Simple logic tells us that VAT is not a tax on 'consumption' (as if that were a bad thing), but either a tax on business turnover or a tax on gross margins (depending on how you argue it). Suffice to say, like Hal 9000, if you try to build some sort of coherent strategy on something that is basically a lie, bits will keep dropping off and you have to invent new lies to patch over the missing bits.
Approaching five billion missing bits, it would appear.
FFS, if they haven't worked out how to make VAT 'work', even on a purely administrative level after thirty-six years (even ignoring the economic damage, which is more difficult to measure), can't they just do the decent thing and scrap it and increase corporation tax to fifty per cent* (or whatever rate we'd need to make up the difference). Which is roughly what employees suffer, if you factor in Employer's and Employees' NIC and Tax Credits withdrawal at the 'second withdrawal rate'.
There'd be a complete outcry, of course, if the government announced that they were abandoning their favourite stealth taxes - VAT and National Insurance - and having a flat tax rate on all income of fifty per cent, but at least it would be honest.
Ah ... right.
* Fag packet time, based on round figures from memory, valid as at a year ago - corporation tax receipts (excl. North Sea surcharge) £30 bn on pre-tax profits of £140 bn, VAT receipts £80 bn. Gross profits, pre-VAT = £220 bn, so required rate = (£80 + £30 bn)/£220 bn = 50%.
Male Talkers
6 hours ago
19 comments:
One of the problems with cutting VAT or removing it entirely is that there would be a huge temptation on the part of retailers (and everyone else down the supply chain) not to cut their price by the full amount and pocket the difference. Thereby reducing disposable income to consumers.
Increases in VAT have a similar effect - prices tend to rise more than the VAT rise. Retailers tend to use any external excuse to raise prices (VAT increases, fuel price rises, commodity price rises) and conveniently 'forget' to reduce their prices when the external forces move in the opposite direction.
Sobers, you are still falling into the trap of thinking that "the consumer pays the VAT".
VAT is a tax on gross margins, so the consumer pays the tax no more or less than it pays the supplier's tax on net margins (i.e. corporation tax). OK, it pays more of the former and less of the latter but it's only a question of degree.
Put it another way, if they cut corporation tax, would this primarily be with the aim of encouraging companies to reduce prices? No, it would be with the aim of encouraging investment in business - and as more businesses are drawn into a more profitable environment, ultimately prices would come down as well.
Or put it another, another way. If businesses are paying £110 billion corp tax + VAT in Year One and then just pay £110 billion corp tax in Year Two, why would this be expected to change anything at all apart from being honest about true tax levels and a welcome simplification?
FFS, if they haven't worked out how to make VAT 'work', even on a purely administrative level after twenty-six years (even ignoring the economic damage, which is more difficult to measure), can't they just do the decent thing and scrap it and increase corporation tax to fifty per cent* (or whatever rate we'd need to make up the difference).
No, no, no - why hit businesses for the sins of the government making up for shortfalls it caused itself?
The last thing we need today is for small and medium business to be hit by yet another tax or fee.
JH, what I suggested was replacing a stealth tax (VAT) with an in-your-face tax (higher corporation tax) on a fiscally neutral basis.
Some businesses would win and some would lose, but at least people would realise how ridiculously high taxes and government spending are.
You also appear to be falling for the myth that businesses don't "pay" the VAT.
Larry Elliott is quite interesting on tax in the Guardian today.Added inducement: he's come out for LVT!
DBC, sure, but he also says:
"Darling ... could prevent corporate tax avoidance by taxing companies on their turnover rather than their profits"
In the pantheon of taxes, taxes on "turnover" like VAT are the very worst taxes, and two wrongs don't make a right.
Mark, you forget that the biggest contributor to govt coffers through corporation tax is the SME. A flat 50% tax rate would kill SME's in a single stroke.
I'm a contractor. Because of this government's obsession with contractors seemingly dodging tax, they forced us to become private limited companies and therefore subject to corporation tax. All my meagre profits (post drawing of salary, paying PAYE, NIC, employers' NIC and other expenses) is subject to corporation tax. Whatever is left after that I may draw down as a dividend which is added to my earnings and taxed again. Is it any wonder then that I begrudge paying this government anything at all and do everything within the current tax laws to minimise the amount of tax at all levels I have to pay?
HC, I spend all day sorting out corporation tax and VAT for SME's.
I have plenty of clients who pay four times as much VAT as corporation tax. They pay an effective rate on net profits of 80% or something. So they'd be far better off.
Perhaps you are in a VAT zero rated industry, so you'd lose out (but still be profitable).
You are the third commentator who fails to realise that IT IS VAT THAT IS KILLING BUSINESS!
Why would a stealth tax that adds at least 20% to the true tax rate be any better than an in-your-face tax that adds 20% to the true tax rate?
(The fact that taxes are far too high is, as I have said a zillion times, a different topic.)
HC, you are factually incorrect as well. Until the banks went *pop* last year, three quarters of corporation tax was paid by banks and oil companies.
I'm afraid MW you haven't really answered my point. Not withstanding all that stuff about gross margins etc, it is my opinion that any shopkeeper would attempt to maintain the retail price to the consumer and increase his profit margin if VAT were to be abolished.
