Thoughts on politics and life from a liberal perspective

Monday, 14 June 2010

Why is VAT seen as the natural option?

In George Osborne's first budget next week, most commentators are expecting him to put VAT up to 20% or thereabouts. It will bring in a decent chunk of extra revenue to help deal with the deficit.

Why is it though that VAT is perceived as a natural, easy option for putting up by politicians?

If you measure how VAT affects people by relating it to their income then it is regressive, i.e. it affects the poorer disproportionately. There are some who argue it should be measured by consumption (by which measure it is less regressive) but opinion is at the very least divided on which is the right way to measure it. Items such as some foods, children's clothes and other essentials are exempt from the tax and I would be surprised if Osborne significantly changes this but I still think putting up VAT is quite unfair. There are plenty of things that are not exempt.

One form of tax that is not regressive is income tax because it is based on the ability to pay. So for example if Osborne instead decided to put up income tax by 2% next week, at least then those paying the extra tax would be those earning above the earnings threshold and would only be proportionate to how far up that scale they go.

Of course income tax is the most visible of taxes. A VAT rise may not even be noticed by lots of people because it is many small adjustments to the various things they purchase rather than being able to compare one month's salary slip with another and seeing a very definite and comparatively chunky drop.

But just because something is politically easier should not make it the only game in town. I hope these options are being discussed at a high level and not dismissed out of hand.

The current government is almost certain to be unpopular in a year or two's time due to all the things it is going to have to do that will affect people's services and pockets. Given that, it might as well implement measures that spread the pain more fairly around.


Sergio said...

In another country I would agree that a rise in income tax would be fairer than in VAT, but the UK is still too unbalanced towards consumption, so the VAT approach seems to me to make more sense right now. Money taken from you in income tax cannot be spent, nor saved, nor used to pay off debt.

The VAT rise still gives you the choice to spend the money on more essential items, save it or pay off debt, rather than buy another plasma TV.

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