Local income tax 'could lead young to break contract of welfare state'

THE SNP's plans to scrap council tax in favour of a local income tax will hit young people and could lead future generations to "break the contract" of the welfare state, a leading academic has warned.

David Bell, professor of economics at Stirling University, also warns that levying more tax on income could undermine efforts to encourage business growth in Scotland.

Writing in The Scotsman today, Prof Bell raises concerns about the impact the tax would have on the younger generation, which already has mounting debts and is struggling to get on the property ladder.

He claims the plans would put a severe strain on the assumption that younger workers will pay for the costs of the older generation, often referred to as the "intergenerational contract".

Prof Bell also claims there is international evidence that higher income taxes deter workers – particularly women – from supplying labour, and it is the employers who pick up the bill when income tax is increased.

He writes: "The switch from council tax to a local income tax will benefit the old at the expense of the young. It is the young who are the main contributors to income tax revenues.

"Many of the young are struggling with student debt, family responsibilities, have little chance of finding a defined-benefit pension and little hope of getting on the housing ladder.

"If the young see the tax system as being unfair, they may be minded to break this contract, which would be dangerous for economic stability."

His comments came as the SNP and Liberal Democrats continued talks on their shared aim of replacing the council tax with a local income tax.

John Swinney, the finance secretary, is expected to launch the Scottish Government's consultation on the issue today.

Speaking to The Scotsman last night, Prof Bell explained that, with the ageing population putting extra demands on local services, the make-up of the welfare state may change and the elderly may be forced to work longer or accept lower pensions.

In his article, he points out that, in 20 years, the number of pensioners will have increased by 50 per cent and the number aged 75 and over by 70 per cent.

He explained: "At some point younger people might say, 'We are not prepared to accept paying higher and higher taxes for older people'. Future generations may feel unwilling to pay towards the welfare state."

Prof Bell also said more information should be gathered on the effects of a local income tax on workers and firms before radically changing Scotland's tax structure.

In his article, he claims there is evidence from Denmark showing the burden of labour taxes may be shifted on to the employer.

"This means it is not employees who ultimately pay when income tax is increased, but employers pick up the costs rather than lose workers," he writes. "The result is a fall in profits. This is vitally important if we are striving to attract and retain businesses in Scotland and promote economic growth."

The SNP is committed to a local income tax set centrally at 3p. Lib Dems favour a local income tax which is set by local authorities.

Scottish Labour is opposed to the plans and leader Wendy Alexander has warned of "disastrous consequences" for pensioners and households with two or more earners.

David Lonsdale, assistant director CBI Scotland, said there were "serious misgivings" about local income tax, as there were fears it would be a costly administrative headache for Scottish firms and UK or international businesses operating in Scotland.

A Scottish Government spokesman said Prof Bell's comments "ignored the reality that the vast majority of households will be better off under our proposals".

A KEY ISSUE AT THE BALLOT BAX

REFORM of local taxation was one of the key issues in the Holyrood election.

The SNP said it would scrap council tax and introduce a local tax system based on the ability to pay. The local tax, it claims, will be fairer and lower than what the vast majority of people pay in council tax.

A local income tax would work in much the same way as national income tax. The SNP proposal will set a rate of 3p on earned income. By taxing only the money you earn, the SNP says the proposals will not eat into the hard-earned savings of pensioners or lower-income families. It is claimed that more than 500,000 pensioners – those who at present pay no income tax – will pay nothing under the SNP's local tax system.

Critics argue the SNP's plans to scrap council tax are ill-conceived and a local income tax would present more red tape for Scottish firms, as well as international companies with operations north of the Border.