Il n’y a que le provisoire qui dure (only the provisional lasts). This piece of French wisdom applies perfectly to the UK’s irrational and unfair council tax, an annual levy on residential property. Introduced in 1992, to replace the highly (and rightly) unpopular community charge, popularly known as the poll tax, it ameliorated, but did not eliminate, the gross defects of its unlamented predecessor. Since then it has ossified. Above all, no revaluation of properties has taken place since 1991. The case for reform has become absolutely overwhelming, as an excellent piece of research by the Resolution Foundation makes clear.

The most important feature of the council tax, apart from the ridiculous failure to revalue property, is that, instead of levying the tax on the value of each property, they are all placed in one of just eight bands. Furthermore, the top band is very broad indeed: any property worth more than £320,000 in 1991 is placed in the top band. Billionaires who live in Kensington pay the same tax as someone occupying a relatively modest property.

The council tax is, however, regressive on many more dimensions. The tax paid is the same within each of the broad bands. Because of the failure to revalue properties for 27 years, no account has been taken of the relatively dramatic increases in housing wealth in some parts of the country (notably in London). Furthermore, since property was (and is) more valuable on average in some parts of the country than in others, the tax rate is also necessarily higher in places with less valuable properties and vice versa. Most important of all, the tax rate rises far more slowly than the value of housing, across the bands. The tax was designed to be regressive from the start. And so it is.

A noteworthy result is that it is inter-generationally unfair. As the report notes, “the regressivity of the council tax system falls hardest on the young and especially on this generation of young adults, who are more likely than their predecessors to live in the lowest (most regressive) council tax bands . . . The result is that as a proportion of property value — and even more so as a proportion of property wealth given low home ownership among younger cohorts — council tax has become most generous to older households.”

It would be possible to improve the system by systematic and regular revaluations, together with the addition of many more bands at the top end, going all the way to £100m. Ideally, however, a far more radical reform should be made. Tax should be levied in proportion to value. Where reform would impose hardship on housing-rich, income-poor elderly households, one could capitalise the tax and then levy it upon death.

Where reform would impose hardship on housing-rich, income-poor elderly households, one could capitalise the tax and then levy it upon death

An obvious reason for a property tax is owner-occupiers enjoy an extremely lightly taxed implicit income. Furthermore, the UK will need to raise taxation in future to pay for essential services. There are strong efficiency, as well as distributional, arguments for taxing property: land cannot evade tax. Moreover, rises in the value of land are essentially unearned. There is no good reason for the windfall gains of the propertied to be less heavily taxed than the fruits of enterprise. Yet that is what happens. Indeed, the report demonstrates a broader point: the net wealth of households has doubled over the past generation in relation to gross domestic product; but the ratio of wealth taxes to GDP has stagnated.

The decision to reform council tax or, better, replace it with a new system, would raise some important issues. One is how to fit local authority taxation within what should ideally be a national system. The obvious answer would be to have a national system of tax that allows for local variation in rates. One of the advantages of such a reform is the taxation in cities like London would rise, encouraging people to move elsewhere.

Another issue is how to fit the reformed taxation of property into the development of housing. A heavy tax on the value of undeveloped land that has planning permission is also needed. It would be possible to turn the replacement of council tax into a tax on land value, as well. But that is less necessary, since the main determinant of differences in the price of housing is always the value of land. A final issue is how to relate reforms in council tax to reform of stamp duty on transactions. Ideally, it should be a replacement.

The case for the Labour party to embrace reform of council tax is obvious. But if the Conservatives want to convince the young that they are on their side, the argument for reform is also overwhelming. Council tax is an outdated mess. Reform it now.

martin.wolf@ft.com

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