James Frayne: The scale of the unpopularity of Council Tax is staggering

19 Apr

James Frayne is Director of Public First and author of Meet the People, a guide to moving public opinion.

Several years ago, before the surge of political and public interest in the environment, I struggled to explain to a visiting American political consultant why the Conservatives didn’t ‘go for’ the then-Labour Government on motoring taxes and charges. He couldn’t understand why, when so many people were being whacked by high fuel tax, car tax, parking charges, and all the rest, the Conservatives barely campaigned on it. Such is the clarity that outsiders sometimes bring. I couldn’t do any better than say, “they just don’t”.

I would similarly struggle to explain why the Conservatives don’t do more on Council Tax. My agency recently ran a comprehensive poll for the TaxPayers’ Alliance on Council tax – the most detailed recent poll on this subject I’m aware of. The scale of the unpopularity of the tax is staggering. In my mind, I can see some of you rolling your eyes: “of course it’s unpopular, who knew?!” What was interesting about this poll was that we looked not just at the top lines on Council Tax, but we also looked at Council Tax in relation to other taxes and also in the context of people’s views on local government more generally. From the standpoint of this poll, if anything, opposition to Council Tax looks more serious and more embedded.

In our poll, we found the following:

  • By 61 per cent to 15 per cent, people said they would oppose an above-inflation Council Tax increase this year; by 74 per cent to 16 per cent, people think Council Tax should be frozen or cut;
  • The Conservatives’ new base – the working class – are particularly hostile: by 64 per cent to 16 per cent, C2 voters said they opposed an above-inflation Council Tax increase, with DEs opposing it by 65 per cent to eight per cent; ABs opposed it by a much narrower margin of 51 per cent to 25 per cent; by 81-12, C2s favour a freeze or cut, compared to 74-11 for DEs and 68-23 for AB;
  • Thinking about the issues people will vote on in the council elections, Council Tax levels are third overall, sitting just below people’s perceptions of their local council’s general competence (36 per cent) and how much money they waste (32 per cent), which, of course, are related.

More interesting are the figures on Council Tax compared to other taxes:

  • Given a list of taxes that could go up in this Parliament – if the public had no choice but to accept such rises – just ten per cent of people said they thought Council Tax should rise. This compares to 29 per cent for Inheritance Tax, 27 per cent for Stamp Duty, 23 per cent for Income Tax, and 22 per cent for National Insurance Contributions and Vehicle Excise Duty;
  • In a series of questions about the relative fairness of a series of taxes, only the TV licence fee was viewed as less fair. 40 per cent of people said Council Tax was unfair, compared to 54 per cent saying that of the TV licence fee, 38 per cent Inheritance Tax, 34 per cent fuel tax, 25 per cent VAT, 24 per cent Income Tax, 21 per cent Vehicle Excise Duty, 18 per cent Capital Gains Tax, 17 per cent VAT, and 15 per cent Corporation Tax.

Council Tax is hugely visible given the way it’s levied and communicated. It constantly rises without apparently sufficient justification – people don’t think they see enough for it.

So, why don’t the Conservatives do more on Council Tax? To be fair, as the flare up over the prospect of replacing Council Tax with a property tax showed recently, many of the alternatives look worse. And there’s clearly no public agreement on what alternatives might work better. The TPA poll showed:

  • Given a list of options that might be introduced to replace Council Tax, the top pick was an increase in Income Tax (backed by 26 per cent), followed by “none of the above” (24 per cent) and then charging for the use of leisure facilities (15 per cent). There were relatively few differences between social groups or political affiliation. In other words, the public are split on alternatives;
  • Asked whether people support a new property tax being brought in to replace Council Tax, around 30 per cent each supported and opposed it;
  • Thinking more narrowly about alternatives to raising Council Tax, unsurprisingly people overwhelmingly prefer alternatives to new taxes or charges. The most popular options councils should take to keep Council Tax down were: limiting senior staff salaries (59 per cent); more actively pursuing debt collection (51 per cent); and merging teams between councils to improve efficiencies (39 per cent). While the figures were a little lower in terms of people’s views on the actual impact of these measures on keeping Council Tax down (a question we asked separately), they still chose them in this order;
  • Incidentally, asked about the number of exemptions, a third of people (32 per cent) said there should be no Council Tax exemptions and that everyone should pay something; 24 per cent said they should be kept the same and 12 per cent said they should be increased;

While it’s unquestionably complex, the Conservatives should think about the implications of what would happen if Labour got serious on this issue. Yes, they’re a bit late to all this, but Labour finally seem to have realised the power of Council Tax as a political weapon; they’ve begun attacking the Conservatives on the issue. Conservative activists might think this is a bit rich, but the public generally don’t mind political opportunism of this sort; generally, they will take what they can get from whatever political parties are standing at a given moment. The Conservatives should look to head off this potential problem and find a way to replace Council Tax, or at least find a structural, long-term alternative to endless rises.

