One small step for womankind and one giant leap for mankind

From the BBC:

The 5% rate of VAT on sanitary products - referred to as the "tampon tax" - will be abolished in the UK from 1 January.

EU law required members to tax tampons and sanitary towels at 5%, treating period products as non-essential. Chancellor Rishi Sunak committed to scrapping the tax in his March Budget.

Campaigners welcomed the end to what they called a "sexist tax" with activist Laura Coryton saying it was "about ending a symptom of sexism".

I'm not really sure that VAT on tampons etc is 'sexist' (it's borne by the manufacturer and retailer, not the consumer). I'm not sure how you are supposed to distinguish 'essential' from 'non-essential' or even what relevance that distinction has (in VAT law, it is irrelevant), but who cares?

VAT is the worst tax we have, for a variety of reasons, so the more things they exempt the better.

"Coronavirus: Visitors may not see the thrill of VAT cut"

From the BBC:

... experts predict many businesses will not cut prices, instead using the money to save their ailing businesses.

The chancellor said the VAT rate on food, non-alcoholic drink, accommodation and attractions in the UK would be cut to 5% between 15 July and 12 January.

In theory, the rate change could mean a couple buying a pub meal costing £45 without alcohol would save £5.62, while a £54.50 one-night stay at a hotel in a family room would see a saving of £6.81, according to accountants Deloitte.

In practice, venues may decide to keep prices the same, but keep the extra money they would have sent to the tax authority. Providers will not refund those who have booked and paid for accommodation later in the summer, because the rate is for when the sale was made.

Many of these businesses find themselves on the brink, given they were closed for months during lockdown, and the Treasury believes that the choice should remain with these operators, rather than the government, on whether to pass on savings.

Well, firstly, hooray for VAT reductions, the worst tax of all.

We would expect - going by what happened when several European countries reduced VAT for restaurants and small service businesses ten years ago - that prices will not fall by very much, so businesses (and their employees, hopefully) will benefit most.

This is hardly surprising, as VAT on most things is almost entirely borne by businesses. Most spending, and in particular spending on eating out and theme parks is highly discretionary, so consumers are sensitive to prices and businesses have to swallow the VAT when it increases. The reverse applies when VAT is reduced, businesses don't need to drop prices much either.

So the "experts" are shouting about how wicked businesses are, pocketing that tax cut meant to benefit consumers. It would be far simpler to ditch the propaganda that VAT is a "tax on consumption" and admit that VAT is (largely) borne by businesses and their employees.

Tim Martin seems to get it.

Via msn.com

Pub owners say tax reductions are needed to keep industry afloat

Wetherspoons chairman and founder Tim Martin said “tax equality” was needed if pubs and restaurants were to “survive and thrive” in the future.

He told the PA news agency: “Supermarkets pay almost no VAT on food sales and pubs pay 20%. Without equality the price gap between pubs and restaurants and supermarkets will continue to grow so that ‘on-trade’ becomes more and more uncompetitive.”

CAMRA still don't get it:

The national chairman of the Campaign for Real Ale (Camra), Nik Antona, said he would like to see the Chancellor reduce beer duty – the tax on producing and selling beer – for the “on-trade”.

Mr Antona said: “He could reduce the duty on the on-trade and make beer cheaper in pubs than it is off-site, in supermarkets, and therefore reinvigorate the industry. It would bring people back to the pub and stop them drinking at home.”

This chap knows what he wants, but doesn't know how to get it:

The pub’s licensee, Steve Boulter... told PA: “Having had three months of all being on canned beer, which is a pound a can, you do think: ‘Will people come back?’ when it’s three or four pounds a pint. I agree with Nik. Pricing makes a big difference so it needs to be the other way round – cheaper in pubs and a bit more expensive in the supermarkets.”

That can easily be achieved.

Broadly speaking, the VAT on a £4 pint in the pub and the beer duty are about 70p each. Pub landlord gets £2.60 net.

On a 80p multi-pack can (440 ml) in the supermarket, the VAT is 13p and the beer duty is 54p. Supermarket gets 13p net.

A pint costs five times as much as a can.

If they scrapped VAT completely and added 50% to beer duty, what happens?

Let's assume that the consumer bears all the tax for simplicity.

Pub landlord can drop price to £3.65, minus £1.05 duty, still gets £2.60 net.

The can now costs 94p, minus 81p duty, supermarket still gets 13p net.

A pint now costs 'only' 3.9 times as much as a can, which is what the pub landlord wants.

Why monopolists prefer VAT to corporation tax

Dinero, in the comments here:

"It occurs to me that VAT has a monopoly profit tax element to it. [In that it taxes the profit margin on a transaction rather than the profit of the balance sheet aggregate turnover]. I was thinking of the word monopoly in that where a vendor sells something unique and in demand, without competition then that vendor can successfully pursue a high profit margin.

Ignore the sentence in square brackets, which betray a deep misunderstanding of basic bookkeeping and economic concepts.

VAT does precisely the opposite! It doesn't tax the profit margin and helps the monopolist.
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Consider our monopolist, who is insulated from market forces (by some combination of economies of scale, barriers to entry, customer loyalty, patents etc). He pays his workers £50 per unit and sells them for £100 incl. VAT. The UK VAT is one-sixth of the selling price, so he pays £16.67 VAT and has a net profit of £33.33 per unit, or 33.33% of the selling price.

Our new entrant or challenger, subject to competition pays his workers £50 per unit and sells them for £70 incl. VAT. He pays £11.67 VAT and has a net profit of £8.33, just under 12% of turnover.
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If the unit selling price is squeezed by a £5 and costs go up by £5, the monopolist's profit per unit is still £20, or 21% of the selling price. The little guy still has to pay £10 VAT and ends up with a net loss of £5 per unit.

So the little guy goes out of business and his ex-workers are all looking for work. The monopolist survives and can push up the selling price to £100 again and push down wages to £50.
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In our first scenario, the two businesses had pre-tax profits of £70 and tax man collected £28.33 in VAT.

