Scottish Labour

Reforming local taxation: SNP and Labour proposals assessed

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SNP vs LabourIn the past few weeks, both the SNP and Labour have revealed their proposals for reforming local taxation. While the SNP is proposing only modest tweaks to the existing Council Tax (a far cry from their previous pledges to scrap it), Labour is proposing a significant overhaul.

I, too, have undertaken some significant work in this field, with my proposals soon to be published in the British Tax Review. In the meantime, I’ve assessed both Labour and the SNP’s proposals against characteristics of good local taxation, as well as parties’ attempts to make local taxation, at least perceptively, “fair”.

Characteristics of good local taxation

Autonomous revenue streams

The rationale underpinning local government is that local decision-makers will sometimes make decisions that would not be made by central government. Divergence is the whole point of having local government. It therefore follows that in order to carry out those decisions, they should have at least some resources that are free from strings from central government.

Revenue expenditure by local government in Scotland is primarily funded from three sources: grants from central government; local taxation (Council Tax and Non-Domestic Rates); and sales, fees, and charges for services. Of these sources, grants from central government make-up by far the largest source of local authority income.

Central government grants come in both hypothecated and unhypothecated form. Hypothecated grants are grants that must be used for a specific purpose, while unhypothecated grants allow local authorities to decide how to spend the money. The “Concordat” between the Scottish Government and Scottish local authorities (acting through COSLA) was lauded for removing ring fencing from most of the central government grant.

However, Government was giving with one hand and taking-away with the other. The Concordat had a profound impact on the fiscal autonomy of local authorities, by requiring councils to freeze Council Tax at 2007-08 levels. Furthermore, though the Concordat removed specific ring fencing, the Scottish Executive (as it then was) sought to replace many of these controls with a package deal – local government agreed to deliver many of the Executive’s policies, including on class sizes, pre-school places, and police numbers.

Accountability

Local taxation greatly enhances local accountability, by compelling local authorities to justify its spending choices to the electors from whom they raise revenue. Where the levels of expenditure bear little correlation to levels of taxation, invariably, the link between decisions of voters and decisions of representatives will be weakened. Given that fiscal autonomy has been the central issue in consideration of further devolution –with accountability frequently cited as one of the main reasons for further such devolution. There is a logical inconsistency in; on the one hand, seeing fiscal autonomy as essential for the accountability of the Scottish Parliament and Government; but not so necessary where local government is concerned.

Fairness

One of the most frequent criticisms of the Council Tax in political discourse is that is it “unfair”. However, there appears to be little commonality as to what critics of the Council Tax consider to be “fair”.

Debates around local taxation have featured competing conceptions of what constitutes “fairness”. Margaret Thatcher considered the Rates to be grossly unfair. Her motivation for scrapping them is said to have been inspired by the plight of the “old ladies of Morningside living in six-bedroomed family houses who had no children at home and only had their bins emptied once a week.” Her solution to this was a poll tax. The rationale behind this poll tax was along the lines that as most people, regardless of the size of their properties or levels of income, consumed roughly the same amount of local services, they should all contribute equally to the provision of these services. Everyone paying equally for services consumed roughly equally was, in the mind of Thatcher, fair.

History recalls that large swathes of the population did not agree with Margaret Thatcher’s conception of fairness. Public discontent over the Community Charge was remarkable – inciting levels of public unrest seldom seen in British society. The source of their disquiet over the Community Charge was that it was, in their opinion, unfair. Under their conception of fairness, the charge was unfair because everyone paid the same, regardless of income – it took no account of individuals’ ability to pay.

Upon John Major’s accession to the Premiership, Michael Heseltine was appointed Secretary of the State for the Environment, with a special mandate to formulate a replacement for the Community Charge, and to do so quickly. The result was the Council Tax compromise. It is in part a tax on property insofar as the liability to charge varies in accordance with the value of the property you occupy. It is in part a poll tax because it doesn’t vary very much. And it is in small part an income tax insofar as the income level of the taxpayer is reflected in the availability of Council Tax Reduction (formerly Council Tax Benefit) to low earners.

Residence as a suitable basis for local taxation

If one of the primary justifications for local taxation is local accountability then taxation anywhere other than at the place of residence makes little sense. With the exception of elections to the City of London Corporation, and Business Improvement District (BID) referendums, voting franchises in the United Kingdom are based entirely upon individuals in their place of residence.

