As I've said before, VAT is The Worst Tax of All.
The Chartered Institute of Personnel & Development have also come to the conclusion that increasing VAT from 17.5% to 20% will result in 250,000 private sector job losses, which gives us a nice easy rule of thumb: 1% VAT increase = 100,000 jobs lost.
Extrapolating is always a risky business, but it's also a not unreasonable assumption that 20% VAT adds two million to the unemployment statistics, plus a corresponding number of businesses which go under (or never got off the ground).
I shall have to wait until later in the year when the supermarkets* report their half year figures for a period when VAT was 20%, and then we can see what impact the changes from 17.5% to 15% to 17.5% to 20% have had on their gross profits. So far all the evidence says that the bulk of the tax is borne by the producer - if the old lie, that 'the consumer bears the tax' were true, then changes to the VAT rate would see overall business income change when the rate changes (consumers have limited budgets) but gross margins would stay the same.
* Taking them as a proxy for the economy as a whole.
But It's Not A Person...
12 minutes ago
19 comments:
"...if the old lie, that 'the consumer bears the tax' were true..." Weerrll. 'Economies consist of people and things. Governments and companies are just convenient admin. fictions by which we better organise our lives' - hence ALL taxes are ultimately borne by individuals, or more strictly wealth creating private individuals in private businesses
L, yes of course. That's how big the lie is - even when you are trying to counter it, you stumble into yet more untruths and contradictions.
"Extrapolating is always a risky business, but it's also a not unreasonable assumption that 20% VAT adds two million to the unemployment statistics, plus a corresponding number of businesses which go under (or never got off the ground)."
Seems reasonable when you take the real unemployment figures i.e. incapacity benefit scammers. Add to that the number of part-time jobs currently in the economy in which 2 people are doing the job of one. Add to that the public sector where one job is done by 6 people.... the figure exceeds 2 million significantly and we have other job destroying taxes such as Employer's NI contributions. Not an unreasonable assumption. Now what's 2mil x average pay x sensible tax rate(after scrapping VAT/NI)
SW, this sort of forecasting is very tricky, but I did some estimates here.
Once you take everything into account, the overall impact of government revenues minus spending could be anywhere between negative £2 billion and plus £4 billion.
MW/SW excellent ASI paper here:-
http://www.adamsmith.org/think-piece/economy/tax-and-spend-destroys-living-standards/
Mark, I share the sentiment but it is not THE worst. Poll Tax is the worst.
L, sure but the ASI have got a blind spot when it comes to LVT (despite Adam Smith recommended it).
JH, what I don't like about Poll Tax is the sheer utter pointlessness of it, it'd be quicker and easier to reduce benefits or reduce the tax free personal allowance.
While reading this post I thought about your previous post on VAT inhibiting entry to markets. And as a result another possible bad effect of VAT occurred to me.
If you agree with Ricardo's idea that all wages are affected by the minimum wage and that the true minimum wage (as opposed to the legal minimum) is at least the maximum of the amount which can be earned by self-employment or by social security benefits in modern Britain, then anything that makes entry into the market as a self-employed person more difficult will also have an effect on the overall level of wages. So it seems to me that VAT might cause a fall in the level of wages owing to its effect on market entry in addition to the increased unemployment due to the VAT-related fall in production.
Does this seem reasonable or is it a step too far?
D, being entirely fair, the UK VAT threshold is quite high, so if you can make yourself self-employed and earn £70,000 or less, it doesn't affect you too much (but it is a huge barrier to taking on an employee or two, because that's the level where you go over £70,000 turnover), but yes, all things being equal, VAT must depress wages slightly (because there are fewer employers looking for employees).
The best bit was George Osborne on Radio 4 this morning saying that VAT had the advantage that it was "relatively simple to administer"!
Hang a moment, on one of the (many) LVT threads you were claiming abolishing VAT would save the average person £3k in VAT paid on goods. So there you were arguing VAT falls on the individual consumer, but here you're claiming it falls entirely on business?
And even if the bulk of VAT is borne by businesses, as others have pointed out above, that merely moves the tax burden on to other individuals, as companies per se do not exist, but are merely legal fictions. As a result of VAT someone, somewhere, is being paid less, making less profit or paying more for goods than would otherwise be the case. The business itself is irrelevant. Its just the conduit through which the tax flows.
AC, it's simple enough for the government, they just change the law and hope for the best.
S, VAT is almost entirely borne by 'the producer'. I may occasionally have gone along with the official line that 'the consumer pays it' for mathematical simplicity, but so what? Whether I overpay by £3,000 for goods and services or whether my wages are depressed by £3,000 is irrelevant.
As you rightly say, as most people are both producers and consumers, it's neither here nor there.
VAT is a tax on economic activity which depresses economic activity.
So for every £1 the government collects, the economy shrinks by £2 (or whatever). The simple fact of collecting tax in this way makes us all collectively poorer. (the same goes for most taxes apart from LVT).