What's the position if the tax man scrapped VAT and imposed 40.5% corporation tax instead (£28.33 ÷ £70 gross profits)?

The monopolist pays £20.23 corporation tax on £50 gross profit (more than he paid in VAT) and the little guy pays £8.10 corporation tax on £20 gross profit (less than he paid in VAT). That's a good start.

If selling prices drop by £5 and wage costs go up by £5, the little guy's after tax profits fall to £5.95 per unit, so he still making a living. The monopolist is still doing very well. We end up with more new entrants and challengers; lower unit prices for consumers; more employment; and higher wages.

What's not to like?

By how much would UK tax receipts fall if VAT were scrapped outright?

Physiocrat, here, is very radical on this:

VAT costs and losses

1) Admin - not very much as the costs are transferred to business.
2) Churning - VAT is part of the price index to which pensions, benefits and public sector pay are linked. This makes it a major government cost in its own right.
3) Abstraction from other taxable revenue streams.
4) Welfare costs arising from deadweight losses.
5) Tax revenue losses due to deadweight losses (separate from abstraction).

My piece on the LVTC web site needs to be re-worked with better calculations. I would not be surprised if, because of the above, the Exchequer is out of pocket due to VAT.

I think he's overselling it. We exchanged emails this afternoon, and my summary is this, FWIW. Total VAT receipts are about £130 billion a year in the UK. What happens if we scrap it (which we can now do, post-Brexit) and make no other changes to the tax system?

1) Admin costs

Government HMRC admin costs are supposedly around 1% = £1 bn, double that for 'carousel fraud' etc = £2 bn.

Number of VAT registered businesses (two million) x extra work each quarter adding the extra info to the accounting system and doing the quarterly VAT return (ten hours) x average hourly cost of employing a bookkeeper £50 (wages, NIC, desk space) or lost value of small business owners' time when they could be actually producing something = £4 billion a year. Smallish number, so let's include it with dead weight costs at 5) below.

2) Churning

I'm not sure I agree that "VAT is part of the price index to which pensions, benefits and public sector pay are linked". VAT has little impact on end prices, Phys countered that "End prices would go down if all these people were not handed government money to pay VAT with!" which is true. I'm still not sure what the net impact on government spending would be.

3) Abstraction from other taxable revenue streams

This is the biggest and easiest number.

PAYE (income tax plus two layers of NIC) on average worker = 40%. Higher rate employees PAYE = 49%. Corporation tax is 19%. If profits are paid out as dividends to individuals, there's a bit more income tax on that. VAT cuts into business rents, which are taxed at about 40% via Business Rates. The overall average rate is (say) 33%, so one-third x £130 billion would come back in anyway = £43 billion, assuming no change at all to selling prices and output in real terms (goods and services supplied, hours worked etc).

5) Tax revenue losses due to deadweight losses (separate from abstraction) and 4) Welfare costs arising from deadweight losses

Let's say scrapping VAT boosts the economy and trade by 5% in real terms (low guess - it depends what assumptions you make about price elasticity of supply and demand). Total current tax revenues from economic activity (PAYE income tax and NIC, corporation tax, bank levy, Business Rates etc) about £430 billion a year. 5% of that = £21 billion.

There are about thirty million employees. Let's say that number also goes up by 5% and 1.5 million who are currently un- or underemployed get a part-time job, longer hours, full time jobs. Average unemployment benefit, housing benefit etc (say) £10,000 per person per year = £15 billion saving.

Summary

HRMC would lose £130 billion of VAT receipts.

HMRC would save £2 bn admin costs and fraud; get £43 bn more from other taxes anyway (static basis); get another £21 bn from other taxes from losing deadweight costs (dynamic effect); and the DWP would save £15 bn a year in welfare payments, total £81 billion.

That means that the UK government would only lose about £50 billion a year if it scrapped VAT outright.

For convenience and to make this politically sellable, we can play along with the myth that consumers/households pay the VAT.

£130 billion divided by 29 million households = £4,500 per household on average. If we claw back the £50 bn shortfall from total housing values (pre-lockdown) of over £7 trillion, it would require a progressive property tax of about 0.7% on selling prices (or for the purists, a 25% Land Value Tax on residential site premiums) = £1,750 on average.

The average household is £2,750 a year better off. What's not to like?

Classic VAT DoubleThink

The myth is that VAT is a relatively benign tax because it is a "tax on consumption". Anybody who knows anything about tax incidence and bothers to look at actual statistics on what happens to prices, output levels and profits or wages when VAT rates change; or price differences in the USA where each state has different Sales Taxes knows that this is nonsense.

Value Added Tax is the worst of both worlds, it acts like a tariff, so dampens economic activity and is also, quite literally a tax on "value added" i.e. wages and earned profits. It's a crude profits tax that is payable even if a business isn't actually profitable (but would be if there were no VAT).

In the UK, businesses pay about three times as much VAT as they do corporation tax, so surely, if you interested in the tax system, you focus on VAT. But all the attention is directed at corporation tax. There are loads of headlines that Starbucks or Apple (or whoever) pay little or no corporation tax in the UK, which is quite probably true. But they still hand over £ billions in VAT.

So far so bad.
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Mombers spotted this at Bloomberg:

There’s a new bad idea doing the rounds in Europe. Many governments are convinced that a reduction in value-added tax will help relaunch their economies. Some, including Germany, have already wielded the ax. Others, such as Italy and the U.K., are taking this option seriously.

But the benefits of cutting VAT are limited, and the costs are large.

Reducing VAT from 20% to 17.5% was the best thing that Alastair Darling could have done back in 2009. He did it and it worked i.e. softened the impact of the financial recession. The benefit was measurable and large and far from 'limited'.

As with any other tax cut, the key question is who gains from it. The answer for VAT depends on a concept economists call “incidence,” which refers to how the tax burden or benefit is shared between companies and consumers. In the case of VAT, retailers can either pass on any reduction to shoppers by lowering their prices or they can keep their prices unchanged and pocket the difference.

