IFS want to replace corporation tax with VAT

Posted on

In really haven't given the IFS enough attention of late. In June they issued a press release saying this:

Corporation tax should be reformed or replaced by a higher VAT rate (offset by lower National Insurance contributions) to reduce disincentives to invest in the UK, according to two studies commissioned by the Mirrlees Review of the British tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies.

Let's dismiss the offset straight away: they never survive, and I'm not a great fan of the IFS view of compensation; it's token at best. In this case it's an especially interesting concept: I've searched the three documents the review seems to refer to and none of them appear to mention it - which makes the press realise a trifle odd, but we'll overlook the aberration. IFS press releases on Mirrlees have a habit of being wrong.

In that case let's get to the nub of this. First, VAT should raise £84 billion this year. But, the IFS already want to raise another £23 billion by extending it to food and other zero rate items, although as £12 billion of that will be spent on compensation. So that would raise a net £11 billion. But Corporation tax raises £52 billion, according to the budget. So that's a remaining gap of £41 billion to find.

If VAT at 17.5% can rise £107 billion(that's £84 billion plus £23 billion) then assuming no impact on consumption within the economy VAT at 24.2% could cover the corporation tax lost. If any compensation is given it would require rounding up of the VAT rate. Let's be generous and call it 25%.

So that's £247 on an annual average fuel bill. It's also £1,075 or £20.67 a week on the average food bill. The inflationary impact? About 5% on food and other zero rate items, 3 or 4% on other items. Let's be generous and call it 8% overall. And why do this? Just so that corporations, almost entirely owned by the wealthiest 10% in society, will pay no tax and so that companies can play international tax games at liberty.

Of course, the IFS will argue that corporation tax is a mirage anyway: the real issue is incidence, and we know that those associated with this work have argued that corporation tax is actually a cost to labour. I admit, I don't believe them. Even if in extremis incidence is true (and in extremis ultimately it is, but I'd argue behaviour is not influenced in the way the in extremis argument indicates and therefore the argument is a false one for policy purposes) the reality is that corporations always shift incidence. In this case, the abolition of corporation tax would be used to shift the incidence of tax from those supplying capital to those supplying labour. That is true unless all the corporation tax gain of the companies is passed on in wage increases. And no one thinks that likely, I am sure. I'll be candid: I would expect to see very little being passed on in this way, which is a further cause for likely economic strife to result from this suggestion, even if we ignore the enormous impact on inflation for now.

I presume the IFS want to be taken seriously, but I am having real problems wondering why. I have to say that the comment of David Cameron on a report from another think tank, made yesterday appears particularly apposite here:

This report is rubbish from start to finish. I think the author himself said it might be a bit barmy. It is barmy.

I have another problem. The IFS says in its strategy framework that:

Our independence from political and other vested interests is an important dimension of the quality of our research and is strongly appreciated by the users of our output. IFS research outputs are formally the views of the authors rather than the institution, so it is important that both IFS as a whole and its individual staff are seen to be free of bias.

I am sorry: I don't believe you. This is a blatantly political piece of work designed to promote the IFS neo-liberal agenda and in particular to shift the burden of tax from those best able to pay it in our society onto those least able to pay it. In that case the IFSs' claim of unbiased opinion appears to me little better than the king's new clothing: whilst everyone agrees to not mention the fact it doesn't exist the consensus survives. But as soon as someone points out the obvious flaw in the argument the myth is shattered.

I did believe the myth. I don't any more. I'll provide more evidence why not in the next day or so.