Commenting on the car scrappage scheme back in May 2009, I said:
... the most important tax here is Value Added Tax, which makes up £2,000 [the nominal value of the car scrappage scheme discount/voucher] of the selling price of an average new car costing £15,000. It would have been a damn' sight easier just to scrap VAT on new car sales and have done with it, of course, but we can't do that because of the EU.
VAT is, as I have said many times before, The Worst Tax because it has the most depressing effect on economic activity, i.e. people exchanging goods and services for mutual benefit - VAT effectively makes it illegal to carry out a business activity with a gross profit margin of less than 7/47 of the selling price. If VAT were to be reduced or eliminated, then the dynamic fall in tax revenues would only be a fraction of an estimate of the static tax cut, because other tax receipts (corporation tax or PAYE income tax) would increase by a disproportionately large amount.
So for simplicity, we can look at the car scrappage subsidy as a temporary VAT reduction or exemption for new cars. Recently published statistics in The Times suggest that this effective reduction in the VAT rate on new cars led to a modest increase in overall VAT revenues after deducting the 'cost' of the subsidy, and that's before adding on any increase in corporation tax or PAYE income tax receipts from the motor industry, or any savings in unemployment benefit that would otherwise have been paid out:
Industry figures show that from May to the end of December [2009], 290,000 cars were sold through the scrappage scheme. If the average selling price in those months was £8,000, then the Treasury would have reaped £348 million in VAT receipts against the £290 million paid out.
Lord Mandelson’s decision to extend the scheme by a month ensured even greater profits for the Treasury. In the past three months, another 110,000 cars have been sold. If they, too, were sold at an average of £8,000, the sales at the restored rate of 17.5 per cent VAT would have reaped a further £153 million in the tax. That would make total VAT proceeds of £501 million against incentive payments of £400 million, and a Treasury windfall profit of £101 million.
Just sayin', is all.
Quick update
6 hours ago
21 comments:
> If VAT were to be reduced or eliminated, then the dynamic fall in tax revenues would only be a fraction of an estimate of the static tax cut, because other tax receipts (corporation tax or PAYE income tax) would increase by a disproportionately large amount.
Or House prices would rise.
AC1, true. As the old saying goes 'all taxes come out of rents' so the chances are that house prices would rise as well, in which our old chum LandValueTaxMan would be helpful.
Rather than collecting VAT on damn near everything we buy licitly, it might be better just to increase the duty on petrol and diesel - dead cheap to collect, hard to avoid.
D, indeed, in the pantheon of taxes, fuel duty has to be one of the least-bad, as it's a sort of user charge on roads, and because traffic moves slower during the rush hour, you use more fuel and hence pay more tax when you use roads which are crowded.
Oh yes, I remember the 1997 Labour pledge card, one pledge being to remove VAT on domestic fuel.
If they didn't already know that the EU wouldn't allow that, they were told when Brown went to Brussels not long after he became Chancellor.
High Fuel duty might mess up farming productivity though...
It's a bureaucratic fix (i.e. I hate it) but could a repayment of duty be tied to land yield*?
* To prevent the U.K. having to rely totally on food imports, which is obviously rather risky.
Anon, indeed.
AC1, that's why farmers can buy red diesel taxed at lower rates for off-road use. So that problem has already been solved.
AC1, your housing argument is a red herring -- renting is far better value right now (and has been for a few years now), and prices have been skewed by loaning money to people in unsustainable multiples and conditions.
One result of this has been a huge drop in middle class kids being born (think future tax payers) but it does not turn up on any balance sheets yet because for the
first 25 years of their life they are a liability, they only become assets later on.
As for your argument that VAT savings will only be spend on housing -- in the 1980's crash people would eat Whiskas curries before losing their house eventually, not a rational decision at all, but it's a fact that most people simply can't do the math that would tell them the true state they are in and thus they are easily bamboozled into buying 'investments' they cannot possibly afford. That's not 'slack in the system' but a race to the bottom. (think of how much you can save by living in a cardboard box -- wow, we could crank up VAT to 50% to mop up the 'spare money'...)
Not charging VAT will create jobs because people can once again afford to hire the local plumber and get their (say) loo fixed properly, instead of bodging it somehow DIY-style because it would otherwise cost them the best part of an average week's wages as it does now.
Wealth is calculated by what you can afford after you paid for your basic survival -- you don't bring home a can of beans as a present for the missus, but a bunch of Roses or a box of chocolates...! ;-D
FH, fair points all, but AC1 could also have said that cutting VAT (or any other taxes on incomes or production) will increase the rents that people will pay.
Why should scrapping VAT increase rents -- by what mechanism?
Rents have not increased in most places in the last few years, and there is a glut of rental properties out there, and landlords are often subsiding tenants, in many cases the rents just about bring in at most 4-5% of the purchase price of the house, which means they're in fact running a loss. If they could somehow raise the rents, they would have long ago done so.
Btw, the only reason why rents are not cheaper than they are already are is that they are artificially supported by generous housing benefit provisions.
FH: "Why should scrapping VAT increase rents -- by what mechanism? "
Because rents/house prices are a fairly fixed proportion/multiple of people's disposable incomes, after taxes and necessities. Rents are fixed in the short term, house prices are fixed in the longer term.