While taxation of income makes most sense in the place it is earned, and local taxation makes most sense at the location of residence, income appears to be an entirely unsuitable basis to tax at a local level. This leaves property taxes and consumption taxes as suitable potential candidates for local taxation.

Council Tax in the context of the tax system

It is a generally accepted principle of tax optimisation theory that efficient tax systems favour a broader base with a lower rate over a narrow base with higher rates. Property taxation is a useful tool for broadening the tax base. At present, a number of taxes on property presently exist in the UK. These include Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax, and Council Tax. However, with the exception of Council Tax, all of these taxes require some kind of transaction to take place. The Council Tax is, therefore, the only tax on static property presently in operation in the UK.

Furthermore, there is a considerable body of evidence that property taxes are amongst the most efficient taxes in existence. The OECD’s empirical research confirms that property taxes are, in general

more efficient than other types of taxes in that their impact on the allocation of resources in the economy is less adverse. This is because these taxes do not affect the decisions of economic agents to supply labour, to invest in human capital, to produce, invest and innovate to the same extent as some other taxes.

It follows from this that a tax on land alone (and not what’s built on it) is therefore even more efficient. As the amount of land is fixed, taxing it cannot affect supply. It is further arguable that taxing land alone creates additional economic efficiencies in encouraging efficient utilisation of land assets. However, there exist considerable difficulties in disaggregating the value of land from that which is built upon it, in particular where a considerable amount of time has elapsed from the point of development to the point of assessment. Furthermore, the value of land will inevitably be affected by the amenities and built environment surrounding it. It is perhaps unsurprising therefore that, notwithstanding the economic attractiveness of taxing land over property, the prevailing preference in international practice is for property taxes over land taxes.

Operation of the Council Tax at present

At present, every dwelling in Scotland is allocated into one of eight Council Tax bands. Councils decide what the tax bill will be for a “Band D” property, and then tax in all of the other bands is calculated by reference to a fixed ratio. This ratio is in the proportion 6:7:8:9:11:13:15:18 where Band A is 6, Band B is 7, and so on. So the Council Tax for a Band D property is 1.5 times the Council Tax for a Band A, while the Council Tax for a Band H is twice what is payable in respect of a Band D household. So the Council Tax is relatively flat in Bands A to D, and a bit more progressive for Bands E to H. A 25% discount is available for single occupants, and income-assessed reductions are available for low earners.

As can be seen above, 75% of all properties are in bands A to D. so for the overwhelming majority of Scottish households, there is very little difference in the amount of Council Tax you pay.

The SNP and Labour’s proposals

The SNP’s proposals for reforming the Council Tax are incredibly modest: slightly increase the multipliers for Bands E, F, G, and H, with no change to the lower bands. Despite the Local Tax Commission concluding that 57% of all properties are in the wrong band, the SNP do not plan to revalue properties, meaning the tax will still be based upon second-gear valuations from 1991.

By capping Council Tax increases at 3% per annum (presumably even if inflation is running ahead of that), the Scottish Government plans on tying local government to their preferred level of public service provision.

As proposals for reforming the Council Tax go, this is just about as conservative as it gets. Giving the impression that you’re making the tax more progressive while not actually changing anything for 75% of households smacks of cynical populism.

Labour’s proposals, by contrast, really are quite revolutionary, though some elements give the impression that the plan was worked out on the back of a fag packet. Under Labour’s plans, the system of bands would be scrapped altogether. A comprehensive revaluation would take place, and then (as I understand it) would be updated annually on the basis of local trends in property prices. The tax would then be calculated as follows: £450 + 0.35% of the first £180,000 of the property’s value; with any portion above £180,000 being taxable at 0.9%. Labour’s proposals also include a 3% annual cap, though it’s somewhat unclear what that 3% is actually of (The rate? The cap? Bills in cash terms?)

While it’s difficult to characterise Scottish Labour’s proposals as progressive, their proposal is a good deal more progressive than the status quo, and therefore also a good deal more progressive than the SNP’s.

