The Scottish Government unveiled plans for a local income tax of 3p on the pound yesterday to replace the Council Tax.
Finance Secretary John Swinney insisted that the new tax will be "fairer" than the Council Tax, which has risen by 60 per cent in Scotland in the last decade, with the "vast majority" of Scots finding themselves better or no worse off under the new tax.
"Only the top income decile will, on average, pay more," said Swinney. "The local income tax will benefit most those earning the least. Those earning the very least will see an average 5.7% weekly increase in their income."
The plans, part of a four-month public consultation until Friday 18 July, propose a tax free personal allowance that matches the UK personal allowance levels with exemptions for savings and investment income. The tax would be collected through a system "that complements the existing national system through Pay as You Earn (PAYE) and self-assessment." Not all homes would be exempt from taxation - a tax on second homes would be levied by local councils.
Pensioners and low-earners will be clear beneficiaries of the change. Looking at examples of how the Local Income Tax will work it appears that persons living alone stand to benefit from the new tax regime. For example, a single person on an income of £33,675 in a Band D Edinburgh property would pay £854 under the Local Income Tax, versus £1,169 Council Tax, saving £315. However, if that person lives with someone who is also earning a theoretical £33,675 the rate goes up to £1,708 for the household, an increase of £541.
The Government hopes to bring in the tax within the current term of the Scottish parliament, probably 2011/2012.
The announcement brought strong words from opposition MSPs and business leaders.
Wendy Alexander, Scottish Labour chief at Holyrood, attacked the SNP's consultation document as "ill-thought out and unworkable."
"This Scottish Jobs tax will hit the pay packets of every hardworking Scot. There is nothing fair about the super rich getting off Scot free. And nothing just about making hardworking Scots pay at least 15 per cent more in income tax than the rest of the UK."
Alexander suggested that tax shortfalls would mean the 3p cap on the pound would have to be broken and reiterated a common criticism that a local income tax would inflate property prices and make it harder for first time buyers to get a foot on the property ladder.
The Director of CBI Scotland, Mr Iain McMillan, was also critical, although he praised the Government's freezing of the Council Tax rates for the current year.
"Higher levels of income tax in Scotland will send the wrong message to people in England and overseas about Scotland's tax regime because Scotland's effective basic and higher rates of tax will be the highest in the UK. Moreover, it will tax earned income but not unearned income; it will leave untaxed resources expected to increase capital growth at the expense of income; it will hit income tax payers, who currently do not pay the Council Tax; and it is not even clear at this stage if Scottish Ministers are empowered to require her Majesty's Revenue and Customs and UK employers to assess and collect local taxes on their behalf."
Tavish Scott, the Shadow Finance Secretary for the Liberal Democrats in Holyrood, came to the defence of the consultation.
"Scrapping the unfair Council Tax and replacing it with a Local Income Tax is important to the Liberal Democrats. When some pensioners pay six times as much of their income in Council Tax as the richest people, you know that something has gone very wrong with fairness in Scotland.
"There are differences between the Liberal Democrats and the SNP on whether the rate should be set by government or local councils. These are the issues which need to be discussed if we are to build a parliamentary majority in favour of change and overcome the Labour and Tory supporters of Council Tax."