Unfortunately, research shows they’re more likely to do the the latter, which wouldn’t be much use for any policymaker looking to use such cuts as a way of fostering a consumer-led recovery... They looked at a large cut (from 19.6% to 5.5%) for sit-down restaurants in France in 2009, after the financial crisis.

The results showed that consumers weren’t the chief beneficiaries of the reduction. It was the restaurant owners. The price of a restaurant meal decreased by a mere 1.4% in the month after the steep VAT cut, and it didn’t fall much further over the next two and a half years. The two researchers showed that restaurant owners pocketed 41% of the economic gain from the VAT reduction, while consumers got 19%. Restaurant staff obtained 25% in the form of higher wages, and suppliers accounted for the rest.

This is of course exactly what you'd expect to happen (it has been observed countless times). There was plenty of evidence ten years ago that this is what happened, it is hardly a new insight. What they don't mention is that output increased (a lot more people visited restaurants, even though prices had only dropped a bit).

So, having made the false assumption that VAT is a benign tax because consumers pay it, they argue that VAT cuts are bad because consumers don't pay it? The article then goes on to say that VAT increases are bad because consumers do pay it! Do they not realise that they are contradicting themselves at least twice over? Is there such a thing as TrebleThink? Everybody's entitled to be wrong, but at least be consistent!

As to "fostering a consumer-led recovery", people can't consume more unless somebody else is producing more. And do they not realise that restaurant owners, restaurant staff and restaurant suppliers (and their employees) are all consumers too? If they have more money to spend, they will probably spend it.

Zoë Williams gets it right on VAT

Well nearly, but she's done some proper homework. From The Guardian:

News of the government’s plans surfaced, as they always do these days, in a private briefing – that the chancellor, Rishi Sunak, plans to slash VAT, in an emergency measure to stimulate spending and boost the post-Covid economy, from 20% to 17%.

Which is much to be welcomed, sales or turnover taxes are the worst kind of tax; VAT is very literally a tax on "value added" (wages and business' earned profits), not some harmless tax on "consumption".

The EU, over time, set a minimum level of 15%, except in special circumstances – which, considering sales tax was previously set at 10%, even by a Conservative administration in 1973, made the EU the driver of an essentially anti-progressive policy. It’s a useful, if tangential thing to remember, for the despairing remainer: the EU wasn’t perfect.

Which was one of the main reasons I voted Leave.

Yet in special circumstances, an individual nation could insist on a lower rate for VAT: Alistair Darling didn’t need to, following the financial crisis in 2008, since he just wanted to reduce the rate from 17.5% to the minimum 15%.

You really had to be there to remember the ridicule this generated. It was piecemeal, it was pathetic, yet at the same time it was crazily expensive and horrifyingly risky. It was the act of a chancellor who didn’t know how much trouble the nation was in, but also one who panicked and couldn’t keep his head.

I remember nothing of the sort. Darling said he'd reduce it for 13 months. I cheered at the time, and this was one of two tax-tweaks which softened the blow of the 2008-09 financial recession. The other was reducing the number and generosity of Business Rates exemptions for vacant premises. The Tories got in and increased the rate again after the 13 months were over (the idiots).

In 2009, the Institute for Fiscal Studies, among many others, judged [Darling's VAT cut] to have been a significant success..."

As well they might, because it was. With VAT you can hardly go wrong if you're reducing it.

The same people who ridiculed Darling will now be praising Sunak as a visionary.

And you, Zoë, are praising Darling while slagging off Sunak for doing a similar thing. That's what the media do. They're cheerleaders for one side or the other. It's about as enlightening as listening to football fans arguing about why they support different teams, which are basically all the same.

VAT in its early years was a manifest statement of political intent: Labour chancellors kept the base rate very low, then went wild with the luxury rate (Denis Healey at one point had the higher rate at 25%). Conservative chancellors would then come in and “harmonise”, and this was a classic framing triumph: who could possibly disagree with bringing harmony?

Yet, of course, it meant saddling the general population with a tax that was previously weighted for the broad-shouldered.

This is only correct if you assume that VAT is borne by the consumer, which it isn't (unless demand for something is price inelastic, like booze, fags, fuel). The real damage that VAT does is acting like a domestic tariff and hence a huge brake on the economy.

VAT puts (or keeps) businesses out of business and puts (or keeps) people out of work. The unemployed probably don't pay much VAT, but half of them are unemployed simply because of VAT.

Value Added Tax is quite literally a tax on "value added". Why do people not think about what "value added" means?

The Tory wannabes are trotting out their tax plans, and a couple have mentioned looking at VAT (Michael Gove, article by Sam Dumitriu, and Rory Stewart, via @Sam_Dumitriu).

(Wow, Rory Stewart has "land value tax, at least for business and agricultural land" in his 'good' column and "business rates and no land value tax" in his 'current taxes' column. That's his leadership chances flushed down the toilet).

Gove and Stewart are politicians and don't know or care about economics. Dimutriu ought to know better and is the bigger fool for it. He goes along with the Big Fat Lie that VAT is some sort of harmless tax on 'consumption' or 'indirect tax' which does not affect production.

Let's take a step back and agree that income tax/NIC are taxes on wages or earnings and corporation tax is a tax on corporate profits. Their effect is pretty much the same, the percentage rates and administration is just different.

I trust we can also agree that workers and businesses 'add value', and the more value they add, the more tax they pay. So income tax, NIC and corporation tax are literally taxes on added value.

Value Added Tax  is just more of the same!

We reach an equilibrium point between gross selling prices, net wages after tax and net profits after tax, that point is fixed by the overall tax wedge. Shuffling between these four taxes makes no difference to VAT-registered businesses.

It would make no difference to gross selling prices, output, net wages or net profits (of VAT registered businesses) if we:

a) went to one extreme and scrapped VAT and increased taxes on wages and profits; or

b) went to the other extreme and scrapped income tax, NIC and corporation tax and increased VAT to a very high rate.

Here's a worked example for a typical sort of VAT registered company, which sells output for £120 gross; pays £36 to VAT registered suppliers, pays gross wages (incl. employer's NIC) of £50; employees receive net wages of £30; and has profits before corporation tax of £20.