There are other significant advantages to Scottish Labour’s proposals too. One key flaw in the Council Tax is that it isn’t buoyant – every year local authorities have to announce the level they’re setting the Council Tax at, because it doesn’t increase automatically with property prices. By contrast, the Chancellor of the Exchequer doesn’t have to announce increases to income tax levels every year because income tax is buoyant. Scottish Labour’s proposals have the virtue of buoyancy: in order for local authorities to keep up with inflation they won’t generally have to announce increases in rates.

Scottish Labour further proposes to give local authorities the power to levy a Tourism duty, which has the virtue of broadening the tax base further and diversifying councils’ revenue streams.

The key test for both proposals is the extent to which they make the hated Council Tax perceptively fairer. As the SNP’s proposals represent little more than a tweak to existing arrangements, the proposals do little to address the regressivity of the Council Tax. This is exacerbated further when we consider that 75% if properties are in Bands A to D, which won’t see any change to their multipliers at all.

Labour’s proposals, by contrast, create a slightly odd progression. The effect of the £450 floor is to make the tax regressive to property values up to £180,000 (albeit a good deal less regressive than the Council Tax), progressive from £180,000 up to £390,000, then the £3,000 cap causes the tax to regress thereafter. As can be seen above, Labour’s proposals also eradicate the sharp spikes in the tax burden that occur when a property is just above the threshold for a tax band.

Though Labour hasn’t produced revenue projections, my forthcoming article in the British Tax Review demonstrates how a proportionate system of Council Tax ratios raises more revenue than the status quo, though such projections are based upon tax bills as high as £5,500 for Band H properties. The fact that only properties valued above £300,000, which account for fewer than 10% of Scottish properties, will pay more than they do at present means that it is difficult to imagine that Labour’s proposals raise much additional revenue, if any.

Overall, Labour’s proposals for reforming local taxation are a good deal more progressive than the status quo and the SNP’s modest proposals. Though both parties seek to cap the size of the tax and annual rises, Labour is also proposing to give local government some additional sources of revenue – enhancing the autonomy of local government.

My own proposals for reforming local taxation will be published in the forthcoming issue of the British Tax Review, though I’ll be posting a sneak preview nearer the time. Stay tuned.

Sturgeon’s astonishingly risky EU intervention

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SturgeonThe EU referendum was always going to be a tightrope for Nicola Sturgeon. The risks are manifold: saying something that could ultimately be used against her in future Scottish independence referendum; drawing attention to some of the more unpleasant elements of the independence cause; and appearing to stand shoulder-to-shoulder with the Prime Minister, having previously denounced (and demolished) Labour for doing the same. I always therefore assumed that come the independence referendum Sturgeon, being more risk-averse than her predecessor, would restate her position that she favours British membership of the EU and then stay out of the debate. However, on Monday she delivered a most astonishing speech on Britain’s membership of the European Union – exposing herself to risks on all three fronts identified above, and more.

She acknowledged, though did not dismiss, the inconsistencies in arguing for a “pooling of sovereignty” with other EU Member States while not applying that same logic mutatis mutandis to the United Kingdom. The submission that “there is nothing at all contradictory about independent nations recognising their interdependence” is so packed with contradiction that only a true-believer could fail to spot it.

In the independence referendum the SNP hoped that we would suspend our better judgement and vote with our hearts, rather than our heads – and dismissed the pleas of those who urged us that we do opposite as cynical and negative. The irony of now making the instrumental case for a political union while dismissing the more emotive, nationalistic case for Brexit is clearly lost on her.

Sturgeon made the case for the EU imposing certain certain social standards on the UK (purportedly) against its will:

“In 2013 the UK only increased the minimum entitlement to parental leave as a direct result of European directives. There are other cases – for example minimum annual leave, and conditions for agency workers – where the UK complies with the European minimum and no more. Which begs the question without European regulations would minimum standards be meet the regulation at all?” [sic]

In other words, it’s OK for the European Union to impose laws on the UK that the UK has not voted for, but it’s not OK for the United Kingdom to impose laws on Scotland that Scotland has not voted for. I wrote previously about how the left was generally fine with surrendering control over the levers of power provided the levers are nonetheless pulled in a manner of their pleasing (such as the internationalisation of human rights). However, pulling the levers of power is the core purpose of the SNP and the independence movement. The SNP didn’t give up its pursuit of independence when Gordon Brown was Prime Minister even though Brown clearly enjoyed overwhelming support in Scotland. The fact that the levers of power were being pulled in a manner Scotland chose mattered not one jot to the SNP – what mattered most was who was pulling the levers of power, not how they are pulled – which is where the contradiction in Sturgeon’s position lies.

