Sunday, 26 July 2009

Will VAT go up in the New Year?

Harman says the planned post-Christmas VAT hike is "under review". Darling says the tax hike must proceed. Who are we to believe? My money is on Harman.

The decision to cut VAT in the first place was ill-conceived. It was supposedly done to encourage a pre-christmas shopping boom. It did nothing of the sort. GDP has continued to contract for the nine months after Darling cut 2.5 percentage points off this vital revenue raising tax.

The cut did, of course, create a huge hole in the public sector accounts. If Harman gets her way, and delays this planned increase, next year's fiscal deficit can only become larger. It was already projected to be well over 12 percent, even with the anticipated increase in the VAT rate.

However, there will be an election half way through next year. New Labour has already abandoned any serious attempt to maintain fiscal discipline. The VAT rise will come just six months before the election.

It will be painful and unpopular, which means that New Labour will do what it always does - delay the pain and hope for the best. There will be no VAT increase next January.

29 comments:

AntiCitizenOne said...

VAT is the worst possible tax, a tax on net turnover.

It's good that it was lowered. It needs to stick there (or be lowered further (i.e. after we leave the EU))as long as possible!

Liam said...

I think the VAT cut was in fact a very cunning move by Labour.

And the reason is: Inflation figures. Yes, Brown keeps repeating that all is well because we have low inflation – this of course, is nonsense.

According to the ONS ( http://www.statistics.gov.uk/cci/nugget.asp?id=2075 ) the affect on CPI of the VAT cut is -1.3%. Therefore inflation, with the VAT cut effect removed, is even now still very much above target.

These artificial inflation numbers have allowed the establishment to embark on an highly inflationary monetary policy with little resistance. The only mainstream media commentator to highlight this ruse is Liam Halligan in the Telegraph.

Why is there so much MSM support for QE, 0% rates, and unconditional bank bailouts? Because of the massive vested interest in the property bubble.

Now, as headline inflation figures are annualised the approaching anniversary of Darling's VAT reduction is becoming a of a headache for the Nu-Liars.

Even if the reset to 17.5% is postponed, CPI would jump around 1.3% in November, To reset VAT 12 months on, as Darling stated at the time, would compound the jump, c+2.6%...no?...political disaster!

My bet is VAT will being sticking at 15% until the next General Election.

Mark Wadsworth said...

As AC1 says, Labour may have cut VAT for all the wrong reasons (because they believe the lies that it is a tax on 'spending') but inadvertently they did the right thing - and occasionally they do the right thing, let's be honest about this.

When I am in charge and we get out of the EU, VAT (total receipts £70 billion per annum) will be scrapped and Land Value Tax will be increased.

Anonymous said...

Liam has got it right every time exposing these frauds. And it is all about property: something all the members of the government are heavily invested in. The conflict of interest is disgusting and harks back to the 18th century, when property ownership determined one's worth. New Labour and British socialists are antideluvian frauds.

Anonymous said...

Nah, VAT is one of the fairest taxes it taxes consumption and it is excessive and wasteful consumption that does the most damage to the environment.

Cutting VAT for short term political expediency is wrong. The Government should be encouraging employment in a recession and should have cut National Insurance rates. Either the employer's contribution or the employee's contribution depending on where the benefits were most needed.

Anonymous said...

Mark Wadsworth - scrapping VAT/ introducing aLand Tax is punitive and unfair and will discourage investment and encourage wasteful consumption.... is that really a smart move?

Think with your head, not your rent book.

Anonymous said...
This comment has been removed by a blog administrator.
APL said...

AC: "Darling cut 2.5 percentage points off this vital revenue raising tax."

1. I fancy Brown did, not Darling.

2. 2.5% percentage points or 14.3% is the UK take, if cutting VAT was such a good idea, why not reinstate the 14.3% of VAT that goes to the National government and cut the tax by 85.7%, then tell the EU to F' off?

Anonymous said...

Mrs Thatcher raised VAT to its ridiculous 17.5% level when she had to back off from the poll tax. Even 15% VAT is a real drag on economic activity and consumption - a really bad tax, and the one which raises the total tax take from many taxpayers to over 50% of income - way, way too high.

Taking VAT further down would be the wise move – say progressively to 7.5%. That would give an effective stimulus to economic activity and establish new levels of consumption in some areas, like building renovation, where labour is presently in surplus. There are plenty of domestic and commercial buildings that need new windows, doors, extensions, electrics, air conditioning...

B. in C.

bill said...

