Wednesday, 13 August 2014

VAT Shrink

VAT is becoming ever more popular among politicians aroung the World. Hardly surprising. Most people think it's the least damaging tax. I suppose the logic must be that less domestic consumption doesn't ultimately hurt production (that much).

From todays Telegraph:

"How Japan's massive VAT increase has crippled the economy

Japan's economy contracted sharply in the latest quarter after a sharp rise in sales tax from 5pc to 8pc in April led households and companies to cut spending"

This has lead to quarterly contraction of 1.7% GDP. While it's probably a little early to draw any firm conclusions regarding the effect of the VAT rise, things aren't looking too good so far.

So 3% VAT hike = 1.7% off GDP.

In the UK, VAT is 20%. How much is that off GDP? How much of the slightly-less-bad taxes (income tax and corporation tax) would we get from that missing GDP? Answer = about two-thirds as much as VAT currently raises.

As this report in the Economist makes clear, if there isn't a rebound in the third quarter, the next hike to 10% will be put on ice. I guess we'll have to wait and see.


paulc156 said...

You'd expect some increased purchases ahead of the VAT rise which would have boosted the first quarter figures so some decline would be normal in the 2ndQ. More worrying, industrial production is also trending lower in 2014. In Japan they now have a cost of living crisis by design, as a result of the Abenomics splurge.
Prices are meant to go up with wages lagging to increase profitability so as to spur investment. Investment has been increasing as a result but not as much yet as hoped for. The trade balance is still deeply negative and companies are less increasing investment than raising cash reserves. So far then it's been good for business, just not for most Japanese.

DBC Reed said...

@Pc156 Its understandable perhaps that the Japanese might try increasing prices by design when they have had decades of deflation.But we have n't and government policies are causing the same pile-up of corporate cash reserves.

Mark Wadsworth said...

Yup, VAT is the worst tax, for a multitude of reasons.

In the UK, the rule of thumb is that 1% VAT = 100,000 jobs lost.

If we scale up Japanese example, that seems about right, there are about 20 million real private sector jobs, add 10% to that (GCP grows by half the VAT cut) that's 2 million jobs.

Lola said...

I completely fail to understand why anyone thinks that taxing the exchanges in an exchange economy is a Good Thing. Unless they think that exchanges are a 'sin' and need to be taxed highly the discourage them.
I am truly baffled.

Ben Jamin' said...

@ Lola

It feeds in to our production good/consumption bad protestant work ethic assumptions.

I've got to admit, that's what I used to believe too.

Corp Tax being the worst and VAT being the least worst.

As for "property taxes", I always there was a logic to "taxing" them more, but dismissed it as a serious way of raising significant amounts of revenue.

So, Wrong, Wrong, and Wrong.

Kj said...

BJ: Good find. Unfortunately both conservatives in some camps seem to think this taxing consumption more, probably because of what you say, some libertarian types because it´s "less invasive" or whatever, and even the lefty greenies think it´s a good thing because "consumption" is bad as everyone knows.

Mark Wadsworth said...

Kj, that is the bit which annoys me most, this conspiracy between Faux Libertarians (who hate LVT and are desperately trying to think up a "less invasive" tax) and the hair shirt socialist Home-Owner-Ists (who have the same prejudices).

"Oh... if we have to tax something, let's tax, er, 'consumption'."

Basic maths says:

consumption = production.

People who refuse to accept this are saying "Cooking is good but eating is bad" or "Making films is good but going to the cinema is bad".

Derek said...

Of course the way to get around the

consumption = production

identity. is to tax the consumption of things that are not produced. So when discussing consumption taxes with those who love them, you can agree that a consumption tax would be a good idea for some things: things like land, radio frequencies, airport slots, etc. The usual Georgist sources in other words. Be prepared to get into discussions about elasticity though, as you will probably have to explain why you like consumption taxes on some things but not on others. You can see the details in one of Mark's earlier posts.

Mark Wadsworth said...

D, no no no. The Homeys have an app for that.

They simply deny that they are consuming anything. The land is physically unchanged.

So you ask them whether they lose something if squatters moved into their house, the Homeys say "Yes".

You point out to them in Homey terms that these squatters have not consumed anything, therefore the squatters have taken nothing away from the landowner.

Then they call you a Commie.

Mark Wadsworth said...

D, the price insensitivity argument alone is sufficient to justify LVT.

Bayard said...

"It feeds in to our production good/consumption bad protestant work ethic assumptions"

Don't forget the lie that VAT is a tax on luxuries (on the basis, I suppose, that food, houses and children's clothing are exempt).

Rich Tee said...

Sales tax is a popular tax with politicians because it is easy to collect, so I understand.

Mark Wadsworth said...

B, yes, that's another good lie. Actually, the exemption is mainly for land and finance related activities, with VAT exemption for books thrown in as a red herring.

RT, it's not that easy to collect, far more VAT is evaded than corp tax. But politically it is an easy sell for the reasons mentioned by others above.

Bayard said...

"VAT exemption for books thrown in as a red herring."

I think you are underestimating the influence of the publishing industry. Think of Bertelsmann.