Is Northamptonshire Britain’s first banana republic? This once lovely county, much of it now a waste of wind turbines and warehouses, is close to bankruptcy. It must sack staff, freeze pay, close two-thirds of its libraries and stop all bus subsidies. It faces default on its statutory duty to public health, children in care and the elderly. While much of this is due to mismanagement, the National Audit Office says that 15 other counties, believed to include Somerset and Surrey, are in similar straits. Years of austerity are coming home to roost – and where least expected, among the rich shires. What is going on?

Local councils cannot do what central government can do, which is tax and borrow to meet need. Each year Whitehall spends more. It can tip money into the NHS and triple-lock pensions – good causes both – as well as vanity projects such as aircraft carriers, high-speed trains and nuclear power stations. Councils have no such discretion. Since 2010 their spending has shrunk by over a third, with central government grants slashed by as much as NHS spending has risen.

Ninety-five per cent of British taxation is controlled by the centre, against 60% in France and 50% in the US. Yet local spending must pick up the casualties of the welfare state – vulnerable children, elderly and infirm people. It must fund the day centres, youth clubs, care homes and visits to problem families. To do so, services that most modern communities expect from government must now be butchered, such as parks, libraries and museums. Local, not national, austerity is sending Britain back to pre-Victorian days.

The solution is swift and easy. The government should uncap local taxes, free local spending, and allow local people to pay for what they want. It was how local government ran, perfectly well, up to the early 1980s. In most other countries it is still regarded as a normal feature of democracy.

At present Britain’s meagre local revenue derives from a regressive household tax fixed on 1991 property valuations, which no government (except in Wales) has had the guts to revalue. Thus a billionaire’s flat in Knightsbridge costs just £1,421 a year, while a shop on the floor below can pay £244,000 in business rates. It is no surprise that the former goes to the council, and much of the latter is paid to central government. While this might be an extreme case, anyone wondering why high streets are in decline need look no further. Had council tax in Westminster risen in line with inflation since capping, its average property-owner would probably pay in the region of £8,000, and a multimillion-pound property many times that.

Council tax is absurdly regressive. The richest householder pays only three times the ​​poorest

Like so much of tax policy, this is not about money, but power. Starving local government of tax resources by refusing to let it raise local revenue has cost billions, some of which the Treasury has had to fund in grants. But this Treasury masochism is balanced by gaining ever more control. Thus, when councils began to raise revenue from uncapped parking charges and fines, the government won headlines by ordering that the money go only into road spending. Outside every closing care home is a road being resurfaced.

Now the cynicism has reached new depths. When a national outcry broke out over cuts to local adult care, the chancellor, Philip Hammond, in effect ordered councils to make a 3% increase in council tax, but only for adult care. When there was an outcry over police numbers, another 1% was allowed, just for police. Council tax is becoming just another central impost, like the nationalised business rates.

I wonder what Hammond would say if we all told him exactly how we wanted him to spend our money. He would howl like a spoilt child.

Council tax is absurdly regressive, which is why it is so hard to increase. The richest householder pays only three times the poorest. On any equitable basis it should be nearer 10 times. When Tory Westminster last year asked its top band-H payers – for houses valued at above £1m – if they would voluntarily pay double, 350 actually did so. The council leader, Nickie Aiken, openly called it a “mansion tax”. The amount raised, just £342,000, might be trivial, but it was a start that other councils have said they will imitate. Westminster had found a tax the rich are actually volunteering to pay.

“Whitehall really would not mind if council tax just melted away altogether, and councils were reduced to acting as agents of the centre,” says Tony Travers, the London School of Economics’ local finance expert, who has studied this fiscal evolution over the years. “They could be blamed if things go wrong, while central government could take the credit for what goes right.” On this basis, every local service would be specified, paid for and accounted by Whitehall officials. It would be like universal credit now.

According to Travers, this degree of centralised government is unparalleled in any major democracy. The growing economic imbalance between London and the rest of the country is now being matched by a democratic imbalance between centre and locality.

No government is likely to introduce a new local tax, but the present one could at least do what other democracies elsewhere do – and allow a wide range of local services to be supplied through local decision. As used to be the case, resources could be redistributed between rich and poor areas, as between rich and poor citizens.

Local tax should be uncapped and left free to do the job expected of it by parliament. If we must have banana republics, let’s at least vote for them.

• Simon Jenkins is a Guardian columnist