He might indeed end up paying as much or more income tax as a result, if tax on profits were raised to 50%. And the tax take to the govt would very possibly remain the same.
But if consumers were simultaneously to pay 50% on their income too, the result would be a squeeze on disposable income as prices failed to fall as far in the shops as the tax on incomes rose. Apart from the fact that a significant proportion of retail sales is zero rated, and these would not fall in price at all.
So the effect of abolishing VAT and increasing income tax by the same amount would have the effect of reducing disposable income for the very poorest, as they spend more on zero rated items as a proportion of their income than the wealthier.
Sobers:
1. "it is my opinion that any shopkeeper would attempt to maintain the retail price to the consumer and increase his profit margin if VAT were to be abolished."
I completely agree, but with higher margins, there'll be more competition which will push prices down again.
2. "[The shopkeeper] might indeed end up paying as much or more income tax as a result, if tax on profits were raised to 50%. And the tax take to the govt would very possibly remain the same."
Again, I completely agree. The whole point was this would be fiscally neutral, but at least simple and honest.
3. "...if consumers were simultaneously to pay 50% on their income too, the result would be a squeeze on disposable income."
As I pointed out in the post: "[50% tax] is roughly what employees suffer, if you factor in Employer's and Employees' NIC and Tax Credits withdrawal at the 'second withdrawal rate'."
And for people entitled to any welfare payments (even if it's only council tax benefit) face an effective 'tax' rate of up to 100%.
4. "a significant proportion of retail sales is zero rated, and these would not fall in price at all."
Maybe, but what fraction of our incomes do we spend on food and newspapers? Five or ten per cent?
5. "So the effect of abolishing VAT and increasing income tax by the same amount would have the effect of reducing disposable income for the very poorest, as they spend more on zero rated items as a proportion of their income than the wealthier."
a) The second part isn't true actually - VAT is slightly regressive as it applies to 'essentials' like domestic fuel, petrol, fags and booze, on which lower income people spend a disproportionately large amount of their income. And they spend less on VAT zero-rated stuff like private education, new housing or holidays abroad.
b) As to the first part, we could help 'the poorest' firstly by scrapping means testing and/or by doubling the tax-free personal allowance.
Remember always that a basic rate employee has a personal allowance of £6,000-ish and pays 31% on the rest. A higher rate employee has, mathematically, a personal allowance of £14,000 and pays 41% on the rest.
If you earned £18,000 - what would you prefer? 31% tax on £12,000, or 41% tax on £4,000?
See also the "ten pence tax debacle". Cutting the rate at teh expense of a lower personal allowance is regressive!!
The excuse will always be about the zero rated items and poor people. The answer to that is simple: raise the tax thresholds/unemployment benefit to compensate.
VAT is terrible. It costs business to run it, frequently to do little but bill their clients for VAT, who then just claim the cost back from the VAT man. Pointless. Then there are non-VAT businesses who have an exceptional year and just have to stop trading.
Tax simplification is a complete win-win. The only people who lose are people like accountants and some people at the HMRC. And these are the sort of jobs we want destroyed in favour of more money to pay for decorators, burlesque dancers and ice cream men.
I stand correted and chastised (slinks off to stand in corner)
I think you meant to say 36 years, not 26.
Anon, well spotted, I have amended.
"it is my opinion that any shopkeeper would attempt to maintain the retail price to the consumer and increase his profit margin if VAT were to be abolished."
"I completely agree, but with higher margins, there'll be more competition which will push prices down again."
You've just destroyed your own argument, and demonstrated that VAT mainly reduces overall demand in the long run, not margins; so in that sense it acts as a consumption control. Clearly then increasing VAT will damage business, but only relatively, if the product is still demanded, then the result might be reduced production (job losses); that's kind of the point sometimes (at least where green taxes are concerned). The corporation moves on, since it cares only about its profit margin, not about how many employees can be sustained in its industry.
It's easy to say so-and-so is a tax on business/people, but really that's smoke-and-mirrors, all taxes are taxes on some sort of economic activity, but consumption taxes are in vogue right now.
G, I haven't destroyed my own argument.
Maybe the Greenies and The Tories and The Righteous generally want to reduce 'demand' or 'consumption', but do not forget that 'production' and 'consumption' are always equal and opposite amounts.
You sort of support my argument with this:
"The corporation moves on, since it cares only about its profit margin, not about how many employees can be sustained in its industry."
I have no grudge against 'corporations' or 'employers', but I particularly care about 'employees'. If we are nicer to 'corporations' or 'employers' then they will sustain more 'employees', which must be a good thing, surely?
And I'd hotly disagree with your parting shot:
"...all taxes are taxes on some sort of economic activity, but consumption taxes are in vogue right now."
Taxes on site-only land values are not taxes on economic activity, as simply owning land is not an economic activity, it's not even an activity, really.
I know this is an old thread but this silly tax just got sillier by a factor of 100. Now all under threshold electronic goods providers have to be vat registered to sell into the EU. Banning EU may be illegal. I'm well peeved off! The EU can go f* it's self.
ND, yes.
But it's not "electronic goods providers" who are affected, it's "people who sell over the internet" . It doesn't matter what you sell. Which is a significant chunk of small businesses.
Post a Comment