She continues:

“In fact, when you consider some of the UK Government’s other policies – for example its attempt to further weaken trade union rights – we should be thankful that the European Union sets some basic social standards.”

The 2015 General Election was remarkable for a number of reasons, though one result seldom commented upon is the fact that right-leaning parties won a majority of the vote for the first time since the war (though it was close in the 1950s). For Sturgeon to claim that we Britons should be thankful to the EU for imposing policies upon us that the people of the UK voted against at the last election, while simultaneously crying foul every time the UK pursues policies which “the people of Scotland did not vote for” is bare-faced hypocrisy, and impossible to credibly sustain. The very nature of a political community is one in which individuals and groups subjugate their own desires to the will of the community. The fact that Sturgeon is apparently OK with the principle of laws being imposed against a nation’s democratic will provided those laws come from Brussels and not London, is a conflict that cannot be resolved without exposing some fairly unpleasant truths about some aspects of Scottish nationalism.

Sturgeon further claimed that

“[t]he European Union is good for the prosperity and wellbeing of individuals, families and communities across our country.”

This is a questionable assertion, but whatever the truth of it in the UK, it is most certainly not the case in Greece, Ireland, Portugal, Spain, or Italy – where the EU has imposed swingeing austerity on these nations, usually against their will, in order to protect (primarily the financial industries of) Germany and France from contagion. How can a party that claims to be “anti-austerity” be so enthusiastically supportive of political institutions that have imposed the harshest austerity Europe has seen since the war? Sturgeon’s narrow, self-interested, view of the beneficiaries of the European Union doesn’t square with her support for a social Europe. I would also ask this question of Jeremy Corbyn and John McDonnell, though their support for the EU is, at least, considerably more tepid. This is a contradiction that Sturgeon conveniently glossed over in her speech.

Sturgeon tail-ended her extraordinary foray into the EU referendum debate with an interview with Channel 4 News. Sturgeon was asked what her supporters might think about her fighting on the same side of a referendum as the Prime Minister. She replied

“[i]f he can appeal to those who agree with him, I’ll appeal to those more inclined to my progressive social democratic view of the European Union – if that maximises the vote to stay in, all the better!”

Substitute “United Kingdom” for “European Union” and that line could as easily have been uttered by Jim Murphy or Johann Lamont.

None of this is explosive, though it certainly provides the SNP’s critics (for what they’re worth) with some ammunition. What’s most remarkable is that such a risky speech is entirely out of character for cautious Nicola Sturgeon. Plenty of other political leaders who have won landslide victories became over-confident. Ultimately, it was their over-confidence that was their undoing.

The Problem of Perception for Scottish Labour

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The Scottish Labour Party has an image problem. That is not to say that the root of the problem is our image. At this moment in time I cannot begin to count the various problems that the Scottish Labour Party has, but one of them is undoubtedly our image – how we are perceived by the people we want to vote for us.

Perceptions are difficult to manage in politics, because they can often have little grounding in reality. This, you might think, makes it easy to change people’s perceptions, by simply directing their attention towards reality. However, in politics, perceptions are far more difficult to change than reality.

The perception that we are fiscally profligate hurt Labour badly in England. No matter what the two Eds said or did to demonstrate their prudence, their long association with Gordon Brown’s Treasury meant that they were perceived by the electorate as untrustworthy with the public finances.

In Scotland, we are perceived rather differently. Lord Ashcroft held a focus group in Paisley, and he discerned three problems perceived by voters. The first, is that we are conservative – and virtually indistinguishable from the Tories. The second, is that we are a “branch office” of the Labour Party in London. The third, is that we “betrayed” our supporters by joining with the Conservatives to promote a homogenous establishment defence of the Union.

These perceptions are all, in part, rooted in reality. However, changing the reality does not necessarily change the perception. Once a perception has been formed in people’s minds about a party it is extremely difficult to exculpate it. We have witnessed the difficulties the Conservatives have had dispelling the ghost of Thatcherism. Labour may find it difficult to shake the perceptions that have formed in the public’s minds. Those trained in philosophy or jurisprudence will be familiar with the difficulties in proving a negative. In this instance, that we are not what they perceive us to be.

