supported by low
interest rates, both nominal ones set by the Bank - currently 4.5% - and
long-term interest rates, set in the bond market. Yields on government
debt hit a 50-year low last week.

Separately, Sir John Gieve, a civil servant who was recently appointed
as a Bank of England deputy governor, told a parliamentary committee
that he was encouraged by the fact that wage growth had remained tame,
despite last year's jump in oil prices, though the monetary policy
committee would have to keep an eye on gas prices which have surged in
recent weeks.

"The key issue around the oil price hike is: is the impact on consumer
prices a one-off, or is it getting embedded in expectations and wage
behaviour?" Analysts said his remarks might indicate that he would be
less inclined to raise interest rates than his predecessor Sir Andrew
Large had been.

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