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Defending the Rise

It may seem odd that a blog pertaining to be progressive is defending a rise in a regressive tax – but VAT needs to rise to 20% in order to reduce the deficit and bring public debt down to a manageable level if not eradicating it all together.

Each 1% increase in VAT yields, roughly, £4.5bn in revenue – this is an opportunity that cannot be passed up. It is true that VAT was introduced by a Conservative government and all subsequent increases have been implemented by Conservative governments. The mistake is not the increase in VAT but the reduction, in 2009, to 15%. VAT does not impact massively on peoples lives apart from big purchases. Big purchases being Luxuries. Luxuries are not needed for one to survive.

The reduction in VAT was felt little by consumers and was introduced more to aleviate the fears of the retail industry. The ‘benefits’ were not largely felt by consumers. The experiment cost HMRC £11bn in lost revenue.

Of course a supply-demand analysis of the market will have to be consulted to make sure that it does not impact too negatively on the psychological well-being of retailers. However a variation of VAT in the Nordic countries, MOMS, averages 25%, it is not unfeasbale, considering that the Nordic economies are smaller, to expect something similar.

In a time when fiscal austerity is becoming the norm throughout the Western World – it makes perfect economic sense to raise taxes and cuts in the public sector.

Whilst Mr Pike and I agree with the increase of VAT we also propose a full overhaul of the income tax system to make it fairer and progressive. We believe that a truly progressive income tax system would bring many people out of relative poverty whilst increasing revenue yielded. (Separate Blog in the pipe.)

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Categories: Economy, Tax Tags: , ,
  1. Gary McLachlan
    May 13, 2010 at 20:06

    The problem is not the average – taxes which impact on expenditure always hurt the poor most. And no, I’m not talking about relative poverty as 60% of median income, I’m talking about those on the lowest incomes (often also in receipt of some kind of income-based State benefit) who have margins so tight that a few pounds a week or less in real terms due to a rise in VAT can be pushed under the balance and end up with their expenditure permanently outstripping their income. Playing around with income tax allowances to compensate does not affect the income of these people – they don’t earn enough in relative terms to pay income tax but they do have to eat, pay the balance of LHB (where in receipt), pay rising fuel bills (also VAT on these).

    A rise in VAT for these people has a massive and disproportionate effect. Only distributive taxes on income are ‘fair’ – the income tax system has been tampered with for political short-term gains far too often, and the over-complex and frankly unworkable system we have now is the result. A complete rethink on all taxation is required to reform the system around the income required, without hurting the poor.

    • Mr Oldfield
      May 13, 2010 at 20:36

      Food is currently exempt from VAT, but if there are propsals for including food then I will withdraw my backing. Energy is currently billed at 5% and there is not provision, currently, to increase it.

      I do agree with you that the tax system is unworkable and unfair, and a complete overhaul will rectify that. However, for a short term reduction to the deficit an increase in VAT should help towards that aim. The increase, to the majotiry, is as good as negligible as long as luxuries are not bought – that is where it will be felt.

      • Gary McLachlan
        May 13, 2010 at 20:58

        😉 OK I goofed on energy, which slightly undermines my point I’ll agree.

        However there are non-food things that come in for VAT that are not luxuries and non zero-rated (Food and drink, animals, animal feed, plants and seeds) – I’m not going near savoury snacks, fizzy drinks and alcohol, although some might argue these are not luxuries in small amounts…

        But things like shampoo, detergents, etc etc, which are not under pharmaceuticals or food, but do have to be bought by everyone. I remember the last rise from 15 to 17.5% (the first time around, not the temporary effect from the lowering of VAT last year) and it does make a difference that’s noticable on a low income. The temporary lowering had almost no effect since inflation rose quite nastily at the same time and masked the effect – on the relevelling we’ve started noticing a small increase in expenditure since the change back, and if that becomes much more marked then it’s going to start hurting.

      • James Freeman
        May 14, 2010 at 11:55

        VAT does hurt the poor, especially as its a sneaky tax not one people plan for, or are aware of particularly. Plus it affects non-taxpayers. Students no.1. If we are deemed not eligible for tax them we should not pay it on anything! But because its a brute tax we do. Plus where’s the fairness in splitting the bill between businesses and the people. All 100% of the rise passed on to us.

        How dare the government decide what is a luxury (therefore only meant to be available to the rich). The division of goods into necessity items is wrong. Try living your life on non-VAT able items. Firstly, you’ll be naked unless you are a child. Even in the 19th C we recognised that 2 pints of beer was part of a working man’s life.

        VAT raises a lot of income precisely because it is a brutish tax. Taxation should be progressive not punitive. The same amount could have been raised by increasing inheritance tax or having a mansion tax.

  2. January 4, 2011 at 13:43

    i cant agree with this post, it disproportionally hits the poor hardest. as a labour man i thought we were all about defending the poor and less well off ? how can a VAT hhike ever be called progressive ? yes it may get the debt down but think of who it takes with it. People who are struggling to get by as it is and busienss’s who were hanging on last year by the skin of their teeth will be hit the hardest by this. Not least the fact you forgot to take into consideration inflation which ahs rocketed in recent months and only looks to continue that trend in to 2011.

    • Mr Oldfield
      January 4, 2011 at 13:58

      I never called the increase in VAT progressive. I am well aware that it is regressive. If you take note, there is a link to a separate post detailing a reform of Income Tax. This reform would improve people’s purchasing powers, especially for the least well off.

      Also take note that I wrote this post in May, before any of the Coalition’s plans were in the public domain and inflation had taken off. I still stand by my decision

  1. May 13, 2010 at 19:59

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