Why does no one care his GDP predictions are so far off, so consistantly?

GDP predictions are very important. Our finances rest on them!! I would love to see you do a post on what Darling predicted vs what occured. He strikes out more often than a fat guy at a fashion show.

Mark Wadsworth said...

Anon 1 appears to have fallen for the Big Fat Lies of taxation with this:

"VAT is one of the fairest taxes it taxes consumption and it is excessive and wasteful consumption that does the most damage to the environment."

VAT is a tax on GROSS PROFITS. It is not a tax on 'consumption'. If we want to tax consumption of specific natural resources, e.g. fuel duties, carbon tax, then that is probably a good idea, but a blanket tax like VAT hurts business and destroys jobs.

Further: "The Government should be encouraging employment in a recession and should have cut National Insurance rates."

Agreed. NI is the second worst tax after VAT.

Mark Wadsworth said...

Anon 2 veers even further off piste with this:

"...scrapping VAT/introducing a Land Tax is punitive and unfair and will discourage investment and encourage wasteful consumption..."

Why 'punitive'? VAT is 'punitive' on the whole economy, if they reduced it, business profits would go up and hence investment and employment.

Why is consumption a prior 'wasteful'? One man's production is another man's consumption.

Or are we somehow collectively poorer when somebody goes to have his hair cut? Of course not - the customer 'consumes' a hair cut (and looks smarter for it) and the hairdresser 'produces' a hair cut (and is making a living).

Land value taxes dampen land price bubbles AND they do NOT discourage investment in productive capacity - they divert capital flows from endless speculation in existing land and so, in relative terms, ENCOURAGE investment in productive capacity.

Anonymous said...

Why do you all conclude that VAT is a component of inflation? VAT is just how much we are taxed. In a way, when VAT goes up demand goes down, so not necessarily inflationary at all.
Surely inflation is dictated by the amount of money chasing goods, and the more money you are obliged to give the government, then the less money is actually chasing goods.
! So VAT is not a component of inflation in the way you presume.

Anonymous said...

In fact, on thinking about it, cutting VAT, in increasing demand, is likely to be more inflationary than raising it.

Mark Wadsworth said...

In fact, Anon 2 seems to have completely overlooked what has actually happened in the last ten years, a period in which we had high VAT and little or no taxation of property gains.

We had a massive house price bubble, UK households are massively over-indebted, a large amount of imports were sucked in, all financed by debt, there was underinvestment in UK productive economy and the UK economy is in much the worse shape for all that.

Serious economists going back centuries have always pointed out that reversing the tax burden (away from production/consumption and on to land ownership) would have prevented all this from happening. (and there are plenty of countries that have tax systems like this, who do correspondingly well, in fact the UK tax system used to be a bit more like this).

Anonymous said...

@MW

NI is the second worst tax after VAT

Nah NI is much worse than VAT

The most important thing should be to leave as much money as possible in peoples' pockets and then give them the freedom to choose where to spend that money.

LVT since you brought it up :-) & NI etc. assume Governments are better at making the choices as to where to spend money than individuals.

Which is ironic really because it is the individuals and their endeavours which are the source of government's funding.

Anon 1

Liam said...

Not all prices went down with the VAT cut, but I bet all prices will go up upon reinstatement of 17.5%.

Now that will be inflationary.

Mark Wadsworth said...

Anon, VAT is worse than employer's NI because it raises £80 bn and Employers's NI 'only' about £40 billion. But they're both equally shit in principle.

"LVT ... assumes Governments are better at making the choices as to where to spend money than individuals."

The government wastes a lot of money, but clearly it doesn't waste all of it, otherwise land values wouldn't be so high. On the whole, HM Land Registry, the legal system, the police, road maintenance and refuse collection are a pretty good deal for property owners in exchange for that £1,200 average council tax.

If they ran the country like Zimbabwe, land values would be next to nothing.

And when you buy a house, you have to pay the mortgage plus the tax (i.e. council tax or LVT, which would replace it). So if the government doesn't take the money that way, house prices go up and the government taxes your income instead. So you have to pay higher prices out of lower net income.

Anonymous said...

Mark Wadsworth - you clearly have no idea what you're talking about. I don't have the time or inclination to educate you, so I will stop arguing.

Anonymous said...

If I might inject my bit. Taxes have to be raised in order to finance public spending. Much of that spending is wasted.

