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.

VAT is progressive - IFS

We believe that increasing the standard VAT rate in the current system is mildly progressive when examined on a lifetime basis. The intuition for this is that, over a lifetime, poorer households spend a higher proportion of their (lifetime) income on goods that are zero or reduced rated in the current VAT system, such as food, children’s clothes and domestic fuel and power, and hence a lower proportion of their lifetime income on items that are subject to the standard VAT rate.


Looking over the lifetime as a whole, what matters is whether the lifetime-rich or the lifetime-poor see a larger share of their lifetime resources taken in VAT, and on that basis VAT is progressive because necessities (consumed disproportionately by the lifetime-poor) are typically subject to zero or reduced rates of VAT.


Thanks to LibDem Voice.

VAT

Its extraordinary how outraged the comment on increasing VAT to 20% becomes. Its £3 a week for the average person for heavens sake. It excludes food, children's shoes & clothing, books, newspapers and includes a reduced rate on heating bills. Just how outraged do you think you should appear? Yes its not as progressive as increasing income tax, but its a lot cheaper to collect (retailers & businesses do all the work) and its collected every quarter on the dot - or serious fines ensue.

The coalition's mistake was not increasing VAT, but not to use that increase for a specific purpose. It should have been used as a locally-based sales tax covering all local government expenditure. Amounts raised in VAT and those spent by local authorities (roads, transport, care services etc) are remarkably similar in this country - around £90bn - and a whole layer of local bureaucracy could be saved in the process. This involves valuing properties, calculating council tax, printing & sending demands, collecting & enforcing late payers, legal fees etc. I'm sure you get the picture.

Throughout the US a local sales tax is used to pay for local services. It enhances democracy because local people become interested when their money is on the line and it puts people at the centre of local government. After all, the only way to increase local government revenues under such a system, is to increase either businesses or consumers in your area. Not exactly a nimby's charter then, and rather responsive to demographic changes from immigration, no?