Bob Piper poses the question as to how, exactly, the Lib Dem’s proposals to replace Council Tax with a Local Income Tax would actually work in practice.

If we’re to believe the Lib Dems - not a pastime I indulge in too often - then its all going to be simple and straightforward; your council sets its local tax rate and the Inland Revenue collects it directly from your wages without you even having to think about it. Add to that an as yet undefined governmental macguffin that the Lib Dems are calling ‘resource equalisation’ and everything will work out just fine, it’ll all be completely painless and you’ll even, supposedly, end up paying less - just so long as you’re an ‘average’ household whatever one of those might be.

Of course, life is rarely that simple, especially when it comes to taxation, and the Lib Dems have neglected to mention one or two minor ‘kinks’ in their plans which suggest that things aren’t going to be quite as pain-free as they’d like you to believe.

For starters, lets consider the impact of a local income tax on employers - look I know that’s kind of like sympathy for the devil coming from me but hear me out on this, remember its not the Inland Revenue who deducts tax from your pay packet, its actually your employer who does that and then pays the money over the Revenue.

Right now, give or take the sometimes weird and wonderful world of tax allowances, the tax system for employers is reasonably straightforward with only three rates of tax to deal with, which are the same for all employees. Bring in local income tax, though, and suddenly employers will have to deal with situations in which different employees are taxed at different rates according to where they live.

In an urban area with a decent - as in the sense of being extensive - transport network, like Sandwell, it won’t be unusual for even small to medium employers to have their staff spread across several local authority areas, all of which could have different rates of local income tax, making what is currently a fairly simple task of handling their payroll substantially more complicated. for large employers, such as Sandwell Council itself, the prospect of local income tax must be nightmarish as it could easily see them having to deal with upwards of 20-30 different tax rates due to employees commuting into the area to work not just from around the West Midlands conurbation but from the surrounding shire counties as well.

Vote Lib Dem and, if you’re an employer, your payroll handling is going to get far more complicated, bureaucratic and - bottom line time - expensive…

…and its not just the additional administrative costs you need to worry about, either. Most businesses with more than a couple of employees will use some sort of computer software to handle their payroll calculations. All that will have to be changed if local income tax is introduced and at the employer’s expense.

For businesses using ‘off-the-shelf’ payroll software its going to mean buying new software outright, no software company will give you a free upgrade to cover such fundamental changes in the tax system. Big companies and the big public sector employers such as councils and the NHS who use their own bespoke payroll systems will have to have them updated and, at least, partially re-written to cope with local income tax. In the case of the public sector this will be at the taxpayer’s expense - whoops, there goes your first local income tax rise - and all at what will certainly turn out to be an astronomical cost. Not just millions or even hundreds of millions but probably well into billions of pounds spent on changes to IT systems simply to enable employers to deduct local income tax from your wages, money which the ‘average household’ will end up paying for in higher shop prices and, of course, higher (local) taxes.

So that’s employers, and Joe Public, getting the shaft from the get-go but what about the councils themselves.

One of virtues of local property taxes, whether it was old system of rates or the current Council Tax, is that they’re relatively straightforward to budget for, calculate and collect. Property, but for a traveller caravan or two, tends to stay where it is. This means that councils have a pretty accurate idea of how many properties they have in their area and the proportion of these they can expect to be occupied at any given time, making it fairly straightforward both to budget for the amount of revenue that property taxes will bring in and set their tax levels accordingly.

People, by their very nature, are far more difficult to keep track of. People do thing like move house, change jobs, retire, have babies, get made redundant and whole host of other things which will affect their income and, therefore, the amount of money that councils can reasonably raise from a local income tax. The variability of revenues from income-based taxes makes it difficult, if not impossible, to predict reliably the amount of revenue such taxes will provide. This is equally true for national governments, but then national governments can always borrow an extra couple of billion, if necessary, to cover an unexpected shortfall in tax revenues. Local council’s can’t.

Bringing in local income tax will also affect cash flow into councils. Although there some affluent people who pay their whole council tax bill up front, and others who default and don’t pay anything until the court catches up with them, the vast majority of people will tend to pay their council tax monthly either by direct debit or using a payment book. This money is paid directly to the council and goes straight into its coffers, giving it a nice steady income stream throughout the year.

Move the Inland Revenue into the equation and things become very different.

