Thursday, 24 June 2010

Vince Cable flushes reputation down toilet

From his post on Liberal Democrat Voice:

VAT is far less damaging for growth than most other taxes, like those on income or employment (1)... There are other far more regressive taxes, and our raising VAT has enabled us to do something about them. For example, under Labour, the poorest decile suffered a 90% rise in council tax, compared to 75% for the richest, which is why we have sought to freeze council tax in England for next year...

(1) VAT is a tax on income and employment - or does he think that the "value added" by entrepreneurs, investors and workers somehow appears out of thin air?

I commented thusly:

The debate over whether VAT is regressive or not completely misses the point, as this presumes that "the consumer bears the tax".

As a bit of basic maths and logic, backed up by looking at the accounts of businesses before and after the cut from 17.5% to 15% and back to 17.5% will show, VAT is in fact a tax on gross profits (i.e. underlying profits plus wages, out of which interest and dividends are paid) and by and large, a reduction benefits the producer and is not "passed on" (and vice versa). Because of various quirks, VAT is a far, far more economically damaging tax than corporation tax or income tax (National Insurance is not quite as bad as VAT but worse than income tax or corporation tax). Let's also not forget that VAT raises nearly three times as much as corporation tax.

Further, VAT is a tax on productive activity, and if you tax something where supply is price elastic, you reduce the amount of it. Taxes on land and building values are not economically damaging of course, because supply is price inelastic (or completely fixed, in the case of land). Therefore the least-bad tax is a tax on land values (or on land and buildings as in the case of Business Rates or Domestic Rates in Northern Ireland).

Council Tax is indeed regressive, but it is regressive to property values rather than to incomes, so what is sorely needed is to replace it with a flat tax on values (like in Northern Ireland), or at the very least have Bands A all the way to Z, where homes in Band A pay £100 a year and homes in Band Z pay £10,000 per year.


Lola said...

I long ago sussed cable as a plonker -as I now think have the Libdems.

Question. Local market town (Hadleigh Suffolk) has thriving high street with plenty of good quality good value competing shops, plus moderate sized Co-op supermarket. Tesco want to build a superstore off the high street. This is blatant category killing,, but that's OK as it's competition. Anyway, suppose we had LVT. As Tesco's killed off the smaller businesses the shop values would plummet and LVT would reduce markedly as would the rents chargeable. At the same time the LVT on Tescos site would rocket. The effect of this would be to put up Tescos costs by a significant amount so that they'd have to increase their prices. At the same time the other effect would be to wildly reduce the major costs (rent and LVT) of the small shops enabling them to cut their prices. LVT therefore levels the playing field between Tescos financial muscle and the local small businesses and benefits free markets and competition. Or have I missed something?

Witterings From Witney said...

MW, Lola makes a good point, or have we both missed something?

Anonymous said...

You have both missed something, I think.

"As Tesco's killed off the smaller businesses the shop values would plummet and LVT would reduce markedly"

Not necessarily. Just because the shops are worth less doesn't necessarily mean the land is worth less. It might be worth MORE, for example to a fast food outlet or a DIY store that might gain custom from the Tesco customers.

"At the same time the LVT on Tescos site would rocket"

Not necessarily. Just because Tesco make lots of money doesn't mean the land is worth more.

Overall, you can't have the LVT going up on the Tesco land but down on the land in the surrounding area. LVT just looks at the value per hectare of land in that area.

Anonymous said...

Totally agreed with MW on VAT though of course. You could say it is regressive, I guess, in that its hit on the businesses that pay it does not relate to their profitability - a business that is making losses can still be paying VAT.

James Higham said...

Don't bamboozle him with figures.

Anonymous said...

Very boring I know but all taxes are regressive. Bloody wonderful for the politicians to see heated debate on which taxes are best and which are the most damaging. Plays into their hands very nicely.

What we need are hugely less taxation and then we would not need to bother about which are "regressive" and which are "progressive".

The way to less taxation is to push persistently for smaller and smaller government. Not just promised cuts but actual cuts and not accept promises until they have been crystallised into actuality.

We have been conditioned to accept high taxation as a fact of life. It shouldn't be, any more than we should accept that the stock in trade of a politician is deceit.

Mark Wadsworth said...

Anon, I think 'regressive' is a red herring (that is largely up to welfare to sort out), and I agree that taxes are too high.

The point is there is a sliding scale between stupendously dishonest and damaging taxes (like VAT or Employer's NIC) through income tax or corporation tax (which are at least honest), all the way down to annual property taxes* and Business Rates which are in-your-face, honest and not economically damaging.

* As opposed to taxes on transactions in property, like SDLT, CGT, IHT and so on.