Tuesday, 2 December 2014

"Why do you think so many politicians love VAT?"

... asked L Fairfax at an earlier post, Shiney seconding:

Lots of reasons. Basically, VAT is the diametric opposite of Land Value Tax. The more specific reasons which immediately spring to mind are...

1. Because the EU says so, so they have to do it whether they like it or not.

2. They can palm off VAT as a "tax on consumption", so, the flawed logic goes, it does not affects savings, assets or production.

3. They can palm off VAT as a "tax on luxuries" because a few fig leaf "esential" items (housing, finance, food and education) are largely VAT-exempt and domestic power is only taxed at 5%. A bit of a coincidence that it is land-based/monopoly items which are lightly taxed, eh?

4. VAT is only payable when cash changes hands, so it is somehow a "voluntary" tax and always relates to "ability to pay".

5. VAT is the stealthiest of stealth taxes. The actual economic incidence is on producers/suppliers, and they have to collect it and write the cheques, but they believe that magically "the consumer pays it" so don't complain much, but see also the Greggs pasty tax furore.

6. VAT puts some businesses out of business for good; they stop complaining about VAT because they are no longer there. Those who can't find work are blamed for their own misery. If they increase taxes on land, then the land is still there and somebody will be paying it and moaning about it. To use a crude analogy, a dictator would rather shut up his opponents by killing them than by locking them up.

7. If you look more closely at the numbers, a combination of higher VAT/lower corporation tax benefits large or mature businesses and thus acts as a barrier to entry to new competitors. Large corporations have more lobbying power, so this is self-enforcing. But the UK has a fig-leaf for that as well - we have a very high registration threshold, almost unheard of in other EU countries.

8. Exporters don't have to pay VAT (in their home country - they just pay it abroad) and VAT is supposed to be levied on imports (so satisfies the primitive mercantilist school of thought).

9. The only good thing to say about VAT is that companies with UK sales like Starbucks can fiddle their corporation tax as much as they want, but they can't fiddle their VAT-able turnover to the same degree, ditto energy companies. Google just circumvent this by routing sales to UK customers via other countries.

10. From the pol's point of view, the other big merit in VAT is that the tax base is very large and will not disappear overnight.

No doubt others can add to this depressing list.


Staffordshire man said...

Did you mean point 9 to read LVT

Lola said...

In the main in the general run of life, people just don't notice it, or they evade it. So, they pay VAT on a hot pie without caring. But they go a long way not to pay VAT on Big Ticket stuff. E.G buying nearly new cars. Paying the builder in cash. Ditto the bloke that services their car.
I bet VAT evasion is huge.

Rich Tee said...

11. It is secretly a punitive tax because it affects the poor more. Without VAT, politicians have to put up income tax, which would upset rich people and be politically unpopular.

Point 1: But why does the EU insist that members must levy VAT? I have always found this slightly sinister. It's like the initiation ritual of a gang or secret society; you have to do something to prove your loyalty which then prevents you from leaving.

Shiney said...


Cheers for the list.

Mark Wadsworth said...

SM, yes, now corrected.

L, yes, VAT evasion as a % is the highest of all major taxes.

RT, I don't think VAT is particularly regressive, greater minds than mine have done studies and it appears to be fairly flat. But maybe the powers that be believe that it is regressive, which is good enough for them.

"But why does the EU insist that members must levy VAT?"

I genuinely don't know.

I think they wanted to have a standardised European wide tax, so they had to invent something a bit new and different which could run in parallel to income tax and corporation tax etc, and which could be palmed off as something which is NOT a tax on incomes (even though it very much is).

And who were the EU's founder members?

France loved VAT because farming is exempt.

Germans loved VAT because they are mercantilist.

But that's just my working assumption.

L fairfax said...

"11. It is secretly a punitive tax because it affects the poor more. Without VAT, politicians have to put up income tax, which would upset rich people and be politically unpopular."
Does it really? Surely if someone is really poor all their money goes on essential food,gas,electricity second hand clothes and rent/mortgage. None of which pay full VAT.

BTW I am not a fan of VAT

Mark Wadsworth said...

LF, you are making the mistake of assuming that the consumer bears the tax. Actually at least two-thirds is borne by the supplier/producer, that's easily provable, and possibly nearly all of it.

So apart from VAT on booze and fags, which are clearly regressive and are borne by the consumer, it is not so much that "poor" people pay more as a %, of their spending but rather that VAT is the cause of our economy under performing by ten percent, i.e. half the unemployed would find jobs within a year or two if VAT were abolished.

L fairfax said...

Good point.
If cutting VAT would make such a difference then surely politicians should want to reduce it. Are they really that stupid or are your calculations wrong?
(BTW I am not disagreeing with you, I would make you chancellor if it were up to me).

Robin Smith said...

I vote for point 7.

But more than that its a protectionist privilege benefiting monopoly.

More than its the same as a border tariff protecting a nations people from themselves and only benefiting the privileged industry.

To abolish VAT in the morning, the effect would be positive despite the loss of revenue.

Enterprise would no longer have internal borders opposed to free trade, brother against brother my dear comrade.

Would more capital start flooding into the nation?