Ryan Bourne: A message for Johnson and Sunak on tax rises. Not now. And not these.

2 Sep

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

How’s this for a false dichotomy? Last Saturday, Prospect asked: “Post-Covid, are taxes hikes essential to fund the future? Or should we abandon “deficit fetishism” and spend our way to prosperity?” [i.e. through borrowing]. I shouldn’t need to tell ConservativeHome readers that “spend to grow” and “spend to grow”—the only difference being how to finance it—are not an exhaustive set of fiscal policy options post-pandemic.

But that tweet, sadly, reflects conventional wisdom. You should take the pre-Budget briefing in the Sunday papers about Treasury desires for £20-30 billion in tax hikes through capital gains tax, corporation tax, fuel duty, an online sales tax and restrictions on pensions tax relief with a pinch of salt. Before every recent budget such stories have emerged, perhaps due to kite-flying or overexcited journalistic coverage of illustrative exercises in how one could raise revenues. One suspects the briefings may even be a political ploy—raising fears in the Tory base before Number Ten saves the day.

Yet there’s undoubtedly an unnerving regularity to them. Alongside a steady drumbeat from “One Nation” Tories and such organisations as the Resolution Foundation, the idea that large tax hikes will be desirable and necessary is taking hold, with Covid-19 apparently making this agenda more urgent.

We are told, as the kitchen sink of argumentation is thrown, that the pandemic itself proves the false economy of a “hollowed out” state after a decade of austerity. Or that the “levelling up” and the “inevitable” higher spending we will now want on health, welfare benefits, and higher public sector pay means tax hikes are needed. Or that the crisis necessitates urgent repair to the public finances, and that there’s simply nowhere left to cut spending.

None of these arguments, however, stand the test of reason. Countries that have dealt with the Coronavirus better include those (South Korea, Taiwan, Australia) with much lower tax-to-GDP ratios than the UK and much lower health spending too. Many with higher tax-to-GDP ratios (France, Belgium, Italy) have seen similarly shocking death tolls to us.

At best, any failure to deliver resources where needed reflects bad state priorities, not an impoverished public realm. Indeed, the story of a hollowed-out state at a time of the highest tax burden since the early 1980s, coupled with this international evidence, suggests ascribing blame to austerity for poor performance is both ahistorical and parochial.

The wisdom or otherwise of  the “levelling up” agenda, and how best to pay for it, is largely unrelated to the pandemic too. Actually, to the extent that Covid-19 affects the desirability of infrastructure and public service spending in the regions, it throws substantial doubt on the benefits of projects such as HS2 and other city and town revival plans.

Who knows what lasting impact the crisis will have on remote working, the location of activity, and favoured transport modes? One Nationers arguing that the virus proves the need to level up would have us believe that the pandemic’s effects are significant enough for a tax revolution, but insignificant enough to alter the desirability of any of their proposed spending. One might almost suggest motivated reasoning here.

In macroeconomic terms, the case for significant tax rises now is weaker still. The point of bridging support through furlough was to shelter businesses and workers from this unexpected shock. To pass the bill to the private sector now as it struggles back to life would strangle the recovery. And for what? Borrowing costs are low, and we have no idea yet whether and how much this crisis will leave a permanent budget hole once emergency spending stops and private sector activity revives. In fact, even borrowing to date has not been as high as initially feared.

Of course, the extra debt to deal with the crisis has to be paid somehow, eventually. But, as I argued here before, unusual shocks such as pandemics and wars primarily result in step-level debt-to-GDP increases rather than ongoing budget holes, because you stop spending on the immediate threat afterwards.

The implication is that modest consolidation over decades is optimal to account for the extra incurred debt, rather than adopting large tax increases to compensate over a Parliament. Economists call it “tax smoothing”—debt provides a safety valve to allow us to only modestly change spending or taxation over long periods to maintain incentives. Of course, if the Government thinks that, for political reasons, it must expand welfare benefits or health spending permanently, this would be a normative choice: there is nothing inevitable about sharp tax hikes.

Even if you think permanent scarring will occur, those taxes suggested to raise revenue seem bizarre choices today. The Government presumably wants us to be Covid-cautious still. Two ways of reducing risks would be to drive more rather than use public transport and to shop more online.

Aside from all the other downsides of raising fuel duty and introducing an online sales tax, to use the tax system to incentivise worsening virus transmission right now by making driving and online shopping more expensive seems bizarre.

Raising top capital gains tax rates to 40 or 45 per cent would simply be self-defeating from a revenue-raising perspective. Capital Gains Tax on many investments represents a double tax. The justification for having it at all is to deter people hiding income as capital gains.

