Shall we buy a yacht or feed the children?

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I found it extraordinarily depressing to read the Institute for Fiscal Studies press release on the reform of VAT issued last Friday. Its headline is this:

Abolishing zero and reduced rates of VAT would cut compliance and administration costs for business and government, interfere less with people's spending decisions, and raise enough revenue both to improve the living standards of poorer families and to cut other taxes by £11 billion, according to a study commissioned by the Mirrlees Review of the UK tax system.

Let's be clear what this report is proposing:

1) VAT on all food.

2) VAT on all domestic fuel

3) VAT on children's clothes

4) VAT on books and newspapers

5) VAT on all public transport

6) Extension of VAT charges to charities.

Extraordinarily it says:

Applying zero or reduced rates of VAT to items on which poorer households spend a relatively large proportion of their budgets is a blunt instrument with which to help the less well off, as richer households typically gain more in cash terms from these tax breaks than poorer ones. Scrapping the existing zero and reduced rates of VAT-perfectly consistent with EU rules-would raise around £23 billion. If £12 billion of this extra revenue were spent increasing means-tested benefit and tax credit rates by 15%, this would leave the poorest three-tenths of the population better off on average while still raising £11 billion to cut other taxes or to spend in other ways.

I don't dispute this is a blunt instrument but that's only if you see this charge as being simply a subsidy to the poor.

Of course it is that, but it's much more than that. First of all it recognises that there are some things that all people need to buy to ensure a quality of life. Housing, heat and light, food, essential clothing and maybe the means to educate oneself are all seen as those basic needs. These aren't just subsidies for the poor: they are seen as the basics of life and are zero rated in similar fashion to every person being entitled to a basic personal allowance for income tax. That too is a blunt instrument, and provides greater cash value (I readily concede) to the well off. But I somehow can't see them abolishing it though, precisely for that reason.

Second, these allowances are given to stop the tax system being regressive. There seems considerable indifference to this point in the associated full report: it is treated as if a technical exercise and not as a social issue. Indeed, the whole report is drafted in that way, as the flippant comment that to charge standard rate VAT on all supplies would "interfere less with people's spending decisions" implies. It's as if the authors believe that people ask the question 'shall we feed the children or buy a yacht?' and are indifferent between the two. As economists they may be: in the real world this sort of crass assumption, common in economics, has no place.

I have long suspect that the IFS is dedicated to the neo-liberal cause. Too many of the academics linked to it share that view of life to believe otherwise. Now it is clear that they, along with most in the tax profession, are dedicated to shifting more of the tax burden onto the poor and away from the rich. For that is the only real motive for this proposal.

And as I'll show in posts to be made later today another of their claims is completely wrong. They have said:

It would also have only a modest and temporary effect on inflation, increasing the non-housing retail prices index by around 0.35%. This package is only illustrative, but shows that it would not be difficult to compensate most poor losers from the move to a uniform VAT-indeed the extra revenue raised could be used to make them better off from the change. The only barrier is the reluctance of politicians to be seen to propose taxing "essential" items.

Look at the data I'll publish and this is so obviously incorrect as to be misinformation. So much for the 'objectivity' of the IFS.

Finally, I note that they say:

What might such a reform package for the U.K. look like? By way of illustration, consider applying the current standard rate of 17.5 percent to all commodities except housing and items currently exempt from VAT - eliminating, that is, the current reduced and zero-rate - and combining this with a 15 percent increase in all income support, income-based jobseeker's allowance and tax credit rates and in the associated housing benefit and council tax benefit thresholds.

This, they claim, would mean that the poorest 30% are better off as a result of this change. I'm sorry, but I don't believe them. Why? First because their work assumes perfect take up of benefits. That does not happen. That's why blunt instruments are needed. Second because there's no guarantee that this level of support would survive, but you can be sure the VAT change would.

This policy proposal is not just ill conceived, it is positively harmful to society. And just watch the neo-liberal politicians line up to endorse it.