I've already shown in my blogs, and the IFS have now admitted that their proposal that VAT be applied to all goods and services at equal rate has inflationary impact ten times greater than they originally admitted.
In addition, I've shown that their claim that this reduces market distortion is wrong, in my opinion. Economic theory cannot support that claim. To impose VAT as they suggest is highly distortionary, but has no theoretical underpinning for the imposition of that distortion, whereas the existing model of zero rating essential goods and services does have a social theory underpinning it.
So, the question must be asked as to why the IFS have put forward such a proposal. I gather that they do not like my suggestion that "that the IFS is a bastion of neo-liberal thinking promoted to assist the rich get richer and the poor get poorer" so let's explore the issues.
First, let's look at what the IFS say they want to the change they propose to achieve. They say that:
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.
Now, I acknowledge that in the report they say that their package is illustrative. A more progressive compensation package could be adopted, for example. But they chose not to illustrate that package. I suggest the reason is made clear in this quote from the main report:
The key point, however, is that it is not difficult to find ways of compensating the losers from VAT rate unification, arriving at a package of reforms that improves both the progressivity and efficiency (including in terms of administration and compliance) of the overall tax system-and in the process provide revenue that could finance further desirable tax reductions.
I've already shown that the IFS have massively underestimated the scale of the first task, but I think it is the last sentence that is telling: the IFS do think tax reductions are per se desirable.
So here we have a package that is claimed to:
a) Cut compliance costs, and so improve business profits;
b) Reduce distortion because market solutions are assumed best;
c) Raises sufficient to compensate the poorest in society (but by no means all losers, including a great many earnings less than median income);
d) Can be used to fund other tax cuts.
Nowhere is the suggestion made prominent that the funds could be used for other social programmes: other tax cuts are the recurring theme. I am simply quoting what I am reading that has been given prominence by the IFS.
John Williamson is, in my opinion, one of the best commentators on neo-liberalism. He suggests that key characteristics of it include (and I summarise):
a) Redirection of public spending from subsidies, especially indiscriminate subsidies.
b) Tax reform - broadening the tax base and adopting moderate marginal tax rates
c) Trade liberalization - including relatively uniform tariffs;
d) Deregulation - abolition of regulations that impede market entry or restrict competition
Note that the IFS is recommending:
i) the removal of a blanket subsidy through VAT zero rate;
ii) A tax base broadening exercise which will allow tax cuts - the impact of which will be to cut marginal tax rates elsewhere in the system;
iii) A uniform tariff that is meant to reduce market distortion and so is part of trade liberalisation;
iv) Deregulation in that this supposedly reduces the burden on business.
Candidly: this IFS proposal is neo-liberalism. It reflects the IMF view of VAT that has seen it rolled around the world with pretty dire consequences for the last decade or more, all driven by that same neo-liberal political consensus for which there is no theoretical underpinning. This is not, I stress, economics: this is politics.
As a matter of fact the result has been that the poor have got poorer and the rich have got richer. That's not chance: neo-liberalism was promoted to encourage capital accumulation by a few. That's one of the reasons why neo-liberalism promotes tax cuts, which always benefit the richest most since in absolute terms it is true that they pay most tax. I cannot imagine the IFS do not know that, so I come to the alternative assumption that they're embracing it. I also assume that they know as a matter of fact the compensatory measures put in place for the poor have almost universally either not worked or have been degraded over time. As a matter of fact the world's tax systems are more regressive as a result of VAT. As a matter of fact Gini-coefficients have risen where the neo-liberal model has been most enthusiastically adopted.
And that's the toxic mix being promoted here. I can see no other reasonable interpretation of the proposal or of the language used to promote it.
So was I fair of me to say in this case that "the IFS is a bastion of neo-liberal thinking promoted to assist the rich get richer and the poor get poorer". Yes, I think it was. And if the IFS does not want to be described as such I think it should be changing its spots, not crying "foul" after a fair tackle.
But I'm open to debate.