But there’s a revenue-maximizing balance between this effect and deterring people from selling assets. The Coalition government introduced a top 28 per cent CGT rate precisely because HMRC research suggested this raised most revenue. Though it was then lowered to 20 per cent under George Osborne, raising it to 40 per cent plus would reduce revenue relative to a lower rate. We’d get less investment and entrepreneurship when we need it most too.

And then there’s the mooted corporation tax rise from 19 back to 24 per cent. Taxes on mobile capital will deter foreign investment just as Brexit is set to happen, as well as reducing the after-tax return on new domestic projects. Who will bear the costs? Not just “the wealthy,” as commonly asserted, but workers too: evidence suggests that they bear between 30 and 70 percent of the burden of taxes on corporations.

Not only is the tax rise call premature then, but the specific proposals don’t conform to the pandemic’s needs or Boris’s Johnson’s ambitions to create a high-wage economy. Covid-19 may permanently scar the public finances, sure. But as yet its full effects are unknown and there’s little cost to pausing to see. Anything else at this stage is using the crisis as a pretext for raising funds for hobby horses.

If the Prime Minister truly objects to this rationale as reported and understands the threat to the nascent recovery of sharp tax rises today, he should take this message to his Chancellor: on tax rises, not now and not these.

James Frayne: Big tax rises would make Tory campaigning impossible – in Red Wall seats as well as traditionally blue ones

1 Sep

James Frayne is Director of Public First and author of Meet the People, a guide to moving public opinion.

In my last column, I suggested that the best hope for the Conservatives in building an effective campaign infrastructure in newly-won Northern and Midlands seats was by developing a new business-led coalition in these places.

Many of these towns and small cities have no activist networks of any description, and new voters come from families that openly despised the Tories a generation ago. Practically the only truly culturally Conservative people here – in the North East, the far North West and South Yorkshire – are businesspeople. Businesspeople are relatively large in number and are trusted by their local communities; they would be a perfect launchpad for a new Conservative Party.

It’s early days, of course, and details are yet to emerge, but news of a major assault on British businesses via higher taxes would make such a campaign totally impossible to run. It would be a massive set back to Conservative plans to become a regional party.

If reports are to be believed, amongst other things, the Treasury is considering significantly raising Corporation Tax, as well as Capital Gains Tax (CGT) and taxes on pension payments.

“Corporation Tax” is badly named; it’s a tax on pretty much any significant business, not on “corporations” – but, while larger businesses have both the resources and the endless budget lines to be able to minimise profit and keep corporation tax bills down, SMEs just have to lump it.

And increases in CGT and pension payments will put fear into small businesses, because they ultimately allow business owners to take a lower income now in the hope and expectation of being able to enjoy pay-offs in the future – with their currently lower income supporting their ability to employ others.

All of this would be a bad idea politically at the best of times. But doing it now, just when businesses have been struggling very badly, would be unbelievably risky. It’s not just high street retailers that have bit badly hit; vast numbers of firms have been hit either directly by the logistical difficulties of running a business while social distancing is required, or by a collapse in the confidence of their customers, or both.

New, higher taxes would make it harder for businesses to earn a living, and they would also make redundancies more likely and the scrapping of recruitment plans much more likely. Many businesses will be looking to develop a decent financial cushion over the next year or two – with at least six months’ operating costs in the bank – having been scarred by how close they came during lockdown to oblivion.

They would not be able to generate such a cushion with higher taxes on their profits. (Some businesses are also complaining that this comes on top of Brexit – something else that they would sooner not manage).

Aren’t these businesspeople effectively locked-in to the Conservative Party? Where would businesses go to vote? It’s true to say there are many, many businesspeople across the Midlands and North that would be very unlikely to vote Labour – on the basis the Conservatives would pretty much always be better for them.

But we’re not talking about simply securing their votes for future elections; we’re talking about trying to energise businesses so that they became local recruiters, fundraisers and campaigners for the Party in places where there are no activists. They simply won’t do this if the Conservatives turn them over. Again, if the businesspeople of Rotherham, Doncaster, Barrow, Workington, Bishop Auckland and so on aren’t going to create a new Conservative campaign network, who on earth is going to do it?

While major tax rises on business would make the growth of new regional Conservative Party much more difficult, I strongly doubt it would retain any medium-term popularity with the public either. Public opinion polls always lag behind business polls – and these are showing extreme concern about the state of the economy.

The public would catch up when reality bit and growth slowed and redundancies rose; at that point, the public would see that raising taxes on employers doesn’t help anyone. So where should the Treasury look? There are already suggestions they are being strongly encouraged to look at spending cuts first; only when they have exhausted what’s reasonable morally, economically and politically should they turn towards tax rises.