Tuesday, 4 January 2011

VAT is unavoidable

Happy New Year everyone and best wishes to you and your family for the coming twelve months. Unfortunately, I cannot remember a greater sense of foreboding about the coming year. It seems the Coalition have badly managed expectations at this point - so much so that I am fearful of at least a psychological double-dip - if not the real thing. It certainly seems to me that a rise in tax thresholds to £10,000 - already promised within the lifetime of the Coalition - should not only be brought forward in an attempt to stimulate growth, but the government's intentions actually increased to the level of the minimum wage - £11,400 - by the time of the next election. We small people live in hope.

VAT rises to 20% today as part of the Coalition's drive to reduce the deficit. I have not read his book - The Third Man - but I am told Peter Mandelson records that Alistair Darling twice proposed to Cabinet a rise in VAT to 19% to facilitate just such a reduction. Twice the measure was vetoed by Gordon Brown - the most indecisive and risk-averse Prime Minister in our history. Precisely why he took the easy way out and bailed out the bankers, socialising their losses and creating zombie banks. Our children and grandchildren will still be paying the bills in thirty years time - not the bankers and investors who made the profits. Zombie banks have a long half-life.

The significance here though, is that if Labour were still in power, I have no doubt that VAT would indeed be lower than today. One percent lower. That's a saving of around £78 per household per year. Or £1.50 per week according to the Nick Clegg VAT election calculation. Pretty pathetic really, when you start to read Labour's over-hyped reaction.

The reason VAT has been chosen is that it is the simplest, cheapest and most immediate tax to collect. Businesses up and down the country submit their quarterly VAT returns and payments without HMRC lifting a finger. Its exemptions - food, children's clothing, books, newspapers etc - bring a dose of progression to an otherwise uniform tax, whilst its nature - taxing consumption rather than income - means the consumer has at least some measure of choice about how much and on what they spend their money.

But there is one more reason, not often discussed, as to why VAT is a cleverly targeted choice of tax. For as long as I can remember, many of my neighbours and even several members of my extended family have regularly employed a whole range of professional domestic services - electricians, plumbers, cleaners, gardeners and so forth - every one of which has been paid in cash and usually without a receipt. They are all known by their first names and a mobile phone number. Never a surname or address in sight. They work diligently, at short notice and often engender good relationships with their customers. They are the black economy. Those who pay no taxes or contributions to a society on whom they depend for their livelihood. And VAT is one tax that even they cannot avoid.