Whether you see VAT as a tax on spending or more correctly, as a tax on incomes, a cut in VAT increases disposable incomes and hence will feed through to an increase in rents/house prices.
I disagree with you and claim that rent is not a fixed proportion of people's income at all, other than what is happening at the bottom of the market, where housing benefit levels are setting the limits. Now, if you work for the minimum wage and as a result have to rent a slum house at the bottom of the market where there is lots of competition for the 'cheapest' places(no matter how grim), then yes, you're right, the market has built-in subsidised bottom which squeezes those on a low incomes.
Note that the majority of those people also cannot finance themselves from their earnings but almost always have to claim benefits(due to the tax credit state subsidy trap).
You could make the argument that abolishing VAT will raise their income indirectly, but the resulting (slightly) falling tax receipts will also mean that their means tested benefit will be clawed back in equal measure(and then some), and so, their purchasing power will remain as non-existent as it is right now and also they in general buy less VATted products than 'normal' earners(no car, no office clothing, no gadgets, no expensive lunch either etc). Hence the idea that their rent will rise and so all others will follow is not so plausible I feel.
The level where money is actually 'spare' is also interesting because it is a very different space -- if you are happy to spend 1-300 pounds more on the rent than the local DHSS is offering, you can pick up a very decent home for a fraction of what it would cost to own the same place. That isn't going to change even with VAT removed -- I could easily buy the house I am renting right now, but it's just not a liability I care to own(besides I'm so not into paying 20k+ stamp duty just to move hovel). Regards the mythical housing shortage... in my leafy street, there are about 10 houses for sale for wonderland prices and the last sale took place 2 years ago.
If my landlord puts up the rent, I'd just move to another house of the same type of which there are many, as 'investors' are stuck with their 'pension nest eggs', all looking to rent to 'professionals'.
So it's not a sane or a free market at all, and until the boomers get crusty enough to sell or housing benefit is axed, it'll stay strange.
On the car-scrappage thing, the figures quoted in the Times piece seem to assume that every purchase made using the scrappage scheme was an additional purchase.
This must be wrong on two counts. First because some would have been bought at the same time anyway and, secondly, because others were just accelerated purchases that deliver VAT now at the expense of VAT later. No one can know how many purchases fall into each camp.
The only real VAT bonus was from those who bought a new car (incurring VAT) but would have bought second-hand (no VAT) if not for the scrappage discount.
FH, you can disagree all you like, but the close correlation between rents and wages has been observed since time immemorial. That's an observable fact.
Yes, Housing Benefit, which ought to be scrapped for private landlords anyway. distorts this massively at the bottom of the market, but the correlation still holds.
TFB, The Times' figures are all over the place, but illustrate the general principle that cutting the VAT rate a lot only leads to tax receipts falling a bit, without trying to be too scientific about it.
Hey now, I do agree with you for the most part, wages at the bottom correlate to rents at the bottom, but that is because at that level it's not a free market, because people without cash reserves don't have many choices and moving house is unaffordable for most of those folks as they often don't have savings, so they have to put up with bad deals most of their lives.
The lower middle class (which by now make a big part of the population) are on a totally different level here to the minimum wage folk, there the correlation of housing costs to income is also tempered by how many kids need schooling, number of cars needed, housing is just one expense of many.
Those people are the main players in the game -- they pay the taxes, they hire services and they consume goods.
You can't compare them to the Britons of yesteryear, much of what they do and how they live is much unlike their parents experience which often was much simpler.
Btw, if VAT wold be nixed, the cost of doing business would fall(since no-one needs to waste time playing tax collector anymore), which would allow more competition.
FH, it's not just "at the bottom", housing is a "normal good" so is a fairly fixed % of incomes all the way up the income scale, like City boys who pay £1,000s a week for a posh flat. We can take initial mortgage payments as a proxy for rent as well.
And yes of course there are other factors, like how many children you have and so on, but these also even out all the way up the income scale.
Very well spotted. Yet more evidence that the UK government is taxing too far up the Laffer curve.
Mind you, a £2,000 scrappage allowance isn't exactly the same as a £2,000 reduction in VAT. Don't forget the old bangers being scrapped do have some value. If you have an old car worth say £500 and scrap it, your effective allowance is only £1,500. And also, of course, the supply of old bangers in the country is reduced, so their value rises. So people in the market for an old banger suffer.
By the way, you're not a nutter. Just a sadly misguided UKIP supporter. ;)
AC, agreed, the effect of the Laffer Curve is difficult to measure in practice, because there are always so many other factors in play - hence my concept of The Laffer Rainbow. But the theory is sound - the only thing that you don't get less of by taxing it is the rental value of land.
As to your last comment, what on earth makes you think that I have, or have ever had, the slightest sympathy for the Tories? Apart from John Major, of course.
Eh? I said "UKIP supporter"! I have ample evidence of that!
AC, you are a Tory supporter who described me as a "misguided UKIP supporter", presumably in the vague hope that you could 'convert' me to supporting your favourite out of the big, slushy, large-government parties, i.e. the Tories.
And I was reminding you that there was no way in heck I would ever do so. I'd sooner vote Green, if only I could knock this 'global warming' nonsense out of their heads.
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