From yesterday's the FT:
Sir, Helicopter money can be disbursed most quickly by cutting value added tax rates, especially in the pre-Christmas period. The greatest multiplier effect within the UK arises from reducing VAT on the sales of services that are labour intensive such as hospitality, repairs and bespoke goods.
Andrew Dundas, Perth.
I'm not sure if it's correct to talk about the 'multiplier effect' (to the extent such a thing even exists) of a tax cut, surely what he means is that VAT pushes businesses close to or past the top of the Laffer Curve. Commonsense tells us that businesses whose gross profits or 'value added' are liable to an extra 16.66% tax before they even think about paying the 40% PAYE or 24% corporation tax are most likely to be in this position.
So assuming constant business income and that all profits are paid out as wages, scrapping VAT would bring down the overall marginal rate down from 50.3% to 40.2%, which would make a huge difference to the business/employees and only a very modest overall fall in tax revenues - the receipts from a 40% are not 40/50 of those of a 50% tax, they would be 43/50 (or whatever).
[Cue idiots shouting: "But the consumer pays the VAT!". Yes, that's what the One Per Cent want you to believe - and even if it were true, why is this A Good Thing?]
To back this up, HMRC have published some handy tables on the tax gap, which shows that in relative terms, the most-evaded tax is duty on hand rolling tobacco (38%) but in absolute terms, the biggest shortfall is with VAT (they collect about ten per cent less than they expect every year = £10 billion a year out of £100 billion).
And of course the lowest tax gaps are for land-related taxes, Business Rates has collection costs plus losses of 1.5%.
The SDLT-gap is given as £0.5 billion, which is about a tenth of total revenues. The collection costs of the old flat 1% rate were famously minimal, because few people bothered evading it, but I'm quite sure that the collection costs of the savage 3% - 15% rates are much higher - it is widely observed that transactions tend to bunch at prices just below the threshold - and from professional experience I'd guess that the 'compliance costs' (i.e. 'avoidance costs') are absolutely enormous. For example, fancy firms of lawyers offer SDLT-saving schemes, for which they charge you a third of the SDLT saved.
Friday, 19 October 2012
Reader's Letter Of The Day
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16 comments:
And of course the lowest tax gaps are for land-related taxes, Business Rates has collection costs plus losses of 1.5% and the SDLT-gap is only 0.3%.
Not only that, collection+loss as described here only applies to the HMRC, compliance costs on the side of the taxed is another thing. The compliance costs for VAT is huge, enough to warrant abolishment on it's own, for land-related taxes; neglible.
Kj, excellent point. What are the private compliance costs of the really complicated taxes like VAT or PAYE? Surely at least five per cent of the tax paid.
This swedish survey says 3% private compliance costs. I surfed a bit on compliance costs, and it seems Corporate Income Tax has the largest compliance costs measured against revenue, for which there is obvious reasons, being that this is pretty usually money well spent, while VAT avoidance is largely limited to the black economy.
And I meant "well spent" as in "usually gives a lower tax bill", not from a welfare-economics perspective ofcourse ;)
Kj, from experience, corporation tax has very low compliance costs, once you've done the accounts, somebody mucks about for a couple of hours, job done.
Then there's this statement from the Chartered Institute of Taxation:
Tax guru Cedric Sandford1 , found that across a sample of UK
industry VAT compliance costs in broad terms are some four
per cent of revenues raised, which in macro-economic terms is
1.5 per cent of gross domestic product (GDP) – a large sum of
money for companies to bear.
Kj, from experience, corporation tax has very low compliance costs, once you've done the accounts, somebody mucks about for a couple of hours, job done.
In some jurisdictions, the payoff might be higher (high tax-rates, complex tax code), and the costs of tax-planning comes into play.
Kj, good work, so my guess of 5% was not far off. Although his 1.5% is wrong, it should be 0.15%.
Heh, a VAT which collects 37,5% of GDP would be interesting indeed...
I'm convinced that the main drag on the economy is not one particular tax or another (although I do agree that some taxes are much easier to collect than others - ones which require a record of every single transaction ever seem over-complicated and liable to fraud) but the combination of different taxes on the same activity.
So anything I spend comes out of taxed income, the spending gets taxed at point of sale and then any profits get taxed as well, not to mention that many of the costs to the retailer are taxed again.
It used to be popular amongst "free market" people to say that VAT was the "best" tax (compared to income taxes) but I am not convinced. We should move towards having one single flat rate tax. And I think it either has to be income/capital gains tax or your favourite one, Mark.
BE
BE, yes of course, besides the admin and faff, it's the overall total rate which matters.
But VAT is particularly bad because it means that wealth creating productive activity is liable to a surcharge, whereas land an finance based activities are exempt (no surprises there). This is an extra distortion above and beyond the higher rate.
NIC is the second worst tax because it discourages employment, but at least it is fair between sectors, i.e. NIC on bankers or farmers is the same as NIC on car workers or hairdressers.
And if we had a 50/50 tax system with half of revenues from a flat rate income tax with no exemptions (of about 20%) and the other half from a flat rate LVT (about 3.5% of what your house is worth), well that would be a huge leap forward compared to where we are now. The two are not mutually exclusive.
Alternatively, the poll tax element of council tax could be reimbursed for everyone.
DS, if council tax was reduced, it would simply feed into higher rents and house prices. Great if you're an owner, not so great if you're not...
DS, as Mombers says (but his comment disappeared in the system), a council tax cut is the worst kind of tax cut. The best kind is clearly cutting VAT, end of.
The insane thing is that there are any losses associated with Business Rates. The tax incidence of NNDR is on the owner, so it's a huge waste of time sending the bill to the occupant and then having to run a bad debt office to deal with unsecured arrears. If they just sent the bill to the owner, bad debt would go down to 0 as any unpaid rates get paid when the property is repossessed or sold. And of course you could get rid of empty buildings relief.
N, yes of course, that's argument number 2,317 for LVT-type taxes, but all the same, Business Rates is the closest we've got and it achieves about 95% of what LVT on commercial land and buildings would achieve.
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