According to Brendan Barber of the TUC:
Increasing VAT in the budget will hit the poor more than the rich, have more impact on small firms than big ones, threaten retail jobs, increase tax avoidance and boost inflation — risking a mortgage-threatening rise in interest rates — according to a new Trades Union Congress briefing atwww.tuc.org.uk/VAT
The poorest fifth of households pay 12p in VAT for every pound they spend of their disposable income, while the top fifth of earners pay just 6p.
This is one reason why VAT income has not kept up with economic growth and has declined in importance as a source of government funds over the past decade. VAT provided 16% of tax income in 2004 but has fallen since even before the credit crunch. While average earnings have grown it is the better off who have done best. While the poor spend a high proportion of their income on VAT-able goods and services, the rich don’t.
Most people think of VAT-exempt items as ones that help the poor ,such as food and children’s clothes, but the better off do not have to pay VAT on financial services, private health or private education. And, of course, the rich save, the poor can rarely afford to.
Nor does VAT hit all businesses equally. Only businesses with sales of more than £70,000 a year have to register for VAT. Unregistered small firms pay VAT without being able to claim it back.
Many large companies are avoiding VAT by setting up subsidiaries in the tax havens such as the Channel Islands to sell items that cost less than £18 — such as CDs and DVDs — as these can be imported into the UK free of VAT.
This already costs UK taxpayers £100m a year. Increasing VAT would provide further incentives to operate in tax havens and thus would threaten retail jobs in the UK.
Higher VAT rates would feed directly through to the inflation figures — already over target. The risk is that the Bank of England would increase interest rates as a result, which would feed through into higher borrowing costs for companies and bigger mortgage bills for consumers.
The chancellor should resist the temptation to be VATman when he presents his budget.
There are much fairer ways to raise taxes, such as a Robin Hood tax on financial transactions and capital gains tax. The only VAT changes he should contemplate are ending the zero-rates on the private health and education that only the rich can afford.
Unsurprisingly, as I advise the TUC on tax, I agree.
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Why would you want VAT on private health care and schooling – everybody who uses those services frees up the state provided services or saves the state whichever way way you look at it. I would have thought that should be encouraged.
And beware of the unintended consequences that forcing the horrid providers of independent health and educational services to register for VAT will bring in the form of input credits.
@Justin
Let’s just stick to the VAT issue
The service supply is fundamentally labour
Of course there will be net output tax
And why not? This is discretionary consumption, not a necessity. Why subsidise it then?
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VAT is indeed The Worst Tax of all, even worse than Employer’s National Insurance. So well done, TUC 🙂
Which is not to say I agree with them on Robin Hood taxes – before we start dreaming up new taxes for UK banks, can we get them to repay the £300 billion taxpayer funded bail out loans, and then busk it from there?
@Richard Murphy
So you would have no problem then on accepting withdrawing “exempt VAT status” from services across the board, not just private healthcare and schooling on the basis of “discretionery consumption” (which I disagree is always discretionery, but that is another debate.
That would mean VAT on sporting activities, like public swimming pools, lottery tickets, all hospitals (including those that deliver services to the NHS), charity events, old age homes and hospices and of course any tution or training deliverer by a registered educational institution.
You and the TUC seem to have totally disregarded the separate nature of income tax and consumption taxes and in this instance you seem to be trying to ling the two on the basis of their income earning potential – why don’t you go the whole hog and have different rates of VAT on what you consider to be luxury items such as BMWs and 4 x 4
@Justin
That’s not what is proposed
Don’t fight straw men
As for your last point though – Thatcher did that…………..