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VAT: The Tories’ favourite tax

There is growing speculation that both the Tories and Labour intend to increase VAT to 20% after the election.

Given our preference for higher taxation over brutal cuts (and ignoring, for the moment, that this whole debate is premature), a VAT rise appears to have much to commend it. VAT is relatively cheap to administer, difficult to evade, and is clearly more palatable to party leaders than some taxes.

But that doesn't make it fair. VAT is immensely regressive, hitting the poorest 10% hardest – as those at the bottom spend nearly all of their income. Along with other indirect taxes, VAT counteracts the progressive effect of direct taxes, as shown in David Byrne and Sally Ruane's study, and, more recently, by Richard Murphy.

So, future chancellor, do any of the following:

But don't increase VAT. In fact, leave it where it is, at 15%.

Let's also remember who increased VAT from 15% to 17.5% in the first place: that party of low taxes, the Conservatives, in 1991. And who increased it from 8% to 15% before that? The Tories, in 1979. That 1979 rise was particularly deceitful as it followed chancellor-to-be Geoffrey Howe's election promise that "we have absolutely no intention of doubling VAT". The Daily Mail listed the "double VAT" charge as one of "Labour’s dirty dozen lies" days before the election. The Ministry of Truth website lists Howe's promise as one of its "top 10 political porkies of our time".

In his memoirs, Howe described the broken promise as "part of the small change of election campaigning" – and opted for shameless pedantry over apology:

"We had no difficulty denying it. For there was no prospect, on even the most gloomy of expectations, of our having to go beyond a rate of 15 per cent.

"Some critics afterwards thought it pedantically misleading to rest our case on the fact that twice 8 per cent (the then basic rate) was 16 and not 15 per cent. They also overlooked the fact that some goods (about 6 per cent of the basket) were already taxed at 12.5 per cent: the weighted average impact of the existing dual rate was 8.5 per cent. So our denial was more than technically correct."

Howe later told Nicholas Timmins (whose account of the 1979 VAT hike in the Independent is well worth reading): "The intention was always to make a massive tax switch and I had argued that in every conference speech I had made. The only question was how far we should go."

It was indeed a massive tax switch: from progressive taxes targeted at the rich to regressive taxes penalising the poor. No wonder accountancy giants like PricewaterhouseCooopers share the Tories' fondness for VAT.

Posted by Other TPA at 03:34pm on 22 October 2009
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Posted by Other TPA at 10:46am on 23 October 2009

VAT cuts are ok for capital consumer goods, however keeping VAT where is is aint going to do that much for the economy

A cut on income tax, is desperately needed, rather than VAT. At a time of low liquidity we need people to save and inject liquidity back into the economy into profitable sectors rather than spend spend spend.

Posted by Thomas Byrne at 05:03pm on 23 October 2009

VAT levels are mandated by EU law. We cannot abolish VAT, only tinker with it a little.

As an aside, it’s really not clear whether it is regressive or not. ‘Necessities’ are exempted from VAT, as allowed under EU law, so if all you buy is food, clothes, heating, etc. you will probably pay no VAT.

Posted by mdc at 02:49am on 28 October 2009

Surely the VAT increase from 8% to 15% in 1979 was the result of EU legislation and nothing to do with the UK government? That was the point at which the EU imposed the VAT rate floor (which still exists today) of 15% throughout all member states.

Posted by Ken at 10:14pm on 31 October 2009

Ken, I don’t think even Geoffrey Howe pretends the VAT rise was forced upon him by the EU.

Posted by Other TPA at 05:36pm on 1 November 2009

VAT was also increased by the Tories to compensate the rich for the abolition of the Poll Tax, or as the Tories put it to make up the deficit.

Posted by Bill Edmunds at 05:53pm on 6 November 2009

Given the current fiscal deficit, I think VAT should be one of the taxes that rises. Countries like Denmark have much higher VAT and manage to be more equal than the UK. Plus, like it or not, we are over-consuming at the moment and VAT rises might help rebalance the economy more towards exports.

Land value tax or at the very least (for political realists) more council tax bands at the top end would help stop ordinary people viewing their houses as credit cards.

Posted by Steve at 12:13pm on 9 November 2009

“if all you buy is food, clothes, heating, etc. you will probably pay no VAT…”

There is VAT on clothes (except children’s) and heating (5% on gas and electricity). Some foods are also taxed (remember the Jaffa Cake cas?).

Posted by Roger Houghton at 12:46pm on 13 March 2010

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