The FT reported last night that:
Increasing VAT would be the UK government's best option to raise revenue fast if the public finances veered off course, the OECD said on Wednesday.
They added:
In a new report on the UK economy, the Paris-based organisation gave a stark assessment of the fiscal challenges awaiting Andy Burnham when he becomes prime minister next week.
They added
[I]f a tax increase became “a last-resort necessity”, raising VAT would be the “most prudent” way to limit the damage to the economy, the OECD said.
This is disastrous advice. The right answer to what is required if additional tax revenue is required in the UK is the recommendations made in the Taxing Wealth Report. They are progressive, imposing any additional demand on those best able to pay, and would deliver tax and social as well as economic justice as a result.
Instead, what the OECD is proposing is a deeply regressive tax, which I define in the glossary to this blog as:
A regressive tax is one where as a person's income increases the amount of that tax that they pay reduces in proportion to that income even if it increases in absolute amount, i.e. their percentage tax rate falls as their income goes up. Compare with progressive taxes and flat taxes.
This is, of course, the case with regard to VAT. Those on low incomes in the UK spend almost all their earnings, and will therefore be hit by high rates of VAT in proportion to their income. In contrast, almost by definition, those with higher income and wealth do not spend all their incomes, and much of what they buy does not carry VAT, as the tax is heavily biased in favour of wealth. I explained this in a recent video.
I know there are those who do not agree. The Institute for Fiscal Studies has argued otherwise, but to make their wildly inaccurate claim that VAT is progressive, they defined it in proportion to spending. If you rig the data, you get outcomes as misleading as those that the IFS have claimed on this issue.
In 2011 I wrote a report challenging their view, backed by data. Nothing much has changed since then. That report is available here.
The world's tax economists hate ordinary people; their recommendations make that clear. They also hate tax justice. They are biased to wealth. Expect Shabana Mahmmord to listen to them if she is Chancellor.
I am very worried.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
“The world’s tax economists hate ordinary people” – – by there actions ye shall know them. Why do they hate ordinary people? I’m sure they do – but the question stands.
Because the rich pay the fees. And so they align with them.
The same OECD which also stated in its report the UK state pension system ” was unusually generous” and required gradual reform to ease the burden on public finances. Oh and the triple lock should be scrapped!
What utter garbage.
When they know our pension is unusually miserable within the OECD
As someone who was registered for VAT from day 1, I remember that originally VAT was meant to be a progressive tax and there were was a higher rate band for certain luxury items (including cars). But in 1992 the EU banned higher rates as part of the preparation for the launch of the single market, although with reduced rates for certain necessities. UK Chancellor Lamont meekly followed suit.
How depressing.
Surely we should be giving people with low incomes more spending power not less.
The cynic in me wonders if there is another motive behind the OECD’s advice – such as a crude way to ease the demand on essentials (ration) when the fall out from Trump’s disastrous war hits.
Your quotation from the FT specifically says this is the recommendation to raise revenue “fast”.
It may actually be the case that VAT changes can be introduced much faster than other tax changes. Is that likely?
I certainly remember budgets when the Chancellor of the day raised fuel duty from midnight on budget day, and on the face of it VAT is applied in a similar fashion to fuel duty. Other tax changes might be quite difficult to introduce other than at the beginning of a tax year (and probably need some notice) and some might need legislation.
Although since tax isn’t needed up front to enable government spending, it isn’t clear under what circumstances the speed of a tax change would be crucial.
Vat in theory is that quick.
But in practice changing every price overnight is not something we are set up for.
Curiously, the US is because sales taxes are added at the till.
If Andy Burnham were serious about ending 40 years of neoliberal policies, he could announce a ‘Reverse Thatcher’. She raised VAT from 8% to 15% so that she could reduce income tax, whose standard rate was then (I think) 35%. A Reverse Thatcher could, by suitable choice of rates be fiscally neutral. But it could of course be fiscally progressive, and although I take the point about the difficulty of changing many prices overnight, every one of such VAT changes would visibly help the poorest and reduce inflation.