A new approach to communications

We are bad communicators. This is not to criticise the staff who work in communications. The fault is a systematic one.

Fundamentally, communications staff ought not be necessary. Communication is a core-skill of the politician. However, communication must not be one-way. While, of course, it is a tremendous advantage to have the oratorical skills of Michael Foot or a caustic wit like William Hague – but one of the key failings of these great communicators was that they were transmitters, rather than receivers. Over the years I have known many Labour politicians who are brilliantly attuned to the public mood, but they have been sidelined either through our recent electoral misfortunes, or a succession of leaders who have failed to appreciate the value of such a skill.

As a tarnished brand, and an unpopular product, the party should look to business practices for solutions to our present woes. In recent years, the Scottish Labour Party’s approach to political communication has been more akin to 1950s methods of selling products than modern methods of marketing. Prior to the development of more consumer-oriented marketing techniques, the predominant approach to driving profits was selling and promoting goods and services – the “hard sell” –  rather than determining new customer desires. In effect, selling people something they don’t really want to buy. By contrast, consumer-oriented marketing methods feedback from consumers and attempt to create a product that customers actually want to buy.

It was this approach to political marketing that the late Philip, later Lord, Gould brought to the modernisation of the Labour Party in the late 80s and 90s. It is this responsiveness to public mood that has been sorely lacking in the Scottish Labour Party since the inception of devolution.

For too long we have relied upon opinion polling and canvass returns to gauge the public mood. These have consistently let us down in recent years. In 2011 we fought an offensive election – targeting gains like Livingston and Stirling – when, we should have been defending seats like Shettleston and Cunninghame South. Up until a few months ago, Labour’s key-seat list in Scotland comprised of Argyll and Bute; Dumfriesshire, Clydesdale, and Tweeddale; Dundee East; East Dunbartonshire; and Edinburgh West – our average share in those five seats was less than 15%. These seats were targeted because of both local polling and uniform national swings.

We saw in this election the dangers of relying on opinion polling (and those of us who are political punters paid the price!) Outside of an election cycle there is a tendency for voters to simply provide the answer that they always do – which would explain how Labour’s massive opinion poll leads in the run up to the 2011 election translated into a massive defeat. We failed to detect that “our voters” are no longer “our voters” until it was too late to stem the flow away from us.

Labour needs to make better use of focus groups and modern marketing techniques in order to adequately craft our message to suit the public mood. This might sound frightfully Mandelsonian to some, but it does not mean simply telling the people what they want to hear. In many areas of policy, the public mood appears to be far closer to our core values than we are. If Labour values are what the public wants, then it is utterly incredulous that we appear hesitant to embody them.

I do not believe that our product is fundamentally flawed, we just need to stop trying to flog the people’s last year’s model.

A new visual identity

Aschroft’s focus group discerned that the Scottish Labour Party is perceived as being a mere ‘branch office’ of the Labour Party in London. When even our leader shares that view, there’s bound to be a lot of truth in it. Jim Murphy, at least, recognised that that is a perception that needs to change, and made some attempts to dispel it.

Visual identity is hugely important. Tarnished brands frequently seek to change perceptions of themselves by updating their visual identity. McDonald’s responded to the perception of tackiness by ditching red and yellow in favour of earth tones in their restaurants. BP sought to bolster their environmental credentials by updating their logo. David Cameron did nearly the exact same thing when he changed the Conservative Party’s branding in 2006. And Peter Mandelson, too, sought to renew Labour’s brand by ditching the red flag in favour of the rose in the late 80s.

As a tarnished brand, the party’s visual identity needs to be renewed – urgently – to distinguish ourselves from the failings of the past, as well as the UK Labour Party of which we are perceived as being a branch.

This involves more than merely throwing a few saltires around the place. Name, shape, and colour should all be up for debate.

Of particular focus should be the name. It is arguable that the name ‘Scottish Labour’ evinces a sense that we are the Scottish bit of the Labour Party, rather than being the Labour Party of Scotland. The starting point for any rebrand ought to be the question ‘what would we call ourselves if we were starting from scratch?’ The answer, I suspect, would be ‘Labour’.

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