VAT should be cut even further


10:15 am - April 22nd 2009

by Paul Sagar    


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In 1990, tens of thousands of angry Britons protested against the Poll Tax. Their objection was simple: it is wrong to levy a flat tax on all individuals regardless of income. That a worker barely scraping together £10,000 a year should pay the same contribution as a millionaire was so manifestly wrong that men and women took to the streets – and in some cases, rioted – to voice their discontent.

Yet the Thatcher government which proposed the Poll Tax also oversaw drastic increases in another tax, one which is arguably as regressive as the Poll Tax: the Value Added Tax (VAT). The Tories knew when they increased VAT rates that it affects the poor more than the rich, deliberately employing it as an alternative to progressive taxation.

Labour’s record on VAT thus looks – compared to its record on many other things – comparatively good. The decision to reinstate a reduced rate of 5% in 2001 was arguably an act of progressive taxation. The decision to cut the standard rate last December was also a progressive move – whatever Labour’s motives for the cut.

Yet this aspect of the VAT cut has hardly been publicised.

The rightwing media has generally lambasted it as a “waste of money” . David Cameron has gleefully added to this by citing comments from various European finance ministers and leaders criticising the VAT cut. Yet the leftwing media’s reply has broadly been to back the cut on grounds of being part of a wider economic stimulus – and here Brown has employed his “an extra £20 in each person’s pocket” soundbite to good effect.

But what about the point that the VAT cut is desirable because it represents a reduction in a highly regressive tax regime that disproportionately affects the poor? Certainly the point has been made, for example over at Socialist Unity. But if you stick terms like “VAT cut progressive” into Google News, it’s very hard to find discussion of the issue in “mainstream” news sources.

What I’m trying to say here is not that the VAT cut’s importance for progressive taxation hasn’t been discussed, just that it certainly hasn’t been at anything like the forefront of reaction by politicians or the media. Which is a great shame.

Firstly, because it represents an increasingly missed opportunity for all those who not only believe regressive taxation is morally objectionable, but who also believe the present situation – namely, a broad acceptance of VAT by people who would and did revolt against the Poll Tax – will only change if there is open public debate about the vices and virtues of different tax regimes.

Secondly, because Labour had a genuine opportunity to take action on behalf of the poor, and in turn to publicly profess a commitment to helping the most hard-up in society. Labour could have revealed the Tories as the party of the rich, for the rich. They could have presented themselves as something different.

Except that such a course of action would require the Labour government of the past 10 years to have been something different from its Tory predecessor, at least in any substantial sense. Given that this is the Premiership of the 10p Tax, the silence from Labour on the merits of a VAT cut being anything more than a consumer stimulus may in fact speak volumes.

Related
Cut in VAT ‘boosts retail sales’

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About the author
Paul Sagar is a post-graduate student at the University of London and blogs at Bad Conscience.
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Story Filed Under: Blog ,Economy ,Labour party ,Media ,Westminster

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Reader comments


All for cutting when we’ve paid off the debt.

You’d have to defy EU regulations to cut it below 15%.
…but point taken about it being one of the worst taxes around. As far as I know, it also has the largest welfare loss proportionate to its size.

3. Kardinal Birkutzki

I think you left out something; presumably you mean “in my opinion it is wrong….”

I remember so vividly the claptrap at the time complaining of how we should have an economy based on the continental social-democratic model.

I spent the 90s living in Frankfurt, Germany and guess what? Lo and behold, local taxes, the equivalent of the poll tax, were paid by every single working person at exactly the same rate, whatever their income or net worth. Because if I get my bin emptied or my street swept I have to pay exactly the same cost; similarly if I go and buy any service or product in the ecomomy they do not ask my neighbour to subsidise it. That is exacly how people portrayed it to me.

That does not, of course, mean that the good citizens of Frankfurt were right; it is a value judgement and not “manifestly” right or wrong.

However, rioting on the street to blackmail others into paying for your services – now, that IS manifesly wrong………………..

This is just wrong, though. The poorest spend most of their money on rent (no VAT), food (no VAT), clothing their kids (no VAT), health essentials (no VAT), heating and lighting their homes (no VAT cut), and transport to and from their jobs if they have them (no VAT cut).

For those on index-linked benefits, even their notional gain from the VAT cut will be wiped out by the fact that it will be uprated in accordance with a lower rate of inflation. The £20 in everyone’s pocket soundbite has been hopelessly ineffective, because most people haven’t seen those twenty pounds, so just see it as spin.

I agree with this. I’d love the 15% rate to be made permanent, though I doubt it will happen.

I thought the government spun the VAT cut very badly – it was presented as the biggest part of the stimulus whereas other measures like cutting tax for people on low incomes and bringing spending forward were more important for recovery, they didn’t make the point about it helping small businesses and protecting jobs where people might be thinking about having to lay someone off due to tightened margins, and this progressive slant was not referred to. However the policy itself was a good thing.

I thought the Liberal Democrat position was to call it a “waste”, though?

It is the liberal democrat position.

In terms of a fiscal stimulus, the liberal democrats may well be right that it is a waste – if you want to boost spending, there are arguably better ways to do it.