VAT is a tax only at the end of the supply chain. Only the final user pays the tax. Everyone else in the chain reclaims the input tax. It is necessary for a business to keep track of its trading position anyway, so its not much of an imposition to have the businesses collect the tax, which is generally thus a fairly efficient tax to collect. Besides, the days of huge employers are long gone, so the rise of the Tesco's makes for huge single collectors of sales tax, which keeps the cost of collection down too.

All competitors selling in our market are subject to the levy, so it does not favour any one producer, save in that it amplifies price differences.

The tax was raised by Mrs Thatcher in order that a move away from direct to indirect taxes was encouraged. You should be free to spend or save ( we used to do that when I was young) your income any way you like without the state extorting a bit because "they know best" how to spend it. VAT is not levied on many items deemed essentials, like childrens clothes and unprepared foods. So it does not harm the poor disproportionately.

Whatever gave anyone the impression that the government ever wanted to help anyone except themselves? The whole thrust of everything they do is to prolong their own access to the trough of public patronage. Consideration of anyone else is entirely partisan, and has all to do with electoral advantage, and nothing to do with fairness, efficient economics, or the general welfare of our citizens.

Mark Wadsworth said...

Anon (directly above) says:

"VAT is a tax only at the end of the supply chain. Only the final user pays the tax."

That's the big fat lie that politicians of all hues would have you believe. Actually it's a tax on the gross margins of every single business in the supply chain of VAT-able outputs.

Taking a real life example, imagine you run a VAT-exempt business (because you are under the £67k threshold or you make cakes) and your business then becomes VAT-able (because you cross the threshold or because the government decides that cakes will be VAT-able, like biscuits).

Do you think that you can then just hike your prices by 15%? No of course not, so the producer has to suffer some or all of the VAT. Which leaves him less money to pay people further up the chain (his employees and suppliers).

"You should be free to spend or save ... your income any way you like without the state extorting a bit"

But if you spend it on something that's VAT-able, it's OK for the government to cream 15% of the price? How does that encourage free exchange of goods and services?

AntiCitizenOne said...

MW, it's not worth responding to people who can't even mange a name.

Mark Wadsworth said...

AC1, I realise to my horror that people have fallen for thirty-seven years of brainwashing that "VAT does not harm the economy", so I am trying to do my bit to educate people about the difference between legal and economic incidence of taxes.

I know that the Anon's above prefer to believe politicians than basic economic theory or simple maths, but maybe other people will read the exchange and start thinking for themselves?

Anonymous said...

@MW You are so wrong on so many levels

[i]That's the big fat lie that politicians of all hues would have you believe. Actually it's a tax on the gross margins of every single business in the supply chain of VAT-able outputs.

Taking a real life example, imagine you run a VAT-exempt business (because you are under the £67k threshold or you make cakes) and your business then becomes VAT-able (because you cross the threshold or because the government decides that cakes will be VAT-able, like biscuits).[/ii]

The exemption gives small business and businesses starting out an advantage. All taxes are bad in that they are a cost and a damper on economic activity however they are a necessary for a civilized society.

VAT is a one time event and occurs only when an individual exercises his right to the freedom to choose to buy goods or services. Taxes like council Tax and LVT are far more insidious, they are not once only tax - they tax over and over and over again. Further there is a tendency over time to take more and more on each hit simply because they can.

How can it be right that someone who has worked all their life to acquire a small piece of Britain to spend the rest of their days quietly minding their own business is required to stump up a huge percentage of their income? - In many cases the council tax (even in the lower bands) takes a higher percentage of the State Pension, than is levied in Income tax on the most economically advantaged.

And for what? Services many of those same vulnerable people will make little or any use of. People like you should hang your head in shame when constantly advocating for annually recurring taxes like Council Tax and LVT.

Also if you want to prevent bubbles that's quite easy too. (There just isn't (wasn’t?) the political will to do it. - Too many people telling them they are doing a great job and too much easy money for everyone to siphon off/squander on pet projects.) You certainly don’t need a clumsy sledge hammer like LVT.

Anon1

Mark Wadsworth said...

@ Anon 1:

"All taxes are bad in that they are a cost and a damper on economic activity however they are a necessary for a civilized society. "

Yup. With the exception of taxes on land values. Owning land is not an economic activity. Therefore "the least bad tax is land value tax". Thus spake Milton Friedman and Adam Smith and David Ricardo.

"Taxes like council Tax and LVT are far more insidious..."

VAT (and Employer's NI) are stealth taxes - between them they raise six times as much as council tax and do infinitely more damping of economic activity. At least Council Tax (or LVT) is an in-your-face tax, where people can weigh up the pro's and con's of buying or continuing to own that land - and if the tax is 'too high', you can always sell up and the newcomer is compensated by the fact his mortgage payments are lower.

