I've just been interviewed by The Times on the VAT increase to 20%, happening tonight. They seemed keen to know of my views.
Let's be clear, the number one problem with this change is it is regressive. I know the Institute for Fiscal Studies say VAT is not regressive - but they only get to that absurd position by arguing that regressiveness is assessed against spending and not income and by saying regressiveness should be measured over a lifetime - a claim only neoliberal economists could make. By all proper measures of regressiveness VAT is regressive and always will be. So this is a tax change that hits the poorest and middle income earners hardest in our society, and that's the wrong policy decision when just about every other change the ConDems have announced has exactly the same impact.
Second, this increase will encourage VAT planning. Abuse through the Channel Islands will increase, for example. This imposes a real cost on the UK economy.
Third, tax evasion will increase. HMRC's own data suggests VAT has an error rate of around 13% inherent in it - twice the rate they say income tax and NIC suffers. This is a tax based on their own data prone to abuse. In that case why increase it when tax evasion is already an issue?
But most of all the big issue is the economic one - and that is the last thing our economy needs now is money sucked out of it when what is really needed is a boost to make sure that more jobs are created so more people are at work and paying tax to ensure that the government can pay its way. This measure has the exact opposite effect. It takes money out of the economy and drains demand from it, meaning that it is bound to be recessionary.
As a policy measure this one is a disaster in the making - and one every household will see as prices go up. If compounded by an interest rate rise because the Bank of England then thinks it has to tackle the resulting inflation it will be even worse.
Right now it is hard to imagine any more misguided tax policy. But George Osborne has delivered it, all the same. Yet another sign of a lack of economic competence I am afraid.
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Try and see the bigger picture, for once.Government borrowing is unsustainable,even Darling admitted that.Sterling has already been devalued.There is a new top rate of income tax.Where else can the money come from, if not VAT?
@william
Try a Keynesian stimulus – the only way that has ever worked
@william
Corporations tax, greater efforts to minimise evasion (rather than cutting jobs from HMRC), scrapping Trident, withdrawing from Afghanistan, a tax on unused land…
Or the bank of england, which is, as far as I know the only factory that actually produces legal tender for this country.
@william
Hi William. What is this bigger picture you talk of? Pray, do tell!
I notice you’re quick to use the IFS when it suits your argument (for example, their claim that the Budget was regressive), but quick to chastise when it doesn’t.
The IFS has far more skill, expertise, resources and experience than a lone man will ever have sitting in his office in Norfolk.
VAT is a far less damaging rise than a rise in income tax/NI would be. And food is still zero rated, only luxuries are taxed, so what’s the problem? Anything to stop this wretched consumerism is a good thing, I’d say.
By the way, your point about tax evasion is daft. It will still raise £13bn.
UK VAT is still amongst the lowest in Europe.
I thought you would applaud this rise. You are often quick to claim that countries with lower tax rates are stealing other countries’ tax revenues. Why does this analysis not extend to indirect as well as direct taxes?
A single market (which is still the raison d’etre of Europe, despite the politics) requires tax harmonisation, and the EU Commission had been gunning for the UK VAT rate to be raised for years. In fact, they would probably have forced them in time.
@Alex Hodges
I note the Guardian called me yesterday “Richard Murphy, the anti-poverty campaigner and tax expert”
http://www.guardian.co.uk/business/2011/jan/03/baby-boomers-economy
They got it right and in the right order
This is a regressive move
And that is the reason for objecting – apart from the fact that your other claims are such gross simplifications they are absurd
Did you see Paul Krugman blog November 17, 2010, 5:38 pm, ‘Why I’m Soft On Sales Taxes’? Of course Krugman would not put tax up in the current
liquidity trap, and when the economy recovers he would like to see a higher rate of income tax at around 70%, but he did say that “it does seem that countries with strong welfare states have less progressive tax systems than those with weak safety nets.”
@Alex – since when are clothes and Tampax considered a luxury?
@Kit: why on earth would you only want to tax unused land?