One of the usual suspects trotted out the usual lies and myths about VAT in today's CityAM Forum. He is perfectly happy with VAT of course, because neither health services nor higher education, nor being a quangocrat is liable to VAT:
The 50 per cent of income tax payers on lower incomes account for just 15 per cent of revenue. The longer-term aim should be to eliminate income tax payment for all those earning under £20,000. This, especially if we move away from national insurance as a tax, would create powerful new work incentives. It would reduce the fiscal costs of underemployment by bringing back into the workforce many who would otherwise have had the highest claims on public spending. It would give greater traction to the government’s much-needed reforms on welfare.
Fair enough so far.
This change could be funded by a shift to consumption taxes, mainly through a widening of VAT coverage to include the same range of goods and services as in other developed countries. Such a widening of the VAT base could raise the £20bn to £25bn required to lift 50 per cent of income tax payers out of income tax. It would raise VAT receipts by about 25 per cent.
Idiot. VAT is just a tax on the gross profits of businesses, which includes their wages of course. Whether a hairdresser pays £2 income tax or £2 VAT on a £10 hair cut makes little difference to the tax burden or its deadweight costs. As I showed last week, it is the most damaging tax of all.
The fact that VAT only applies to the productive economy and not land-based activities (housing, food, banking) just makes it worse. Note again: he does not suggest that VAT be applied to his own sources of income: health services, higher education or quangocracy.
Consumption taxes make sense in terms of a fairer distribution of the tax burden between those in and out of the workforce. They would be paid by the more affluent elderly and would, in effect, fund many of the extra benefits, like heating allowances, that come their way. It would mean that the baby boomers would make a fairer contribution.
VAT is not a consumption tax, it is a tax on economic activity and is the most immediate cause of unemployment (worse than Employer's NIC). If you want "the affluent elderly" to pay more taxes without clobbering the unemployed with a double-whammy of higher taxes and lower chances of employment, then collecting more revenue from the rental value of land is the way to go. That way there's more reward for working and more incentive to work.
Consumption taxes fall on imports, including imports of services, while income taxes are a tax on domestically-produced outputs.
Slightly true, but so what? If you want to be protectionist, then let's be honest about it and have import duties instead of VAT.
Consumption taxes also increase incentives to save.
Save the biggest lie for last.
VAT measurably reduces the size of the economy; it reduces people's earned incomes and profits disproportionately; it erodes the value of businesses. If people have less disposable income and there's less there to invest in, then it is futile worrying about Nanny-state "incentives to save", all that happens is that the price of the shrinking pool of assets - like house prices or shares in the pension funds of Baby Boomers - worth investing in gets driven up. Which is perhaps why the Home-Owner-Ists love VAT?
Inconvenient people
2 hours ago
7 comments:
Which is perhaps why the Home-Owner-Ists love VAT?
No. Do you honestly think they are capable of thinking it through that far?
The only sensible way to extend VAT is to make everything liable to VAT, including financial services, oh, and make banks pay customers all the interest they make on the money in their current accounts.
B, yes I do, HOism is a set of carefully constructed and self-reinforcing lies and has been drummed into people over generations. They're always ready to speak in favour of VAT ("It's a good tax because essentials like housing aren't taxed").
And the only sensible way to extend VAT is to scrap it, or extend it to consumption of land only.
My point was that it wouldn't be half so popular if you paid 20% of the purchase price of your "dream home" to the government in VAT, or the banksters had to charge people for current accounts and add 20% onto their invoices.
B, they have VAT on new build residential in some countries (they do in Germany, at full rates), that makes little difference as it reduces the land value and once paid, that's it, there's no repeat VAT on rentals or subsequent sales.
When I say consumption of land I mean occupation thereof, not buying/selling.
I keep reading on here that VAT is the most disruptive tax but elsewhere that it's one of the lest disruptive taxes.
How to find out the true answer?
BE, you find out by ignoring the spin and looking at actual real life, or actually run a business which is near the registration threshold.
Sure, I have to do simplifying models, but basic economics says it's the worst kind of tax. Hence and why they try to reduce smoking (or claim to, at least) with a flat tax in pence-per-cigarette, rather than taxing tobacco company profits at higher rates (this attempt fails because demand is price inelastic and because of smuggling).
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