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Annex F: Household Impact of a Local Income Tax
Overview
1. This Annex outlines the methodology used to estimate what the impact of introducing a local income tax ( LIT) would have been on Scottish households in 2007-08. This Annex also highlights the key results of the analysis.
Methodology
2. The assessment of the impact of a LIT was produced using a micro-simulation model of Scottish households 2. The model estimates Scottish household net income based on detailed information on the UK tax and benefit system. Using this information for 2007-08 we simulate household after tax income under a LIT of 3p levied on earned income for both the basic and higher rates. We compare this with household after tax income under the existing council tax regime.
3. In the modelling, we also estimate council tax benefit ( CTB) take-up rates from the FRS (Family Resource Survey). We estimate a take-up rate of 73%. This estimation approach is designed to capture the fact that in reality not all households fully take-up their council tax benefits.
Results
4. Our analysis estimates that in 2007-08, under a LIT, 67% of Scottish households would have experienced an increase in net income, 18% a reduction and 15% no change (no change is defined as a change in weekly income of less than 5 pence).
5. The estimated average weekly increase in income would have been £4.90.
Distribution of Scottish households by income deciles
6. For 2007-08, it is estimated that the average household in nine out of ten income deciles would have been better off under a LIT. Households in the top income decile are forecast to have experienced, on average, a decrease in net income. Table 1 shows the results across income deciles rounded to the nearest 10 pence and as a percentage of households' after tax income.
Table 1- Average weekly change in net income for each income decile 3
Income Decile | Bottom 10% | Decile 2 | Decile 3 | Decile 4 | Decile 5 | Decile 6 | Decile 7 | Decile 8 | Decile 9 | Top 10% |
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Average Weekly Change (£) | £6.70 | £6.80 | £8.10 | £8.80 | £10.30 | £9.70 | £6.90 | £6.00 | £0.90 | -£15.10 |
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Change as % of after tax income | 5.7% | 3.7% | 3.5% | 3.1% | 3.0% | 2.3% | 1.4% | 1.0% | 0.1% | -1.2% |
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7. It is important to note that the impact on individual households will vary according to their particular circumstances. Chart 1 presents the percentage of households within each income decile estimated to have experienced an increase, decrease or no change in net income.
Chart 1 - Percentage of households better and worse off in each income decile.
Distribution of Scottish household by family type
8. On average, in 2007-08, the majority of Scottish households across all major family types would have been better off under a LIT. Table 2 displays the estimated average weekly change in net income according to seven family types.
Table 2 - Average weekly change in net income by family type
Family Type | Single Non-Pensioner | Married without Children | Married with Children | One-Parent Families | Single Pensioners | Married Pensioners | Households comprising "Multiple Taxpayers"* |
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Average Weekly Change (£) | £3.30 | £3.40 | £3.10 | £5.40 | £7.30 | £13.80 | £2.50 |
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Change as % of after tax income | 1.1% | 0.5% | 0.5% | 1.7% | 3.3% | 3.4% | 0.4% |
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*Note: Households comprising "Multiple Taxpayers" (also known as Multiple Tax Units) involve a number of different household types, the main of which are - young adults living together, adult children living at home with parents and parent(s) living with their adult children.
9. In Chart 2, we present the percentage of households by family type estimated to have experienced an increase, decrease or no change in their net income as a result of the replacement of the council tax by a LIT.
Chart 2 - Percentage of households better and worse off in each family type
10. Table 3 below gives estimates for 2007-08 which further illustrate the impact on the groups shown in Table 2 above.
| Pay Less | No Change | Pay More |
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Single Non-Pensioner | 63% | 20% | 17% |
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Married without Children | 67% | 6% | 27% |
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Married with Children | 68% | 4% | 28% |
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One-Parent Families | 57% | 38% | 5% |
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Single Pensioners | 66% | 30% | 3% |
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Married Pensioners | 88% | 10% | 2% |
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Households comprising "Multiple Taxpayers" | 59% | 11% | 30% |
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Total Count | 67% | 15% | 18% |
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Summary
11. For 2007-08, we estimate that under a LIT:
- 67% of Scottish households would have been better off, 15% would have been no worse off and 18% would have been worse off;
- The average change in household net income would have been £4.90 per week; and
- Pensioners and One Parent Families are estimated to benefit from the greatest increase in net income.
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