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The truths they don't want you to read....

Wednesday, November 12, 2008

Local Income Tax - some numbers

I'm very grateful to Lewis MacAskill for asking some questions and to WhatDoTheyKnow.com for publishing the answers, so that we can make some informed comments.

Council tax currently yields £9.5m per annum (CnES annual report 2006/07 p9) and the detail is available on p35 of the report.

The Inland Revenue have apportioned tax yield by constituency (Table 3.15) for 2005/06, and estimate the income tax yield in the Western Isles is £28m per annum.

In my view, the use of different years and the errors in the estimates are negligible for the purposes I intend.

If Council Tax is abolished, and replaced by a 3% rate in the Western Isles there will be a shortfall of £8.6m per annum: £9.467m - (£28m x 3%) ≈ £8.6m.

Therefore for a Local Income Tax to be acceptable, Central Government will have to pledge to increase basic grant support by £8.6m which will have to come from cuts in other services or from other sources of income (i.e. taxation).

That doesn't necessarily make LIT A Bad Thing, but what it does emphasise is that there is a large sum to come from somewhere to bridge the gap and that abolishing Council Tax is not a painless matter.
Looking through the other data, there are some fascinating insights....
Mean (the 'average') self-employed income is £13,000 but the median (the number exactly halfway through a list sorted by value) is only £7,200. This clearly shows that the vast majority of self-employed people have very low taxable incomes, and a lot have very high taxable incomes*

This disparities in other income sources are nowhere near as large, implying that income distribution from other sources and total income is broadly the traditional 'bell-curve'.
* This can be distorted by reducing taxable income from self-employment with allowances for replacing equipment

I could point out that to replace Council Tax with LIT would require a tax rate of 33%, but that is so ridiculous that no-one would suggest that would happen. Would they?

10 comments:

Anonymous said...

it facinates me, Angus, that time after time when you give these accountancy-type pieces no-one from the SNP comments. Now, do you think that this is because they can't understand them, or because they know you are right?!

Anonymous said...

The figures quoted are at a time when Britain was booming. What will be the effect on the figures when:

a: Unemployment increases leading to less Income Tax being paid

b: More Council resources are required as people lose their houses through repossession and the requirement for social housing increases

c: More business go bust due to the banks increased intolerence of borrowing, leading to even less income tax being paid into the system

I do not understand how the Councils are going to make the figures add up in the current economic climate. Any ideas, anyone??

Anonymous said...

I'm a bit confused as to how you got to the shortfall being £8.6 million.

It lists there being 11,000 tax payers with an average wage of £17,500. That would give as a grand income tax contribution to the treatury of around £192,500,000 (17,500 * 11,000). 3% of that figure gives us £5,775,000 so to balance out the books either a figure of over £3 million would need to be provided or the Comhairle would have to use a LIT rate of 5p (if it could).

The actual figure would be more than that given personal allowances etc. but that gives us a good rough estimate. It would have been easier to use the overall yield but since the £28 million wasnt subdivded into the various tax brackets theres no sure way of getting a reliable figure.

LIT isn't a 3% tax on what people have already paid to the treasury its a 3% tax on their incomes as a whole. I suspect/ hope thats why your shortfall figure is a lot bigger than mine.

Anonymous said...

Sorry just to edit what I said earlier. If you were to try to include the personal allowance of last year in the calculations by using the basic rate (£5225) LIT would raise something like (11,000 * (17500-5225) * 0.03) £4,050,750 or around 7%. That would leave the shortfall at about £5.5 per annum.

It's hardly shocking when you consider that as a UK Parliamentary constituency the Western Isles has the fourth lowest average income behind Glasgow East, Glasgow North East and Glasgow South West.

So as long as the money is redistributed appropriately and the Scottish Government provides appropriate levels of funding LIT as a national tax policy should be viable.

Anonymous said...

Using the average income figure as a basis for any of these calculations is going to give a figure that is just plain wrong - especially when the median is £14k, £3.5k less than the 'average' income - so this means that 5500 of those taxpayers are earning less than or equal to £14,000 per year so if we take that half and do the two sums what do we get

1) (((17500-5225)*5500)*0.03)=£2,025,375
2) (((14000-5225)*5500)*0.03)=£1,447,875

So as you can see there is a difference between the two figures of £577,500 or half a million to round it down a wee bit so when we factor in that they are both being optimistic estimates given that a fair chunk of that 5500 are probably on the lower tax rate (assuming it still exists come LIT) then you can see how basing the figures that LIT will bring in on 'Average' wage figures is building on sand.