Current system, with VAT

Gross sales.......................£120
Paid to HMRC as VAT.....(£14)
Net sales............................£106
Paid to suppliers, net.....(£30)
VAT paid to suppliers
and passed on to HMRC...(£6)
Gross wages......................(£50)
Net profit before tax..........£20
Corporation tax @ 19%.....(£4)
Profit after tax.....................£16

No VAT, 17% extra Employer's NIC and 38% corporation tax

Gross sales.........................£120
Paid to suppliers...............(£36)
Gross wages.......................(£50)
Extra Employer's NIC
£50 @ 17%...........................(£8).
Net profit before tax.........£26
Corporation tax @ 38%...(£10)
Profit after tax....................£16

No income tax, NIC or corporation tax, VAT at 46%

For the non-mathematically minded, net sales £82 x 46% = £38; £82 + £38 = £120, so gross sales £120 as before.

Gross sales........................£120
Paid to HMRC as VAT......(£38)
Net sales..............................£82
Paid to suppliers..............(£36)
Tax-free wages.................(£30)
Tax-free profit....................£16
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The idiots out there think that because sellers can split the total selling price up into 'net' and 'VAT' that magically, consumers pay it.

If that were true, businesses could simply split the selling price into 'net', 'corporation tax' and 'VAT'. Would the idiots then believe that businesses don't pay corporation tax?

Introducing LVT by stealth

I love LVT and I love maths, so here goes...

First, write down what you know.

1. Let's get rid of the four biggest and most egregious taxes on housing/wealth: Council Tax (regressive) net of rebates annual revenues £25 bn; SDLT (progressive) £10 bn; Inheritance Tax (hyper progressive unless you are really rich) £5 bn and the TV licence fee (hyper regressive) £4 bn.

2. And let's get rid of Employer's NIC, a tax on jobs, annual revenues (say) £86 bn (60% of total NIC revenues £143 bn -  I've never found an official split between Employee's and Employer's).

3. To be fiscally neutral and replace those five taxes, a residential LVT would need to raise £130 bn a year. This would require an LVT of 65% of total annual site premiums, or for the uninitiated, about 1.8% of current selling prices.

4. Politically, this will only way this will fly is if you minimise the numbers of losers and maximise the number of winners which is how the buggers get away with hiking tobacco duty each year, because only one-fifth of adults even notice.
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Let's start in the middle (and work outwards) with a recent first time buyer couple in an average/median value home, both employees on an average/median wage of £25,000 a year, who bought a house with a 20% deposit (or who have 'built up £50,000 equity' since they bought) and a 4 x joint income mortgage, so their house is worth £250,000.

At present, their P60 looks like this (courtesy of Listentotaxman.com):
+ Salary £25,000
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,538

What they don't know is that their employers have each had to chip in £2,259 Employer's NIC. In truth, their gross wages are £27,259 each and they pay £6,721 tax each.

What they do know is that they have to pay about £1,100 in Council Tax and the TV licence fee out of their net income.
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Next year the LVT on their home will be £4,500 (£250,000 x 1.8%), which will be collected via PAYE, half each (the same as any coded out benefit, Student Loan repayments etc) and their P60s will look like this:

+ Salary £25,000
+ Employer's LVT contribution £2,259
- LVT £2,250
- Income tax £2,498
- Employee's NIC £1,964
= Net £20,547

So no real difference there, except they no longer have to pay the £1,100 Council Tax and TV licence fee. So they will be modest winners and will wonder what all the excitement was about.

HMRC won't care whether they tax they collect is called 'Employer's NIC' or 'Employer's LVT contribution' or 'LVT', it all goes in the same pot and can be dished out again as old age pensions or as block grants to local authorities (to make up for council tax). Those councils with high council tax get the same high amount; those with low council tax get the same low amount.

Employers won't care either for the same reason. Cost to them is the same.
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It is easy to find 'hardship cases' where people will pay more than now:
- Poor Widows in Mansions (who get the 'defer and pay on death' option);
- the self-employed who pay  much about one-third as much in National Insurance (tough, they now get the same state pension rights so there is no policy justification for this);
- private landlords. Super tough, they should have seen it coming.

It is just as easy to find a huge group of people who will pay a lot less - tenants (and young adults who still live with their parents), who out-number all the Poor Widows in Mansion and the self-employed in electoral terms, if they can be bothered to register to vote and actually vote.

They will see the lines 'Gross salary' and 'Employer's LVT contribution' with no deduction for 'LVT', so that's like a 9% pay rise,  well worth registering and voting for.
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Then the government just has to keep going...

If LVT goes up from 65% to 100% that means a £70 bn reduction in other taxes; such as reducing the rate of VAT from 20% to 5% or so (and getting rid of a load of dumb exemptions and the zero rating for new housing). The maths gets a bit more complicated here because of the circularity, but it's all do-able, I'll plan the next step once we've got going.

Amazon's tax bill (here we go again)

From The Independent:

Philip Hammond has said he will consider tax changes hitting online businesses to ensure there is a more level playing field for high street retailers.

The hint at a so-called Amazon tax for online companies that sell products over the internet comes as high street stores – under pressure from soaring costs like business rates – demand a fairer system.

The only logical way that a special 'Amazon tax' would help high street retailers is if the tax is so high as to discourage people from buying online; or so high as to push Amazon into a permanent loss-making situation.

Mr Hammond added: “The European Union has been talking about a tax on online platform businesses based on the value generated. “That’s certainly something we’d be prepared to consider.”

Amazon already pay two kinds of taxes on 'value generated', being normal VAT at 1/6 of their turnover and corporation tax on their residual profits. Do they play fast and loose and book profits sideways elsewhere? Quite possibly, says The Murphmeister, but that's a different topic. Try enforcing existing laws first before you start inventing new ones on an ad hoc basis.

The Guardian is of course going to town on this:

The company... revealed that pre-tax profits at its UK business tripled from £24m in 2016 to £72m last year. The figures were reported by Amazon UK Services, the company’s warehouse and logistics operation that employs more than two-thirds of its 27,000-plus UK workforce, in its annual financial filing to Companies House. The company almost halved its declared UK corporation tax bill from £7.4m in 2016 to £4.5m last year.

