Council tax and stamp duty are “unfair and unpopular” taxes that should be abolished, says the economist who devised the Covid furlough scheme.
Tim Leunig, who has advised a series of cabinet ministers, including Rishi Sunak during his prime ministership, said it was time for a new and radical approach that would axe the two taxes and replace them with proportional levies.
With figures across the political spectrum calling on the chancellor, Rachel Reeves, to think radically about fairer tax as she contemplates which tax increases to implement as part of her autumn budget, Leunig said there was no justification for retaining council tax.
He said that under the existing system, it was the case that “a terraced house in Burnley pays more than a mansion in Kensington”.
Council tax has come in for heavy criticism from economists because it is based on property prices in England 33 years ago.
The Institute for Fiscal Studies (IFS) recently ridiculed a system based on the value of homes “when Mikhail Gorbachev was president of the Soviet Union and Chesney Hawkes topped the charts with The One and Only”.
Privately, many politicians agree that it is outdated and that wealth is generally undertaxed, compared with people’s incomes.
The IFS has also described stamp duty, usually paid when someone buys a property for more than £250,000, as “one of the most economically damaging taxes levied by the government”. The levy has also been blamed for holding back growth by stopping people from moving to more appropriate homes.
In a paper for the centre-right Onward thinktank, Leunig proposes a radically different system in which council tax would be replaced with a levy on home values up to £500,000, which would go towards funding councils. It would be set at a level to raise the same revenue as the existing system.
A national annual levy would then be applied to the value of homes worth above £500,000 as a way of eventually replacing the revenue from stamp duty.
Leunig said the change would ensure that poorer areas with lower property values would then only pay for local services, while affluent areas with more expensive homes would contribute more towards the nation’s coffers. The new taxes would be paid by owners, not tenants.
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With Keir Starmer placing economic growth at the heart of his plans to revive public services after years of decline, Leunig said that a new approach to household taxation was needed because at present it undermines economic growth.
“Council tax and stamp duty are terrible taxes,” said Leunig, Onward’s chief economist. “They are unfair and unpopular, and both should be replaced with proportional property taxes. These proposals would make it easier and cheaper to move house, for a better job, or to be near family, as well as being fairer.
“It should not be the case that a terraced house in Burnley pays more than a mansion in Kensington – and it wouldn’t be under these proposals.”
His report describes council tax as a “particularly regressive mess”. A band D home in Blackpool, for example, pays £2,277 in council tax a year, while in Westminster, a band D home pays less than half that – £973.16 a year.
Stamp duty also has a clear impact on a householder’s willingness to move. In the south-east, homes valued below £250,000 sell every 11 years, while more expensive properties are sold only once a generation – every 26 or 27 years.
Under his proposed system, Leunig recommends a minimum payment of £800 for any property. An average rate of 0.44% would replace council tax income. The national rate, applied to a home’s value above £500,000, could be 0.54% for those worth between £500,000 and £1m, and 0.81% on any value above that.
He is the latest prominent figure to call for council tax reforms. Patrick Diamond, who worked for Tony Blair and Gordon Brown in Downing Street, wrote in the Observer earlier this year that there is an “overwhelming economic and ethical case” for Starmer to impose higher taxes on wealth, including a revaluation of council tax.