POLL TAX

 


 
 
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The poll tax was the popular term for the community charge which was introduced in Scotland in 1989 and in England and Wales in 1990. It was brought in as a replacement for the rating method of taxing domestic property which had been in existence since the Tudor period. The rating system was originally intended to raise money to provide relief for the poor, but  by the time of the reforms of the Thatcher government, rates had long since lost their original function of poor relief and were by then were used to help pay for local services. In the nineteenth century councils were granted the authority to levy property taxes or rates to pay for the services they provided. It was considered that property owners would be the main beneficiaries of these services and that therefore it was they that should be taxed. Rates are based on assessments of open market rental values of properties; that is how much money hypothetical tenants would pay to rent properties assuming that they continue to have their existing uses. Business and domestic properties were assigned rateable values based on these assessments. In general terms, the rateable value was the estimated annual rent of a property after maintenance and repair costs had been deducted and the rates payable on a property was determined by multiplying its rateable value by a coefficient known as the rate poundage. This was set by local authorities and was expressed in terms of the number of pence that had to be paid for each pound of rateable value. The poundage for residential properties was usually set at 18.5 pence less than for business premises, giving a form of domestic rate relief. This domestic element was introduced in the 1960’s in order to reduce the amounts payable by householders in comparison with the bills payable by business ratepayers. It was not possible to vary either the business or domestic poundage without increasing the other by the same amount.

Rates were a regressive form of taxation: although in general households with the highest incomes tended to live in more expensive homes which would have higher rental values and therefore paid more in rates than the less well off, they paid less as a percentage of their earnings than low income households.  In 1965 the Allen committee carried out an enquiry into the effects of domestic rates on household finances, it presented research demonstrating that rates were an extremely regressive tax, accounting for a greater amount of the earnings of poorer households than of wealthier families. The committee recommended that rate rebates should be provided in order to alleviate the effect of the tax on people of low income. Following the report of the committee, a system of rebates was brought in, and until 1988 they could pay up to 100% of a household’s total rates bill. In 1988 A maximum limit of 80% was placed on local tax rebates in accordance with provisions contained in the Social Security Act of 1986. By the time of the replacement of domestic rates by the community charge, roughly 25% of households obtained at least some rates rebate.

Although the introduction of rebates helped to reduce the rates burden on poorer families, high income households still paid a smaller percentage of their earnings in rates than lower income groups. Those in the highest earnings decile paid between two and three percent of their earnings in rates compared with the approximately 13.5% that would have been paid by people in the lowest decile before rebates are taken into account. This meant that low income households would have to pay at the least four times the amount as a proportion of their earnings as the richest people paid. With rebates, the percentage of income paid in rates by households in the lowest income decile went down from around 13.5% to nearly 4%. The percentage for the second decile was reduced from about 8.5% to almost 5%, and the third decile went from about 7% to 5%. These were the poorest households in terms of income and even after rebates they were still paying higher percentages than that paid by the richest households in the highest income decile who were only paying around 2% - 3%. The percentage of household income that had to be paid in rates showed a general decrease with increasing income. The effect of the rebates was to help the poorer households in that they were better off than before, but they did not alter the fundamental regressiveness of the rating system.

In the later decades of the twentieth century rates on domestic properties were abolished in England, Scotland and Wales and replaced by the community charge, more popularly known as the poll tax. This was introduced in Scotland in 1989 and in England and Wales in 1990.  The community charge was described as Margaret Thatcher’s flagship policy but it was to have an important role in bringing about the downfall of the Thatcher government. It was a flat rate tax in which everyone over 18 in the same authority paid the same amount regardless of income or the value of their homes. According to the government of the time the community charge wasn’t even a tax at all; it was a charge for services provided to people by their local councils and everyone was required to pay the same charges. 

Certain groups were exempt from the tax (e.g. diplomats, prisoners and religious communities) and there was a system of community charge benefits providing rebates of up to 80% of the total amount. This still meant that apart from exempt groups all taxpayers were required to pay at least 20 percent of the community charge.  There were also various transitional arrangements put in place to reduce the effect of changes in taxation levels on councils and on households. The community charge reduction scheme set limits on the amount of money that households would lose because of the change from local rates to the poll tax. In addition, in 1991 the tax was reduced by £140 per person, which was paid from central government funds raised by increasing vat from 15% to 17.5%.