Amazon UK’s warehouse and logistics staff and management enjoyed a bumper $164m (£125m) payout from the company share scheme – a rise of almost a third on 2016’s £95m bonanza – thanks to the company’s surging share price... The payouts will have reduced Amazon’s tax bill because under UK tax law companies are required to deduct the vest value of the shares provided to employees.

Companies aren't *required* to claim this deduction, but they would be stupid not to (I've submitted such claims for my own clients, it's great fun). The value of those shares is liable to PAYE in full as if it were a cash payment.

PAYE rates are much higher than corporation tax rates, so these share-related gains don't *reduce* Amazon's tax bill, they significantly *increase* it, i.e. that £125 million was probably taxed at about 40%, meaning Amazon paid £50 million extra PAYE in addition to the £4.5 million corporation tax. Which is a pretty high overall tax rate when compared to £72 million profits.

For accounting purposes Amazon Services UK reports turnover as a charge to its parent company for the cost of delivering products, which hit £1.98 bn last year. Amazon will not reveal how much it paid in total to HMRC last year, beyond what it paid through Amazon Services UK.

That's turnover net of VAT, so Amazon will have paid about £400 million in VAT as well. Makes a total of £454.5 million tax paid. And we have no reason to assume that they don't pay full Business Rates on their offices and warehouses etc.

All the mugs who believe that 'the consumer bears the VAT' can go back to the remedial class. VAT is a tariff, just like the tariffs that Trump imposed on lots of stuff recently. Did all the businesses affected by them just shrug their shoulders and say 'Not to worry, consumers in the USA will pay the tax'? Of course not.

Many a crocodile tear shed over Trump's steel tariffs.

From the BBC:

EU leaders have a "gun held to their head" over the threat of US tariffs on steel imports, the head of trade body UK Steel has warned. Gareth Stace said the EU needed to impose safeguards to curb Chinese steel once destined for the US that will now be heading to Europe...

Mr Stace said US tariffs would be "purely protectionist... The Trump administration says protecting America's steel and aluminium producers is a matter of national security. What President Trump is proposing to do here is not free trade and it's against WTO rules," he told BBC Radio 4's Today programme...

Mr Stace admitted that there was a problem of global over-capacity in the steel industry, but said most of that was in China. About 20 million tonnes of Chinese steel would need to "find a new home to go to and, because we are a free and open market here in the UK/the EU, it'll come here, we believe, and therefore further damage our sector - not only from the direct impact of tariffs in the US but the surge of steel coming here", he said.

Does the man not listen to himself? He appears to be arguing against and for tariffs at the same time. As to over-capacity, who's to say that the over-capacity is 'in China'?? The Chinese would have a better argument that it is the higher cost producers in Europe who are the over-capacity.
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It appears to be agreed across the board* that Trump's tariffs are A Bad Thing, which they are IMHO. Can these people now apply the same logic to the 20% tariff which the UK government imposes on most ostensibly free-market transactions, even where both supplier and customer are within the UK?

* I do have the impression that if a left-wing government of a developing country were to impose such tariffs, a lot of the same people would fully support them.

Most employees pay far more National Insurance than Income Tax

The 'earnings threshold' for NIC is lower than the personal allowance for income tax; and for basic rate taxpayers, total NIC is 25.8% of earnings above the threshold but income tax is only 20% of earnings above the personal allowance.

At the top of the basic rate band, it's £9,786 NIC and £6,900 income tax.

Above that, it flips over, NIC is 'only' 15.8% of earnings but income tax is 40%.

The break-even point at which you pay the same amount of NIC as you do income tax is about £58,300, which you can check here, so only the top few per cent of employees actually pay more income tax than they do NIC.

VAT raises approx. the same amount as National Insurance, meaning that a majority of employees probably pay more in VAT than they do in income tax as well.

Just sayin'.

More VAT-Brexit-related fuckwittery

From The Guardian:

More than 130,000 UK firms will be forced to pay VAT upfront for the first time on all goods imported from the European Union after Brexit, under controversial legislation to be considered by MPs on Monday.

The VAT changes spelled out in the taxation (cross-border trade) bill – one of a string of Brexit laws passing through parliament – are causing uproar among UK business groups, which say that they will create acute cashflow problems and huge additional bureaucracy.

Labour and Tory MPs and peers said that the only way to avoid the VAT Brexit penalty would be to stay in the customs union or negotiate to remain in the EU-VAT area...

This is a typical spat between incompetent government and hard-core Bremoaners, with long-suffering UK businesses caught in the crossfire.

VAT is the most damaging tax, but all the same, it can be made administratively as painless as possible. Before wading in, it is important to know how it currently works on a day-to-day level. When a UK VAT-able business imports from the EU, VAT is nominally due, but it is not paid up-front - what happens is that the notional import VAT is added to the total VAT payable on the next VAT-return, but the importer can also reclaim the notional import VAT is input tax, so the overall payment is nothing.

This defers the business' cash outflow by a few weeks or months - the apparent proposed new system is to collect VAT at point/time of import (a massive administrative burden) and not to credit it as input VAT until the next return (usually quarterly).

There is nothing to stop the UK government from continuing current practice post-Brexit (in fact, we could do this for most import duties). And despite what 'Labour and Tory MPs' have said, there is absolutely no need for the UK to remain in the Customs Union or the Eu-VAT area to be able to do this - remember that post-Brexit, it is entirely up to the UK government whether or not it imposes import duties, import VAT or even VAT at all.

"Why a consumption tax may not make any sense at all"

A splendid article, spotted by BenJamin' in the Nigerian Government & Business Journal (but equally applicable to all countries):

The devil in the (accounting) details – and the economic effects: You often hear calls out there — mostly from Right economists but also from some on the Left — for a consumption tax in the U.S. As presented, it’s a super-simple idea: tally your income, subtract your saving, and what’s left is your consumption. You pay taxes on that.

