Thoughts on politics and life from a liberal perspective

Sunday, 23 November 2008

VAT's not the way to do it

So it looks like the government is going to announce a temporary cut in the rate of VAT from 17.5% to 15%.

My initial thoughts on this are:

  1. For the cost to the economy, this is not going to make a significant difference to people's daily lives. It will cost £12.5bn per year apparently (for as long as it is left in place). However let's say you are going to go out and purchase a massive plasma TV that would previously have cost £999. Well under the new proposals it will now cost you £977.74 (a 2.13% overall reduction). Will that really make that much of a difference?
  2. What are the odds that retailers will take the opportunity to not pass the full reduction onto customers? In the above example it would be very easy for the retailer to reduce the price to £979. It looks virtually the same at the reduced price but is slightly higher. I cannot imagine many people insisting to see the manager and demanding the full 2.12765957% reduction (assuming they even know what the previous price for the item was).
  3. VAT does not apply to things like (most) food, children's clothese, books etc. so quite a lot of the things that people purchase on a daily basis will be unaffected by the change. This effectively means that the change will benefit the richer more as they are more likely to have more disposable income to spend on discretionary goods that are affected by VAT. This is starting to have echoes to me of the 10p debacle that ultimately made the poorer worse off.
  4. I run a small business, as do lots of people in this country. At the moment our systems all use 17.5% as the basis for VAT calculation. It will not be a huge effort to change this, but it will take some and it is possible mistakes will be made. Now multiply this by all the millions of businesses that will be affected by the change and you can see there will be an administrative burden. To an extent, that's just the way it is for businesses, there is always red tape. However this is a "temporary" change, i.e. they are just fiddling and it is likely to go back up in a year or two's time. That's yet more changes later on and yet more administrative work.
  5. Relating to our business, this change is not likely to make much is any difference to our revenues as a business. Virtually all the VAT we pay is offset by the VAT we charge our customers.
  6. Robert Peston thinks that in order to pay for this VAT cut, the rate will eventually have to go up to 22.5%, the only question is when will this happen. However if/when that does eventually happen, that will mean a pretty large hike in the amount charged for goods which include VAT. Surely this will damage the economy. Oh, and it is also worth noting that aside from this (temporary) measure, VAT has never come down in the long term s it is a pretty safe bet that once it reaches 22.5% it will stay at that rate (or higher) for the long term.

Overall, I cannot see this change having that much of an impact. Given that the £120 basic tax rate hike from earlier in the year (a cobbled together fudge to mitigate the effect of the abolition of the 10p tax rate) that gave each taxpayer an extra £10 a month cost £2.7bn, a quick back of the envelope calculation tells me that instead of reducing VAT, they could have given an extra £46.30 per month to each taxpayer in the country. This would have benefitted everyone who pays tax equally and actually lifted some people out of paying tax altogether. There are doubtless even more equitable ways to do this to focus on the poorest most.

I think if this change goes through in the form I have seen reported so far then it will be a very expensive and possibly counter productive damp squib.

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