The introduction of the community charge brought about a dramatic increase in the number of people who had to pay local taxes. Under the rating system only about half of the adult population were in direct receipt of rate bills. Out of thirty-five million people in England who were entitled to vote in local elections, only about eighteen million were responsible for paying rate bills. With the community charge, apart from exempt groups, all 35 million adults in England would be required to pay local taxes, although the rebate system still meant that some people would pay discounted amounts, as was the case with domestic rates from 1988 onwards. (In 1988 A maximum limit of 80% was placed on local tax rebates in accordance with provisions contained in the Social Security Act of 1986, and this restriction was extended to the community charge.) Unlike the domestic rates where only 18 million people were sent rate bills, community charge bills were delivered to all liable adults.

This extension of the tax base was in keeping with the government’s objective of increasing accountability in local government. It meant that everyone who was entitled to vote in local elections would have to pay local taxes. (See for example Paying for Local Government) The 1988 local government finance act that brought in the community charge also took business rates out of local authority control. Previously each local authority was able to set the business rate poundage for non domestic premises in the area, and they retained the receipts. In 1993 this system was replaced by a uniform business rate determined by central government which applied throughout the country. Local authorities collected the receipts and sent them to central government which redistributed them to councils on a per capita basis. Together with reforms to the system of central government grants this meant that any increases in local authority revenues would have to be raised from the community charge, for which the authority would be accountable to the local electorate.

The implementation of the poll tax resulted in higher bills than the Thatcher administration had predicted. In 1987 the government had said that the average amount of community charge payable would be just under £180 for each person, but in the first year of the tax in England the average per individual was nearly £360. With income support and transitional relief the amount went down to around £280. In England and Wales most authorities set community charges at higher levels in real terms than the average rate bills had been in the previous year, with the majority having increases of between £50 and £150 for each person. Households with single occupants were about twenty percent better off in real terms.  However two adult homes were worse off than before with average increases of about 25 percent. Household occupied by more than two adults had average increases in local taxation of just over 80 percent. However these figures would be adjusted by transitional relief allowances. Altogether about three times as many households were paying more under the new system of taxation as were paying less. There were also significant regional effects with around fifty percent of homes in the north and northwest paying more. In the south east the effect was less marked, but still more people lost money than gained from the change in taxation. The community charge was even more regressive than the rates system it was brought in to replace. For the richest people – those in the top decile of household income the poll tax accounted on average for only about two percent of earnings. But for the poorest, those in the bottom decile it accounted for nearly sixteen percent, about eight times as much. When the data is adjusted to take benefits into account the lowest decile paid about four percent and those in the third decile paid about six percent of household income, as compared with around two percent paid by households in the top decile. In general terms, the less well off households lost money and better off households gained money as a result of the change. Households earning £5,000 a year were nearly £70 a year worse off. However those earning between £10,000 and £13,000 a year were about £200 a year worse off due to the fact that they were above the threshold for community charge rebates. Households with incomes of between £30,000 and £50,000 gained over £200 per year and households earning in excess of £50,000 gained over £300 per year. Those living in the most expensive homes with high rateable values gained a great del from the change in the method of taxation. People  that under the previous system were  getting rate bills of around ten thousand pounds a year were now paying community charges of   hundreds of pounds.

Although the community charge was more regressive than domestic rates both methods of taxation had similar distributions with respect of percentage of earnings paid in tax at different income levels. Without  rebates, both systems showed a direct negative correlation between income and the percentage of income paid in local tax. The poorest ten percent of households paid the highest percentage of their incomes in tax, and the richest ten percent paid the lowest, and in between these extremes there was a consistent reduction in the proportion of earnings paid in tax as income increased. With rebates, the richest ten percent of households continued to pay the lowest proportion of their earnings in tax for both the rates and the community charge. The effect of rebates was to help the poorest households, mainly the lowest thirty percent in terms of income, although on average they still had to pay a higher proportion of their income in tax in both community charge and rates than the richest thirty percent of households. Apart from the poorest thirty percent, both taxes were consistently regressive even with rebates – with increasing income there was a lower proportion of earnings paid in tax.

The community charge was highly unpopular.  The announcement of the tax in was followed by sharp reductions in public support for the conservative party. There was widespread non-payment, anti-poll tax unions and poll tax riots.  Opposition to the tax was instrumental in bringing about the resignation of Margaret Thatcher. John Major replaced Thatcher as leader of the Tory party, and he pledged to abolish the poll tax, as had all the other candidates for leadership. In 1991 the government stated that the community charge would be abolished and in 1993 it was replaced by council tax.

 

 

 

 

 

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