VAT tomfoolery over at John Redwood's

The patron saint of Home-Owner-Ism trotted out the old propaganda yet again:

Some tax rises can be self defeating. VAT is probably the least bad tax option. Hiking the rates of CGT, Income Tax and profits tax might result in less revenue being collected. It is all too easy to put people off enterprise.

You can drive them or their profits and earnings abroad very quickly. Higher rates of Income Tax and CGT are more damaging to tax revenues and the rate of business investment and growth than higher VAT.

Nope. I left a comment as follows (ever so slightly tidied up):

Wrong. VAT is by far and away the most damaging tax.

1. It distorts massively between VAT-able and non VAT-able businesses (which are mainly those related to banking and finance, or land, i.e. food and housing, i.e. those things that got us into this recession).

2. Corp tax is a tax on the return on capital, but if you are making losses you pay nothing, so it does not eat into the capital itself. VAT has to be paid whether a business is profitable or not, so it eats into capital.

3. VAT acts as a barrier to entry/barrier to growth for new and smaller businesses, because the £70,000 threshold means that a business with a turnover of £69,000 has to leap straight to a turnover of about £90,000 before it even catches up. Further, new businesses tend to make losses in the first couple of years, so it benefits incumbents, see point 2.

4. As a simple matter of observation, VAT is largely borne by the producer, not by the consumer. Consumers cannot magic money out of thin air to pay 2.5% more than they were doing before.

5. One sign of competitive (i.e. efficient, i.e. successful) industries is where net profit margins on sales are very low (5% to 10% is about normal, across all businesses). So very profitable businesses earning more than 5% will become less profitable, marginal businesses with profit margins of 5% or less will be in the danger zone; and businesses in the danger zone, say 1% or 2% net profits will go bankrupt.

6. If you grind the figures, the knock on effect of trying to raise an extra £13 billion from VAT will be that corp tax receipts go down, PAYE receipts go down, unemployment and welfare costs go up. It is quite possible that incremental extra tax revenues minus additional welfare payments is so close to zero as to make this a very dangerous experiment indeed.

7. VAT is imposed by the EU, and as a Tory MP, you might be aware that the EU wants all Member States to harmonise VAT at 20% – to pretend that this is to try and reduce the deficit (which is not going down under the Tories, I might add) is a bit feeble.

8. If we are to try and tax ‘consumption’ rather than ‘production’, taxing the output of enterprise, labour and capital is NOT the way to do it. You have to try and identify something that has value, which people are prepared to pay for but which is not actually ‘produced’ in any meaningful way (and certainly not by individuals who can change their behaviour).

9. So how about a tax on the ‘consumption’ of land? This cannot be created, destroyed or taken abroad, so all you’d be doing is replacing privately collected taxes (ground rents) with publicly collected taxes (Land Value Tax) and reducing publicly collected taxes on output, income and profits accordingly.