AB emailed me a link to the minutes of the IEA's Shadow Monetary Policy Committee's last meeting:
... Some members expressed concern that the UK was the wrong side of the Laffer curve, now that government spending was around 54% of the factor-cost measure of national output. One member presented a model simulation of the effects of raising Value Added Tax (VAT) to 20%.
This simulation suggested that such a move would leave government debt higher in ten year’s time, than leaving VAT unchanged, and that unemployment would be 231,000 higher and national output 1.3% lower with such a tax rise. It was suggested that the new Office for Budget Responsibility (OBR) should publish a series of such simulations using the HM Treasury model as a contribution to a more informed public debate.
a) I bet the OBR will do no such thing. The Lib-Cons will no doubt perpetuate the myth that 'taxes on consumption (i.e. VAT) are not so bad for the economy', glossing over the fact that VAT is in fact a tax on gross profits (the clue is in the name - 'value added' = 'gross profits').
b) It is more or less impossible to design a sales tax or turnover tax which is not simultaneously a tax on gross profits, unless demand is price inelastic and supply is price elastic (fuel, alcohol or tobacco duty), or if the tax is there to pay for 'externalities' (like a 1% on new goods to pay for refuse collection) in which case depressing output may be an end in itself.
c) The only tax on consumer spending or 'consumption' which is not in any way simultaneously a tax on gross profits or economic activity is of course Land Value Tax, for which there ain't no Laffer Curve as land is not produced and you can't take it offshore.
d) While you can't rely on these models for 'the answer', I'm sure that they point in the right direction. Using them to extrapolate in the other direction is doubly dangerous of course, but if a 2.5% hike = 231,000 job losses, then a 17.5% reduction = 1.6 million jobs created. Getting rid of VAT would be of particular benefit to those businesses which create real wealth, relative to those on which Labour's economic miracle was based, i.e. house prices and financial services banking (which are VAT exempt or zero-rated anyway).
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18 comments:
You can tell who really runs the country, just look at those sectors of commerce that pay no VAT.
This simulation suggested that such a move would leave government debt higher in ten year’s time
After the crash, eh?
Land is produced, the special term for this is conquered.
Oi! Not all of us wot 'ave a living in financial services were part of New Liebors 'economic miracle'. Some of us were dead against the bollocks that turned out to be New Liebors 'economic disaster'. Some of really do try really hard to 'add value' - it's just that we don't like being taxed on our gross profits for doing so.
B, indeed. You can also tell who invented VAT - an unholy coalition between German mercantilist manufacturers and French farmers. The fact it was gleefully embraced by UK Home-Owner-Ists and banks was more or less inevitable.
JH, which crash?
AC1, warfare is usually a negative-sum game.
L, fair comment, I've changed it to 'banking'.
MW,
I was being a bit flippant.
I've been recently thinking if there's a sort of Laffer Curve in terms of population density.
AC1, maybe there is, maybe there isn't, but that's up to this wonderful thing called 'individual choice'.
Different people at different times in their lives prefer the bustle of the metropolis, the calm and convenience of the suburbs or the [I struggle to think] of the countryside.
Some businesses just need lots of potential employees and customers but little physical space; others need plenty of physical space; or might be the sort of business near which nobody wants to live (nuclear power stations; airports; sewage works; whatever).
There is no 'optimum' in any direction.
VAT is a tax on gross profits, eh?
Hmmm
Imagine a business that buys stuff for £1 million plus VAT and sells for £10 million plus VAT, but has to pay out £9 million in wages. Gross profits = nil.
Customers pay 17.5% VAT on £10 million = £1.75 million. (Or if you prefer, the business pays that out of its sale prices of £11.75 million.)
The business also pays out £175,000 in VAT on its supplier's invoices, but it claims that back from the government.
The business is paying £1.75 million in VAT but making nil gross profits.
The truth is that VAT is a tax on all sales by VAT registered parties to non-VAT registered parties. Short-hand for which (roughly) is a tax on consumption.
Granted, it is a daft tax because it is paid and reclaimed so many times.
AC, I have been doing this for twenty years and know more about tax and accounting and economics than most people.
a) Gross profits = true profits + wages + non-VAT-able costs like interest or rent (if landlord has not opted for VAT); or gross profits = VAT-able turnover minus VAT-able inputs.
b) In your example, gross profits = £nil + £9 million + £0 = £9 million.
c) VAT paid over to government = £1.75 million minus £175,000 = £1.575 million.
d) Gross profits £9 million x 17.5% = £1.575 million.
e) VAT is a tax on 'value added'. 'Value added' is the same - whether literally or mathematically - as 'gross profits'.
f) VAT is not a tax on 'consumption' it is a tax on 'gross profits'; and seeing as the total gross profits of the whole supply chain = cost of raw materials from ground + wages + profits + interest etc, it is ultimately just a tax on economic activity.
g) Let's take the example of a mobile hairdresser who happens to have crossed the VAT threshhold and has practically no VAT-able inputs. His or her gross profits = the value of his or her labour/skills/wealth created. Where is the moral, mathematical or practical difference between his or her 'income' and the amount of hair cuts which his or her customers 'consume'?
AC, or if you want the edited version of that: "stop just believing what the EU and politicians want you to believe and do a bit of logic and maths"
AC, or if you want the edited, edited version: "Do you have the faintest clue about the difference between 'gross profits' (in your example £9 million) and 'net profits' (in your example £0)"?
Maybe go and buy yourself some accountancy textbooks or something, eh?
OK I'll put it another way. There's a population density that maximises the citizens Dividend.
I think LVT would suffer to some effect from the laffer curve, in that the effect of LVT would be to depress prices, set it too high and prices will come down to the point that you're taking less money via LVT.
RA,
Not really. There's a point where the LVT won't rise further, but it won't drop.
Remember, price is basically the future yield, once all the location value is taxed away the price will fall to a floor based on the value of what is done ON the property.
LVT is not a property tax.
RA, at low levels, it makes no difference whether the LVT is a % of capital selling values or a % of rental values.
a) As AC1 says, if it were a % of capital selling values, then there is no downward slope on the Laffer Curve, it just flattens off (but once we get to higher percentages > 20%, the capital selling values would tend to fluctuate strongly, which could be fixed by averaging over longer time periods).
b) If it were a % of rental values, then 100% is the ideal value but there is no Laffer tipping point - it is a straight upwards line; if it went slightly above 100%, then it would act like and income tax on the rental value of the building (in which case the world would not come to an end) and/or it would put a brake on new construction (which some may see as A Good Thing).
I reckon that the Laffer Curve maxima is as low as 7% so it's not worth putting higer than say 10%.
AC1, I was talking about a tax on site-only values, plus I backed this up with a bit of maths.
This might well average out at just under 7% of total property values (including bricks and mortar), which I believe is your preferred option (and far from the worst way of doing it).
Yep. I believe "The Crown" could charge for the WHOLE (location + buildings) site value and then provide rebuild insurance.
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