The government should scrap council tax and replace it with a 1% tax on the value of property, according to the National Institute of Economic and Social Research (NIESR).

In its latest quarterly economic forecasts, the NIESR has argued that a new 1% levy on property would generate more revenue than the existing council tax.  The NIESR said that in 2004 council tax raised £20bn whereas a 1% tax on property values would yield around £30bn.  This extra money would allow stamp duty to be scrapped which the think tank argue currently inhibits the efficient use of housing by discouraging trading.

The NIESR has admitted that the proposal would hit owners of expensive properties harder than the council tax does at present, but said the overall system would be fairer.  Furthermore, if the government wished to make the tax hit rich people more, a level of 4% could be set for higher-rate taxpayers which would  then be added on to the homeowner's annual income tax.

NIESR director Martin Weale commented: "The people most affected would be those who bought expensive properties at the top of the market, such as the Blairs."

However, the report also tacitly acknowledged that the plan would hit retired people who live in large houses and do not want to move.  "On one hand, the point of the tax is to encourage people to use housing more efficiently and thus to use less [housing]. On the other, as the population ages, so the political difficulties arising from housing tax reform are likely to increase."

Mr Weale said the tax could be phased in over 10 years to prevent disruption to the housing market which the NIESR consider to be currently overvalued by around 20% with a sharp fall in prices still possible.

Sir Michael Lyons is currently carrying out a review for the government into local government financing.