We want to encourage thrifty saving and discourage profligate consumption, so what’s not to like?

Lots...

Worth a read in full. No point trying to summarise but he points out that the measurement, administration and enforcement will be a nightmare; "the empirics over many decades bear that out: higher saving rates have pretty much nothing to do with investment rates"* and finishes off by explaining why such taxes (for example VAT) are a huge drag on the real economy.

When people promote this idea I always try to make the very same points but they are just brushed aside.

* As I have explained before, household "saving" and business "investment" are two more or less completely different things, one has very little to do with the other.

Glorious bit of misreporting by The Daily Mail

They've really come up trumps this time:

Wetherspoons is set to slash prices on all of its food and drink for one day only in a bid to convince the Government to lower booze taxes. The pub chain is well known for its cheap pints but it is knocking off a further 7.5 per cent as part of the protest.

It is one of thousands of businesses across Britain supporting Tax Equality Day on Wednesday September 20th.

Under UK law pubs and restaurants are forced to charge 20 per cent VAT on food and drink - but supermarkets do not have to do the same. This allows Tesco and its rivals to sell alcohol at a much lower price, encouraging drinkers to stay at home to socialise with friends rather than go out.

Tim Martin is an astute bloke, and realised long ago that it's not booze duty that puts pubs/restaurants at a price disadvantage to supermarkets (because booze duty applies at the same rate per pint whether it is sold in pubs or supermarkets).

It is the VAT which really hurts pubs/restaurants, which being ad valorem, adds far more to the price of a pint in the pub (about as much again as booze duty) as it does to the price of supermarket booze.

VAT is also slapped on everything, i.e. all the food and soft drinks they sell (food in the supermarket is VAT zero-rated, not sure about soft drinks but the ad valorem point applies here too). I think this is one of the reasons he supported Leave - VAT is imposed by the EU.

For some reason The Mail assumes that supermarkets do not have to charge VAT on booze, which is addle pated nonsense of course, thus completely messing up the point which Tim Martin is trying to make.

Killer Arguments Against LVT, Not (422)

That Facebook conversation started with this:

Hello! I would love to get some feedback on an idea I've been thinking of. Today the Tories attacked irresponsible big business, but I believe it's the government's job to adequately tax business and not to pick any winners if we're not getting enough money from them, that's the government's fault not the companies'.

I have always thought having a £2,000.00 VAT refund per person would be good and there's plenty of articles to support this, it would encourage people to collect VAT receipts for any purchases and likely increase the total taxation and lead to less tax evasion...

I've read some interesting articles proposing raising VAT to 40% and ridding all other tax's and they offer just as convincing an argument as [those for LVT].

That's supposed to be a sane alternative to LVT, is it? The proposal is fundamentally flawed on very many levels.

1. There is no need to match any particular item of government spending with any particular kind of taxation, as long as the totals roughly match up. A Citizen's Dividend of £2k a year each is just a Citizen's Dividend, and VAT is just VAT. People who believe that National Insurance is a good tax because it goes towards old age pensions and/or pays for the NHS need their heads examining (but preferably not on the NHS).

2. Flat rate universal welfare payments/tax rebates would be a good replacement for the bulk of the welfare system (excl. disability related stuff) and various tax breaks/allowances, no need to worry how it's funded (in isolation).

3. When he talks about "a VAT refund" and people collecting "VAT receipts", this suggests a system like they have/had in Turkey (according to my Turkish friend). When you do your own tax return at the end of the year, you get a tax deduction for a certain amount of private spending, as long as you provide actual receipts. In which case this would not be a Citizen's Dividend - the rebate would be larger for people who spend more than the limit and lower for really low earners/spenders who don't. So presumably high spenders would be able to sell spare receipts to low spenders for a share of the value of the extra tax rebate they can claim. Either way, it's a shed load of extra paperwork and opportunities for fraud.

4. VAT is the most damaging tax (favoured only by Faux Libertarians and Puritans), facts and logic tell us this. They also tell us that VAT is largely borne by producers (owners and employees alike) but that's another topic. The incentive to evade it is the same no matter which particular item of spending it is nominally matched with, and as we know, it is not primarily domestic UK businesses who evade it, it is international conglomerates that route sales offshore somehow. All those receipts that people collect would be from high street retailers etc who by and large cough up the VAT (their systems being computerised thus making underpayment easy to detect). Businesses who currently don't pay the full amount of VAT - be they evaders or magically exempt (banks, landlords, private schools etc) - still wouldn't.

5. With a UK population of about 65 million, an annual rebate of £2,000 each would 'cost' £130 billion, which is more than total VAT receipts. Perhaps tax compliance would improve slightly, but nowhere near enough to make up the shortfall.

6. Those arguing in favour of 40% are the Faux Libertarians, Puritans and idiots generally. It would be massively regressive and damaging to the economy. I have read lots of such articles and they are addle pated nonsense. I have read endless articles in favour of LVT, most of which are pretty convincing.

So that's my feedback.

Outbreak of common sense...

... in The Labour Party.

From The Guardian:

Labour will aim to help tens of millions of people who are struggling on lower incomes by cutting the rate of VAT if it wins the general election, the shadow chancellor John McDonnell has told the Observer...

... in a high-stakes move, he went further, saying his priority would be to deliver a “fair tax system” under which income tax rises for the highest earners would be followed by VAT reductions for all, when economic growth allows. Such a reduction, he said, would deliver the greatest proportionate benefits to those on low and middle incomes.

“The concept of fairness is at the heart of everything we do,” the shadow chancellor said. “When it comes to tax it will always be a fair tax policy. And if I can reduce the burden of taxation on middle and low earners I will do it as we grow the economy. I will do it.”

Asked what he had in mind, he added: “I think VAT is a real problem for many people. When we come out of Europe there is more flexibility on VAT, particularly in terms of the lower levels.”

There are statistics comparing the amount of VAT nominally paid by households with a) total income and b) total spending, taken together they show that VAT is a fairly flat tax. From Labour's point of view is A Bad Thing because they like "progressive" taxes. For some reason, lefties think that flat taxes are regressive; they are not, they are flat. Regressive taxes are regressive.