What's more "insidious" - a stealth tax (or "indirect tax" in politico-speak) or an in-your-face tax?

"In many cases the council tax (even in the lower bands) takes a higher percentage of the State Pension, than is levied in Income tax on the most economically advantaged."

Agreed. Because Council Tax contains a very large Poll Tax element, it is not proportional to property or land values. So people on low incomes in small/cheap houses get clobbered disproportionately.

Conversely, people in large houses pay far too little in Council Tax but then get clobbered with SDLT or Inheritance Tax. How about levelling the playing field and replacing all three with a progressive property tax, of about 1% of property values, like in Northern Ireland?

"And for what? Services many of those same vulnerable people will make little or any use of."

Taxpayers pay tax. Welfare claimants - which includes pensioners - are paid out of that pot again or benefit from 'services'. And if they don't think they are getting good value for money, with LVT (which would be proportional to property values) they can always trade down to a smaller property or a cheaper area.

You make the mistake of confusing council tax (which as mentioned contains a large poll tax element, in other words, no matter where you live you have to pay it) with Land Value Tax, which, by definition, would be much less than Council Tax in less desirable areas (and much more in desirable areas).

AntiCitizenOne said...

You could also have the LVT @7% and fund a citizens dividend, and practically guarantee no more bust in (initial) house affordability.

Anne Onymous said...

MW. You are completely wrong, and clearly do not collect VAT for the state ( sarky bit over). When I trade, my customers are other businesses. The option to voluntarily register for VAT is there even if trading below the threshold incidentally.

If I turn tuppence or ten millions, I add VAT at any rate under the sun. I send that money to the Customs and Excise. It is a levy, a surcharge, its NOT my money.

The next guy in the chain, to whom I have sold the goods or services reclaims that bit of tax I charged him when he makes his VAT return. If he is selling something VAT zeroed, or exports, he may get money back. If he sells VATable supplies he adds the surcharge to his bill and sends that cash to the Customs.

Neither he, nor I actually paid any tax. The tax is only borne ultimately by end consumers. Everyone else in the chain reclaims the input tax.

Your original hypethesis is factually incorrect. Now rant about different taxes all you like, but read up how VAT works before attacking one of the few efficient taxes.

Mark Wadsworth said...

Anne, I know perfectly well how VAT is supposed to function and all the maths and exemptions and stuff. I do this for a living.

What you overlook is that there is a big difference between the legal and economic incidence of a tax.

I invite you to imagine that you are carrying out a non-VAT-able business (like making and selling cakes, which are VAT-zero rated).

Let's ignore the input tax reclaim complications and assume you grow the wheat, grind the flour, bake the cakes and sell them from your own premises.


The government then decides that cakes are VAT-able (like biscuits).

Do you seriously think that you can just put up your prices by the full 15%?

Maybe you can pass on half the cost, let's say. So the end effect is that prices to the consumer go up, which means that your turnover is depressed doubly - firstly because part of your turnover now goes to the taxmand and secondly because the price increase leads to a fall in demand.

So output decreases and your after-tax profits go down. I don't call that 'efficient'.

There are some commodities where demand is price inelastic (fags, booze, petrol, domestic power) and so a sales-tax is mainly borne by the consumer. But where demand is price-elastic, much more of the tax is borne by the producer.

Mark Wadsworth said...

Anne, simple maths will also tell you that VAT is a tax on gross margins.

Let's assume a perfectly ordinary VAT-able business that buys e.g. furniture and sells it to individuals.

He buys item for £100 + £15 VAT.
He sells item for £200 + £30 VAT.

His cashflows are:
purchases (gross) -£115
Sales (gross) +£230
VAT liability (£30 - £15) -£15.
Retained £100 (to cover overheads and salaries).

If we replaced VAT with a 13.04% tax on gross margins, the cash flows are:

Purchases -£115
Sales + £230
Hence gross margin £115.
Gross margin tax (13.04% x £115) = -£15.
Retained £100.

In other words, although the legal incidence might change, the level of the tax does not.
----------------------
Further, UK VAT receipts are £80 billion per annum and UK corporation tax receipts are £40 billion per annum. Remember that half of businesses are exempt or zero-rated for one reason or another.

So the half of businesses that are VAT-able pay FOUR TIMES AS MUCH VAT as they do corporation tax. Do you sincerely believe that VAT has no dampening effect on the economy?