The great VAT mirage

Posted on: 04 January 2011 by Alexander Hay

It's time to scrap VAT and simplify our tax system.

That 20% VAT feeling... But for many lower income earners, this is no laughing matter

It's fitting that the same day VAT went up to 20%, a solar eclipse obscured the sun and swathed the land in semi-darkness. Eclipses, after all, have traditionally been seen as harbingers of doom, and for many lower income families and their employment prospects, this is as blatant as it gets.

Of course, we've already argued that paying more tax is perhaps a better idea than slashing spending to the bone. False economies aside, a mature society needs to accept that if you want it, you need to pay for it, and our huge national deficit provides no other choice. So shouldn't we accept Chancellor George Osborne's raising tax levels as a necessary evil?

We should, but VAT is not an honest tax, and here is the problem. You don't pay it out of your pre-tax income but are forced to pay it with whatever money you have left whenever you buy something covered by the scheme. In  other words, you're paying twice. This means little if you are from a reasonably wealthy background - like, for example, the current occupant of 11 Downing Street

Yet less well off taxpayers pay proportionately more for goods covered by VAT, and also rely on that same retail sector for employment. This is a double blow: families will spend less meaning more jobs are lost from the service sector, often impacting on those same families in turn. It is not a particularly just institution.

Tellingly, the Federation of Small Businesses has called for the tax to be reduced to its original 17.5% level once the economy improves. Much as poorer families will pay more as a result of the VAT increase, so Small and Medium Enterprises will also suffer, and it is these start-ups that the economy will rely on if it is to recover, now that the financial sector's hawking of expensive money has been discredited (so to speak) and inflated house prices are facing a steep decline.

The other issue with VAT, as messrs Cameron and Osborne know full well, is that it is a stealth tax. Technically it's optional, but unless you like only wearing children and buying food, you will at some point or another become a VAT payer. One could avoid VAT if you lived in a shack and spun your own clothes, grew vegetables and hunted pigeons and squirrels in the local park with a crossbow. But most of us don't have the time, so VAT is in effect an extension of income tax. Combine this with reports that the rise helps camouflage price rises for goods and services and it seems dubious to say the least

Nor is it alone. Along with National Insurancetuition feesStamp Dutyimport duties and Council Tax, it reflects a desire to get as much revenue out of us as possible while avoiding the direct raising of income tax. Apparently, this tax alone would ruin any government that dared raise it (and arguably getting rid of the 10% rate of tax certainly damaged Gordon Brown), yet the money is extracted indirectly instead.

In other words, the government is disingenuous for suckering us like this, and we are - well - suckers for going along with it. Osborne has proposed cutting income tax before VAT in the event of the economy recovering, a gesture that will no doubt have symbolic significance but would otherwise be meaningless – he may as well cut both equally or abolish one and raise the other and the taxpayer would be no better off, yet the prevailing narrative demands this of him. So expect the VAT delusion to carry on for the foreseeable future.

Or not. Let's propose an end to VAT and all the other regressive taxes. Transfer the tax burden equally via income tax and then leave the taxpayer alone from that point onwards. Dismantling the bureaucracies that grow up around and depend on them would save money too, though it seems keeping the Civil Service busy is every bit as important as levying the money to keep it running.

This will of course cause outrage at first. Many taxpayers will be furious or shocked at quite how much they will now have to pay up front. Yet in effect they are already paying similar amounts – it's just that these have been acquired piecemeal or indirectly through such means as, well, VAT.

Regardless of your views on tax, it should be plain that any system which makes the poor pay more than the rich is fundamentally unjust and plays a major role in keeping people down and in stasis, which isn't good for the economy by any reckoning. 

Yet if it reveals, starkly, how much we need to pay to keep the country running, perhaps we can then have an honest debate to identify what's worth spending our taxes on. In the meantime, we will keep paying more and more, but at least our income tax won't go up...

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Alexander Hay

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