The point about VAT is not that low income people pay too much, but that it significantly reduces economic activity and hence causes business failure and unemployment - VAT is the reason that so many people are on low incomes in the first place.

Air Passenger Duty bleating LOLZ

More rent seeking in the City AM:

In one part of Whitehall, the Department for Transport, ministers and civil servants recognise the importance of developing policies over the next decade to help UK aviation to grow sustainably...

But their efforts will be largely in vain if the Treasury cannot be persuaded to abandon hopelessly uncompetitive APD rates that are a major obstacle to UK businesses seeking to follow the Prime Minister’s lead by going into the world and building new trading relationships...

Of course, it is good news that the government has given the green light to the construction of a new runway, but the fact is that we will massively reduce the impact of expanding aviation capacity if we don’t have a competitive tax regime that will enable us to take advantage of it...

The government should also ensure that aviation-related negotiations and decisions are prioritised during the EU withdrawal process – but unless the UK tax environment is competitive, all the air services agreements in the world won’t make it viable for airlines to open new routes to and from the UK.

A few facts:

Gatwick and Heathrow are running at close to 100% capacity, so by definition, APD cannot be reducing the number of flights there. APD might have a marginal impact on the number of flights at less popular/regional airports, but the rentiers don't care about 'the regions'.

The bulk of the value/price of an airline ticket is where you are flying to and from and at what time of the day etc, the actual cost of doing it is surprisingly small. Compare the price of a ticket from Stansted to Riga with the price of a ticket from Heathrow to Berlin, or the price of a very early/late flight with one in the daytime! The difference in price is rent/location value.

Admittedly, APD is a dreadfully clunky way of collecting part of the rental value, but compared to VAT-liable businesses, airlines are still getting a fairly good deal overall:

Air transport is VAT zero-rated. That means that they can reclaim all input VAT but do not have to charge VAT, a best-of-both worlds status also enjoyed by 'home builders' and proper exporters.

Total revenues of UK airlines £22 billion per annum.

Total UK APD revenues £3 billion per annum.

Ignoring the fact that UK airlines also have non-UK revenues and some APD is payable on flights with non-UK airlines, passengers are paying £25 billion all in.

If air travel were VAT-able, the VAT due would be one-sixth of that = £4.2 billion, a lot more than the £3 billion they are actually paying.

Under the circumstances, it would probably be better to get rid of APD and impose VAT instead; that would bear more heavily on flights to and from Heathrow and Gatwick and would reduce the tax paid on flight to and from less popular/regional airports, as well as collecting a larger share of the rental income. The problem then would be collecting VAT from non-UK airlines, I'm not sure how you'd enforce that.

So as ever, the best kind of tax on air travel is a charge on the value of the landing slots, whether the airlines pay it directly or it is included in the Business Rates assessment of the airports is by the by. Airports themselves are probably in the best position to negotiate this and they can just add it to their landing fees.

Heathrow wants a new runway? Fine, they can haggle with HM Treasury over what the extra Business Rates will be; they are in the best position to work out how much extra pure profit they can make. HM Treasury can run a parallel auction with Gatwick, and whoever bids the most is allowed to build a new runway.

Sorted.

Institute of Economic Affairs - gloriously wrong on corporation tax.

From page 204 of pdf here.

There's a lot of good stuff, but they relapse into Faux Libertarianism when it comes to the question of what's worse, VAT or corporation tax.

Corporate profits

The OECD found that corporate income taxes (such as the UK corporation tax) have the most negative impact on economic growth, among consumption taxes, property taxes and income taxes (Arnold 2008). Specifically, corporate income taxes have the following problems:

• They weaken the signal to reallocate resources from low-value activities to high-value activities between different companies and also within the same company by reducing after-tax profits.

No they don't "weaken signals" particularly. I know that the OECD said that but it's nonsense. A good pre-tax decision will nearly always be a good post-tax decision. When businesses are decided which projects to undertake, it is educated guesswork, for a given amount of £100,000 to be invested in a new project, if they expect an overall pre-tax profit of £50,000 from Project A and £30,000 from Project B, they will choose Project A. If the business compares post-tax profits, they will still choose Project A with a post-tax profit of £40,000 rather than Project B with a post-tax profit of £24,000.

That is quite different to VAT. Assuming we are looking at the same time frame/effort, compare:
- Project A involves producing/selling 100,000 small, high turnover items which can be made and sold within five weeks. They cost £1 each and can be sold for £1.05 gross = £50,000 profit over a year.
- Project B involves producing/selling 1 very large slow-moving item, which costs £100,000 and, takes a year to make/sell, and which can be sold for £130,000 gross = £30,000 profit.

If you knew nothing about VAT, you would say that Project A is better. But once you take VAT into account, Project A actually makes a loss of £160,000 and Project B makes a profit of £4,000. That strikes me as being hugely distortionary.

VAT similarly distorts activity in favour of VAT-exempt or zero-rated items and against fully VAT-able items. Corporation tax does no such thing.

• They bias ownership structures in favour of debt capital and against equity capital.

This is another of those myths that I have been railing against for decades to little avail. The UK tax system was heading towards a system (it is now heading away again thanks to George Osbrown's constant meddling) where the amount of tax (corporation tax plus income tax) would be exactly the same whether it is funded by share capital or loans. It would be quite easy to enforce the default rule that interest payments are liable to 20% withholding tax and get rid of Osbrown's stupid tweaks, so that by and large, it makes no difference.

• They distort spending patterns in favour of current expenditure, which is fully tax deductible, and against capital expenditure, which is not (capital allowances partially ameliorate this).

Not really. A good pre-tax decision is a good post-tax decision, see above. I've never heard a businessman yet decide to stop using 'capital' (i.e. labour saving devices) because they will not get 100% capital allowances in the first year. And if the IEA really thinks this is a problem, then they could suggest giving businesses 100% first year capital allowances on all the equipment they buy. Most small and medium sized businesses have been able to claim 100% first year capital allowances on all additions for the last few years anyway. I don't really see the harm in extending this to all businesses, it would result in a corporation tax shortfall in the first few years but slightly higher receipts once it has bedded in and an end to all this Faux Lib bickering.

