VAT: The Tories’ favourite tax
There is growing speculation that both the Tories and Labour intend to increase VAT to 20% after the election.
Given our preference for higher taxation over brutal cuts (and ignoring, for the moment, that this whole debate is premature), a VAT rise appears to have much to commend it. VAT is relatively cheap to administer, difficult to evade, and is clearly more palatable to party leaders than some taxes.
But that doesn't make it fair. VAT is immensely regressive, hitting the poorest 10% hardest – as those at the bottom spend nearly all of their income. Along with other indirect taxes, VAT counteracts the progressive effect of direct taxes, as shown in David Byrne and Sally Ruane's study, and, more recently, by Richard Murphy.
So, future chancellor, do any of the following:
- Uncap national insurance
- A windfall tax on bankers or one of these alternatives
- A land value or mansion tax
- Charge capital gains at income tax rates
- Extend inheritance tax
- Minimum tax rates for high earners
- A child poverty charge or wealth tax
- Clamp down on tax avoidance and introduce a general anti-avoidance principle
- Cut pensions tax relief for the rich
- A pension tax on companies
- Abolish the domicile rule
But don't increase VAT. In fact, leave it where it is, at 15%.
Let's also remember who increased VAT from 15% to 17.5% in the first place: that party of low taxes, the Conservatives, in 1991. And who increased it from 8% to 15% before that? The Tories, in 1979. That 1979 rise was particularly deceitful as it followed chancellor-to-be Geoffrey Howe's election promise that "we have absolutely no intention of doubling VAT". The Daily Mail listed the "double VAT" charge as one of "Labour’s dirty dozen lies" days before the election. The Ministry of Truth website lists Howe's promise as one of its "top 10 political porkies of our time".
In his memoirs, Howe described the broken promise as "part of the small change of election campaigning" – and opted for shameless pedantry over apology:
"We had no difficulty denying it. For there was no prospect, on even the most gloomy of expectations, of our having to go beyond a rate of 15 per cent.
"Some critics afterwards thought it pedantically misleading to rest our case on the fact that twice 8 per cent (the then basic rate) was 16 and not 15 per cent. They also overlooked the fact that some goods (about 6 per cent of the basket) were already taxed at 12.5 per cent: the weighted average impact of the existing dual rate was 8.5 per cent. So our denial was more than technically correct."
Howe later told Nicholas Timmins (whose account of the 1979 VAT hike in the Independent is well worth reading): "The intention was always to make a massive tax switch and I had argued that in every conference speech I had made. The only question was how far we should go."
It was indeed a massive tax switch: from progressive taxes targeted at the rich to regressive taxes penalising the poor. No wonder accountancy giants like PricewaterhouseCooopers share the Tories' fondness for VAT.
Posted by Other TPA at 03:34pm on 22 October 2009
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