But the Liberal Democrat position is silent on the issue of tax justice in terms of addressing a regressive tax – just like Labour and the Tories. Which is interesting considering that the Lib Dems are doing a good job of trumpeting issues like tax credits and raising the threshold on low income earners.

Paul, can I do ‘reader’s request’ that you give your views on the points John at comment 4 raises. Would be helpful as I used to agree with you about this, but found his points rather compelling.

Earth to liberals – the current 15% floor is set by the EU – we do not control our own tax policy

The problem with the VAT cut isn’t that it’s not progressive. Reducing VAT is progressive, I quite agree. The problem is that the cut will only last a year.

It certainly is a waste in terms of what it was designed to achieve.

11. Publicansdecoy

Is LC not liveblogging the budget then?

For pity’s sake people, read what poor people spend their money on, and what rich people spend their money on, and tell me how giving rich people a 2% bonus on two-thirds of their spending and poor people a 2% bonus on one-third of their spending can be called progressive! A person earning £60k benefits by 8 times more £££ than a person earning £15k. Better to cut their income tax by £200 each.

http://www.statistics.gov.uk/downloads/theme_social/Family_Spending_2007/FamilySpending2008_web.pdf

“Paul, can I do ‘reader’s request’ that you give your views on the points John at comment 4 raises. Would be helpful as I used to agree with you about this, but found his points rather compelling.”

Sure,

my repsonse (which is also on my blog):

is:
“Think carefully about what you are saying:

Poor people have to spend almost all their money on bare essentials: rent, food, clothes for their kids.

They don’t have much left over for “luxuries” (taken in a broad sense, not in the technical VAT sense). Yet what they do have left-over for more than the bare essentials suddenly gets taxed at 17.5% – the same rate that those who have to dedicate a far smaller proportion of their income to essentials incur.

Doesn’t that look wrong to you?”

Now, John has written a very long and detailed counter-reply, which I intend to respond to in due course. You read it at:

http://badconscience.wordpress.com/2009/04/22/vat-a-regressive-tax-that-nobody-is-talking-about/

and give me some traffic in the meantime 😉

“Earth to liberals – the current 15% floor is set by the EU – we do not control our own tax policy”

True.

What follows?

Lots.

Care to elaborate?

Well, either leave the EU, dramatically re-negotiate our settlement with it, or forget about this idea and push for a larger tax free income allowance instead.

Hey Nick – how about both those things!!

I wouldn’t object at all to the 50% rate IF the poor were taken out of tax altogether and not forced to act as supplicants within Brown’s lunatic tax credit scheme.

“They don’t have much left over for “luxuries” (taken in a broad sense, not in the technical VAT sense). Yet what they do have left-over for more than the bare essentials suddenly gets taxed at 17.5% – the same rate that those who have to dedicate a far smaller proportion of their income to essentials incur.”

Yeah but the rich (who spend more on luxuries, both in absolute and proportional terms, than the poor) pay 17.5% on more things than the poor. They end up paying more overall.

Think of it like this. No matter what you earn, everyone pays about the same on their essentials. Now however you look at it, the rich will have more money left over to spend on luxuries, so no matter what the VAT rate is, the rich will buy more luxury goods than the poor. So whether the VAT rate is 15% or whatever, the rich will pay more VAT than the poor because they spend more money on goods which have higher VAT on them, both proportionally and in absolute terms.

Comparing it to the poll tax is just stupid.

Exactly, Alex! Flat rate VAT on all items would be about as (pro/re)gressive as a flat rate income tax which, while not as progressive as we would like, is not regressive either in the way a flat capitation tax would be, it’s neutral. Take out essentials and it’s necessarily more progressive again than that.

A tax where someone with twice my earnings pays around three times as much as me can’t be compared to a poll tax, where I would pay exactly the same as them. The most progressive tax cut of course would be a “negative poll tax” – best accomplished by an increase in allowances at the bottom end, clawed back for higher earners if necessary.

Not only would a cut in vat be morally progressive. It would also be the most efficient way of stimulating demand in the economy in the wake of the recession. This is because those on lower incomes have a far higher marginal propensity to consume than those on higher incomes, and as such cutting regressive taxes will stimulate demand more than cutting taxes on the rich.

Reuben – if those on lower incomes have a higher marginal propensity to consume then the best and most efficient way to benefit them would be to increase the income of that specific group, say by substantially raising the personal allowance to take the poor out of tax altogether, rather than by cutting a sales tax which (a) doesn’t apply to large swathes of what the poor mostly spend money on, eg food or rent, as others have pointed out (b) benefits everyone not just the poor, so in that sense is more costly and inefficient and (c) may be swamped by other effects in an environment where prices of a lot of VAT-able consumer goods are in any event falling.

Those arguing VAT is progressive would have more of a point if the items considered luxuries were restricted further. Chocolate biscuits should not be considered luxury items. Ferraris should be.


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  1. Liberal Conspiracy

    New post: VAT should be cut even further http://tinyurl.com/dza6kw

  2. VAT - A Regressive Tax That Nobody is Talking About « Bad Conscience

    […] in Politics at 10:03 am by Paul Over at Liberal Conspiracy a much shorter version of the following piece can be found. Here I supply a longer, more detailed […]





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