Even if you’re part of the PAYE system and have tax deducted either weekly or monthly from your pay packet your employer will only actually pay that money over to the Inland Revenue quarterly, in arrears, with the result that there will be anything up to a three month lag in local income tax payments actually getting as far as the Inland Revenue. Factor in the time it will then take the Inland Revenue to divide up the money it receives, allocate it to the right council and then pay it over to them and, unless the Lib Dems are planning to change the way Income Tax is collected and administered in its entirety and at even more humongous expense, then its likely that local councils will be faced with a delay of anything up to six months between the tax being collected and it actually arriving in coffers.

This lag gets even worse when it comes to people who’re self employed and whose tax liabilities can only be calculated at the end of the financial year - and only after they’ve put in tax return, which can be anything up to 10 months afterwards. Without massive changes to the tax system as a whole, councils will be waiting anything from two years upwards for payments from the self-employed.

It’s not just the lag in payments that will hit councils either.

In major cities, particularly London, as well as in many coastal towns and rural areas, councils currently get some income from owners of second homes, commuter flats and holiday homes, income which will disappear completely under the local income tax system as the owners of these properties will pay their taxes elsewhere. This is not only economically divisive, as councis will still be expected to provide basic services such a refuse collection to these properties - even though they’ll provide no revenue to that council -, but also socially divisive as well. In many of the coastal towns and rural areas which are likely to be most affected by such anomalies in the system, the impact on the local housing market and local communities of people taking on second homes in the area is already a source of considerable tensions without it then transpiring that these people, due to the local income tax system, end up paying nothing towards the costs of local services, leaving local people to the foot the bill for the council services their properties get as well.

Second homes create yet another problem that the Lib Dems appear to have overlooked.

If someone lives in Sandwell, where the local income tax rate is 4%, but has a second home in North Wales, where the tax rate is only 3%, what is there to prevent them from registering the home in North Wales as their primary home and the place where they pay their taxes?

Unless the Lib Dems are planning to further inflate what would already be a monsterously bureaucratic system with complicated rules on residency or force people to declare exactly how much time they spend at each of their properties so their tax liabilities can be accurately calculated and apportioned, then people will work this loophole to their advantage - or at least the one’s who’re wealthy enough to own more than one property will.

Property-based taxes are also, as it happens, pretty difficult to avoid - you own the property, you pay the tax - after all a three bedroom semi is not the kind of thing that’s easily hidden from your local council. Ok, so it is possible to defraud the Council Tax system by claiming benefits and not declaring your income - the same is equally true of local income tax which can be avoided through the age old expedient of working ‘cash-in-hand’ - but otherwise its pretty difficult to ‘work’ the Council Tax system to reduce or avoid paying the amount you should be paying.

The same cannot be said for income-based taxes which are prone not only to illegal avoidance (not declaring income) but also a variety of forms of legal and semi-legal means of tax avoidance as well, so long as you’re wealthy enough to employ a good accountant to work the loopholes for you.

Tax is tax and no one likes paying it but the truth of the matter is that the greater someone’s ability to pay so the greater their ability to employ a personal tax advisor to find ways for them not to pay. For all the Lib Dems claims that the wealthy will pay more under the local income tax system, the reality is that while Mike Average in his three bed semi will still be paying full whack because he has no choice in the matter, Phil Richbastard in his £500k mansion up the road will have his accountant on the case and will probably ending paying much less than his fair share, if not less than poor old Mr Average.

I could easily go on with this to point out other flaws in the Lib Dems plans such as:

- what happens to councils in deprived areas who’ll face a double hit as a result of a local income tax system. Not only will such councils - and Sandwell is one of them - need to spend more on services related to poverty and deprivation such as care and other services but they will have, proportionately, less income as well due to having both fewer people in work and those people earning less than other areas. Of course, these councils could put up their tax rates to make up the shortfall - or hope that government will help out and adjust their revenue support grant - but only at the risk of the high earners they do have living and paying their taxes locally, upping sticks and moving on to a more affluent area where the local taxes are lower -

- what about families with grown-up children still living at home, which is increasingly the case due to the problems young people face in getting even a first foothold on the property ladder. Many such households will end up paying more, not less, under a local income tax system as soon as ‘junior’ gets himself (or herself) a job. Not the Lib Dems have ever mentioned this… -

No, I think there’s enough in this already for anyone with half a brain to work out that, for all the flaws of the present Council Tax system, replacing it with local income tax would be an utter nightmare and the kind of bureaucratic mess that would cost far more to put in place than it would actually bring in.

Far from being a fairer system of taxation, the Lib Dems local income tax system is nothing more than the ‘Poll Tax with Percentages’ - and if any Labour politicians happen to look in, then feel free to quote that last line as much as you like, I doubt even Alistair could come up with anything better.