• They discourage investment by reducing retained earnings, which would otherwise be spent on capital investment goods directly by the company or invested with financial intermediaries to the same effect by third parties.

Nope. By definition, corporation tax is not a tax on reinvested profits, which is what we care about, reinvested profits are paid out of earnings before corporation tax. 'Retained earnings' merely means all earnings not paid out as dividends. It's not even technically correct because corporation tax is paid on total earnings, including the part paid out as dividends, which are at directors' discretion. From the company's point of view, the government is just a quasi-shareholder with a right to a dividend of 20% of earnings. The directors can then decide how much pre-tax profit needs to be reinvested; and how much should be retained in cash and how much should be paid out as dividends. If they think the tax bill is too high, they reduce cash dividends accordingly.

Once a business has shown itself to be viable, it will grow organically. The first outlet/machine/project has to be funded by share capital (assuming banks won't lend to start-ups); if there is sufficient demand and it is profitable, it will grow. If the business decides to just roll up profits in cash instead of expanding, then yes it will pay full corporation tax on them.

I spend all day completing tax returns, and it is only tax return in twenty where the capital expenditure in a year is greater than the profits, so if the business can claim 100% capital allowances on all its expenditure, it has a loss for tax purposes. The other nineteen returns show that capital allowance expenditure was a lot less than the profits for the year, ergo full corporation tax relief and/or the expansion is funded out of pre-tax profits, whichever way you want to look at it.

Admittedly, there is a timing issue here but this can all be fed into IRR calculations, or the loss carry back period could be extended from one year to three years again, to give the one business in twenty a better chance of reclaiming all the corporation tax it paid on the earlier years' profits which it has now genuinely reinvested.

One of the few sensible measures in the UK corporation tax system is that there is no tax relief for buying land, and rightly so, as people selling land to each other does not increase our productive capacity one jot, land is not capital. Annoyingly, there is precious little tax relief for the cost of new buildings, even though buildings are capital in the true sense of the word. Again, that can easily be fixed by reintroducing Industrial Buildings Allowances and extending them to all new buildings.

Uber - employment lawyers don't understand maths or logic

From the BBC:

Uber drivers have won the right to be classed as workers rather than self-employed.

The ruling by a London employment tribunal means drivers for the ride-hailing app will be entitled to holiday pay, paid rest breaks and the national minimum wage. The GMB union described the decision as a "monumental victory" for some 40,000 drivers in England and Wales…

Fair enoughski, but this is just people fighting over the same source of income. Taxi drivers, collectively have a monopoly - each licence is a little monopoly. the tell tale sign is that an increase in demand for taxi rides does not increase the supply of taxi licences (which are at the whim of a local council or similar), it merely pushes up the value of the licences.

From the point of view of the consumer, Uber busted the taxi drivers' monopoly, bringing down prices and increasing supply, but from the point of view of drivers, it created a new one of its own. The trick with these platforms is to persuade passengers/buyers that they are the biggest and have most drivers on call, while simultaneously persuading drivers/suppliers that they are the biggest and have most potential customers.

Things being what they are, it is far easier and more efficient if everybody uses the same platform.*

Which brings me to this…

The ruling accused Uber of "resorting in its documentation to fictions, twisted language and even brand new terminology", adding: "The notion that Uber in London is a mosaic of 30,000 small businesses linked by a common 'platform' is to our mind faintly ridiculous."

No, that is exactly how it is. Presumably, if you register as a driver with Uber that does not stop you from registering as a driver with other platforms at the same time. Question is then - whose employee are they now? Do they have two employers? How is the holiday pay, rest pay and national minimum wage while on call but not driving supposed to be split between the two?

Here comes the maths fail:

Alex Bearman, partner at Russell-Cooke solicitors, said Uber could look to meet any additional costs by increasing the percentage of each fare that it kept as commission: "It seems likely that this decision will be appealed and we may not see a final determination for some time to come."

Again, no. It appears that Uber takes about 25% of the total fare paid by the customer. If Uber takes a higher percentage, then that leaves less for the driver, not more. So either:
- Uber takes a lower percentage (which won't kill it, their income is pure profit/rent once its minimal overheads are paid) or
- prices overall go up by a third to get driver's average hourly earnings up from £5.03 to the National Minimum Wage. And you can't just put prices up, the result will be less demand and fewer Uber drivers. So those at the margin will be unemployed again and those who keep their jobs will earn more for less work. Which is classic rent seeking, it is just when trade unions do it, they dress it up as A Good Thing.
-----------------------------------
Then there are taxes on output and employment to consider. Let's assume our driver is genuinely self-employed and is below VAT registration threshold. He makes £10/hour gross, Uber takes 25% leaving our driver £7.50/hour, on which he pays 29% income tax/NIC = £5.33 after tax. The self-employed will also get a full tax deduction for motor vehicle costs.

If the drivers are all now employees of Uber, the full fare will be liable to VAT, so out of £10, £1.67 goes in VAT. This leaves £8.33. Even if Uber generously slashes its fee to 5% (42p after VAT) to cover its minimal overheads, this leaves £7.91 to pay gross wages. 96p goes in Employer's NIC, leaving £6.95 employment income taxable at 32%, leaving our driver with £4.73 per hour. The tax deduction which employees can claim for business use of private car is also much more restrictive than for the self-employed and is more difficult to claim.

So an epic fail all round**!

* Which is why the answer is for the government to simply set up its own low-cost ride sharing app, it can provide it for free to all and sundry and will make its money back ten times over from all the extra income tax/NIC it can collect (even at self-employed 29% rate) now that it knows who is doing what. That still looks like a monopoly in the old-fashioned sense of there being a single provider, but in practice it isn't a monopoly at all.

** Unless you are totally cynical and think that the Employment Tribunal is an arm of government and decided the case this way because it vastly increases the tax take from Uber drivers...