Vat is in the end protectionis for monopoly power.
Seems a stretch? Well the more you tax production the more unearned incomes will benefit you.(rent) even though total production falls, the portion going to rent will grow. Get it yet?
The larger the corporation the bigger the rentier.
Derek is correct wages will fall in proportion. Sober is also correct. It don't matter in the end. Producers will get less. Non producers more. Of less.
This is why you never hear the big guys complaining. This why Mr Redwood loves Vat.
Its a general principle of taxation that all taxes fall eventually on people not companies. So the burden of VAT falls upon actual people somewhere, be they consumers paying higher prices for goods and services, workers being paid less than they otherwise would be, and business owners (shareholders, sole traders and partnerships) in the form of lower profits/incomes/dividends.
VAT is not 'entirely borne by producers', but some combination of the above 3 elements. How much each element pays is open to debate, but each sector contributes in some way, the amount depending on the nature of the good or service provided and the structure of that sector of the economy.
For example the VAT on petrol is predominantly borne by the consumer, as the demand for petrol is inelastic, and the market not that open to new competition. VAT rises are passed on in their entirety.
Whereas the demand for restaurant meals is much more elastic, and the market far more competitive. Thus a rise in VAT will be borne more by the restaurant owner and his staff than the consumer, who may see prices rise only by a fraction of any extra VAT imposed.
RS, correct, large established producers quite like VAT (or at least, they vastly prefer it to corporation tax) as it acts as a barrier to entry, worked example here.
S, agreed, the burden of VAT is shared between (a) the producer (whether employer or employee, is the same) and (b) the consumer BUT you miss off possibly the most important bit (c) all those businesses which go out of business (or never get going in the first place) and all those people who lose their jobs (or those jobs that are not created in the first place).
I could live with (a) and (b) but it is (c), the dead weight costs, which make it such a terrible tax (and the cost and hassle to the business of administering it).
S, i also like your example about VAT being borne by consumer if demand is inelastic (petrol) but borne by producer if demand is elastic (restaurants).
I've said this many a time, which is why fuel duty ain't such a bad tax, and of course best of all is LVT because supply is completely fixed, so it is always borne entirely by the person occupying the land (whether tenant or owner-occupier) so it cannot be passed on so it has no dead weight costs, not a single job is lost, not a single business goes out of business (unless they can be replaced with a more profitable business, but that's one of the good things about rents).
But Mark this inelastic/elastic thing is the one thing everyone knows about sales taxes, and I assumed you didn't accept it? Surely 'demand for supermarkets non-VAT goods' is inelastic?
M, neither of use can possibly know what the price elasticity of demand for all the thousands of different VAT-able things are which people buy in supermarkets, but we can assume that the overall average is a fair reflection of the overall average of all demand for everything.
And my supermarket comparisons (17.5% to 15% to 17.5%) suggest that the bulk of the tax is borne by the producer (i.e the manufacturer, the supermarket, the employees in totality), i.e. chances are inelastic supply (in short run), elastic demand.
It is only if you take elasticity of supply and demand into account that you realise that some taxes have much bigger dead weight costs than others.
Funnily enough, the lowest dead weight costs are at the two extremes A and B:
A. Fuel duty = elastic supply, inelastic demand = tax borne by consumer, low dead weight costs (and fuel duties act as an excellent rationing mechanism for roads). Same goes for tobacco and alcohol duty.
B. Land rents = inelastic supply, elastic demand = tax borne entirely by supplier (i.e. landowner, vendor or owner occupier). The price the consumer pays to rent or buy already includes the tax so yes of course the occupier ultimately pays it - the question is how the total rental income is shared between supplier and tax man. No dead weight costs at all.
The highest dead weight costs are the intermediate case:
C. Everything else = elastic supply, elastic demand. This leads to destruction of jobs and businesses, and economic activity not taking place that otherwise would have done. This applies to VAT, national insurance, income tax and corporation tax. Bad taxes.
Well of course we don't know what the elastities are for every good, which is why I used a collective term.
I just can't see why demand for "all non-VAT consumer goods" (I shouldn't have said supermarket) would be elastic, ie a 10% increase in prices leads to a greater decrease in demand. Maybe the supply side dominates.
On supermarkets' profits I'm not sure. I think you offered anyone a bet back in July about it, and I almost took it. I did some calculations while sat by the pool in a rather trendy hotel in LA*, and I'm pretty sure the 1991 increase didn't see what you suggest for Sainsbury's (whose data I think is online back that far - or some broker). I'm wondering whether the issue isn't something to do with whether it is a permanent change or temporary.
* I didn't** as I'm not sure but also because I didn't finish the research as I got somewhat distracted from VAT calculations for obvious reasons.
** Unless I did? My memory is rather hazy of the whole period.
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