Without access to the raw data it is hard to get an accurate figure, but I feel it would be an exercise worth doing.

Anonymous said...

So in a way, these figures are good because it means that in the Western Isles our contribution will decrease which means our tax burden will decrease. The downside will be that we will have pretty crap Council Services.

Does that mean that some of these poor overpaid, overpensioned, bureaucrats working at the Whitehouse might end up out of a job and having to live in the real world.
I was anti LIT before I thought this one through.....

Anonymous said...

I wouldn't say mean wages were that useless. The way the data from the treausury is given does make it slightly more confusing though. In the fourth column it gives the total number of people as 11,000 but if you add up the people in the other two colums it comes to 13,000. Also the overall average income figure is higher than if you worked it out using the average income all of the first three columns Therefore I only focused on the last two columns.

Anyway to demonstrate that it is useful we'll make up an imaginary constituency of ten people, all of them convieniently in the medium income tax bracket.

1 - 3,000
2 - 4,000
3 - 5,000
4 - 6,000
5 - 7,000
6 - 8,000
7 - 9,000
8 - 10,000
9 - 11,000
10 - 12,000

I'm assuming that these figures are the full income before tax and that people's whose income is less than the personal allowance aren't included in the mean wage tally.

So immediately we discard the info of 1,2,3 and 4. That gives us 6 people with an average wage of £9,500. If we take £6,000 away from that we find its the same figure as if we found the average from adding up their taxable income.

So as long as the assumptions I've made are valid its perfectly ok to use the mean wage figure to work out a rough estimate irregardless of what the mean is.

Anonymous said...

Just a minor point chaps, personal allownace has not been £5,225 for a long time, it has recently changed from £5,435 to £6,035. Sorry tha accountant in me couldn't let it go past!

Anonymous said...

Lewis,

The point I was making is that regardless of how 'useful' you think sums made using average/mean wages the bottom line is that they are not accurate and never will be.

The trouble is that people start bouncing about numbers based on calculations usng averages/means and then there are recriminations when the harsh sums of reality don't match the rosy pictures painted by politicians and activists.

In the real world an 'average' has more chance of being wrong than right.

Let me illustrate without any assumptions or massaging of figures.

Lets have that list of 10 wages;

1 - 3,000
2 - 4,000
3 - 5,000
4 - 6,000
5 - 7,000
6 - 8,000
7 - 9,000
8 - 10,000
9 - 11,000
10 - 12,000

Now without any assumptions or massaging the average wage is £7,500 - which as you can see means that for a full half of the table - they earn less than the average wage. Fair enough I hear you say - half the table earns more than the average wage so it all balances out.

Well lets add in one more wage to our list.

1 - 3,000
2 - 4,000
3 - 5,000
4 - 6,000
5 - 7,000
6 - 8,000
7 - 9,000
8 - 10,000
9 - 11,000
10 - 12,000
11 - 50,000

One extra wage added in and what does the average become now? Well it is now £11,364. Which as you can see means that 9 out of the 11 wages earns below the 'average wage'. Which also means that any calculations done using the average from this set are basically going to be wrong in the real world.

Numbers are not reality - as the recent credit crunch caused in no small part by projected numbers not matching reality should illustrate.

Anonymous said...

Out of curiosity, are the figures from the Treasury average earned income or average taxable income? If it is the latter which is provided there would have to be an adjustment as (correct me if I'm wrong) income which is not earned is not included in LIT calculations.

This would mean that the shortfall is even greater.

Also, why should people with lower incomes pay less for exactly the same services as wealthier individuals? My own personal opinion is that the current council tax or (perhaps controversial :) ) a poll tax would be fairer and would more accurately reflect each individuals use of council services. There is no reason why someone earning £100,000 should pay more for a service than someone earning £15,000. I believe the correct term is price discrimination.

Now, I'm not sure what the population of the Western Isles is at the moment but if it were 25,000 , each person in the Isles would only pay a £400 charge to give the Comhairle a revenue of £10 million.