The IFS answers… Is increasing VAT progressive?

For the final part in our question and answer series with the IFS on a range of questions about their views on government policy it is the turn of VAT. The impact of increasing VAT is an issue on which I’ve changed my mind. I used to think that increasing VAT was a bad idea because it would be a regressive tax change. But when the issue shot up the political agenda earlier this year, it was the IFS’s reasoning that made me doubt that. Here is the current version of that reasoning (which of course is subject to the same questions over data accuracy as raised earlier in the series):

Do you believe increasing VAT is progressive or regressive (and why)?

We believe that increasing the standard VAT rate in the current system is mildly progressive when examined on a lifetime basis. The intuition for this is that, over a lifetime, poorer households spend a higher proportion of their (lifetime) income on goods that are zero or reduced rated in the current VAT system, such as food, children’s clothes and domestic fuel and power, and hence a lower proportion of their lifetime income on items that are subject to the standard VAT rate.

The common perception that VAT is regressive largely comes from noting that households with low current income often spend a lot – and therefore see a big cash rise in their living costs – relative to their income. But as explained in the previous answers, this is a weakness of looking at a snapshot of income: as the ONS notes, “referring to income distribution to identify the incidence of indirect taxes on households with low income can be misleading”. In general, over a lifetime people’s expenditure must match their income (the main difference being inheritances), so if someone is spending (and therefore losing) a lot relative to their income at the moment – either borrowing or drawing on past savings – they must be spending (and therefore losing) little relative to their incomes at other times. Looking over the lifetime as a whole, what matters is whether the lifetime-rich or the lifetime-poor see a larger share of their lifetime resources taken in VAT, and on that basis VAT is progressive because necessities (consumed disproportionately by the lifetime-poor) are typically subject to zero or reduced rates of VAT.

For the previous questions and answers in this series see our Institute for Fiscal Studies page. Many thanks to Mike Brewer and the IFS for supplying detailed answers to all the questions.

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70 Comments

  • Of course there is the counter argument that VAT rises make it dispropotionately harder for the ‘life-time poor’ to afford anything more than the necessities, and is thus regressive as it deprives them of purchasing opportunity. That said, a society in which the poorest can still afford the necessities is vastly preferable to ones in which they can’t.

    And then there are arguments that regressive taxes aren’t always bad, depending on your perspective. E.g. taxes on alochol and tobacco, there is a correlation between poor health and low income so reducing the opportunity of those on low income to make lifestyle choices that are harmful and ultimately cost the state more (assuming national health system) is a good thing.

  • I used to believe the King had no clothes on until my boss told me that i had to argue that actually he was wearing transparent suit if I wanted to keep my job in the court!

    the major flaw in this argument is hidden in the brackets-

    “In general, over a lifetime people’s expenditure must match their income (the main difference being inheritances), ”

    In general (of course there are exceptions) more wealthy people do not merely spend what they earn over a lifetime because
    a) they generally do at some benefit from family help either directly or via inheritence to suggest otherwise is putting ones head in the sand.
    b) more wealthy people do not usually spend all of their income but instead build savings (which are then passed on perpetuating the situation)
    c) wealthy people do not have to spend as much of their income in the short term allowing them to invest in other options such as property, savings, shares, pensions and so on thus giving them the possibility of acquiring greater wealth in the long run. Those of a poorer background aren’t in the fortunate position to benefit thus.

  • V.A.T. isn’t too bad in a society without large income inequalities, but even in societies with a fairer distribution of income, it’s still far more regressive than a graded income tax.

    @G you’re right, a consumption tax on tobacco, alcohol, carbon etc. do make sense as they’re neither necessities nor luxuries but an active drain on the economy in the long term. Taxing them to make the user pay for the costs to the economy is not only fair, but can promote a reduction in usage.

  • I used to believe the Lib Dems were on the side of social justice, progress politics and equal opportunity before I started to read this site.

    40,000 families own 70% of this country, both in assets and investment terms.

    If they sell or trade these assets they are taxed at 28% (above 10k per annum) as a capital gain, this is naively assuming the assets are not held in a more tax efficient structure.

    If I want to buy £100k worth of the assets, as a lower rate tax payer I would have to earn £140k (£35k for 4 years) as tax plus NI comes to 35% of my salary. If I were a higher rate payer this would be nearer £200k.

    The person selling the assets would have to pay a maximum of £25k in tax on their £100k profit whilst I’d be paying £40k-£100k in tax to earn enough money to buy the assets.

    Why do we tax income and not unearned wealth?

  • The IFS really are a complete joke.

    There is only one way to determine whether a tax is progressive/proportionate/regressive and that’s by comparing the tax burden as a percentage of income for each income decile. It is the standard definition in every economics textbook ever written. If an organisation in the sciences decided to re-write a definition to suite their own prejudice they would be ridiculed. The IFS deserve to be ridiculed.

    VAT is regressive across all income deciles. Source: http://www.statistics.gov.uk/downloads/theme_social/Taxes-Benefits-2007-2008/Taxes_benefits_0708.pdf (Appendix 1). It impedes the ability of those on lower income deciles to save their spare income to maintain the same lifestyle in retirement as a result. i.e. a regressive tax means someone in a higher decile can retire earlier and maintain the same lifestyle compared to someone on a lower income decile (to maintain their lifestyle).

    The tuition fee proposals are also regressive for the top few income deciles.

    Regressive taxes enable the rich to have a lower retirement age to maintain the same lifestyle.

    This isn’t rocket science. I wish people would take the time to actually look up the definition of progressive/proportionate/regressive taxation – it is quite clear.

  • @Timak
    “Why do we tax income and not unearned wealth?”

    The liberal parties have talked about introducing a land-value tax for over a century, but there’s doesn’t seem to be much of a correlation between what the Lib Dems talk about and what Clegg actual does.

  • “Looking over the lifetime as a whole, what matters is whether the lifetime-rich or the lifetime-poor see a larger share of their lifetime resources taken in VAT, and on that basis VAT is progressive because necessities (consumed disproportionately by the lifetime-poor) are typically subject to zero or reduced rates of VAT.”

    That is absurd nonsense and doesn’t correspond to the figures; VAT is regressive across all income deciles. However, it may well be true that a change from 17.5% to 20% may make the distribution across the deciles slightly less regressive owing to the zero-rated and reduced rate items, however for the IFS to state that VAT is in itself progressive is a big fat lie. Their report on the Browne proposals described them as progressive on the basis that higher income deciles pay more – that is just factually incorrect (in the sense that the IFS completely changed the standard definition of progressive/regressive taxation to come to that conclusion).

  • Andrew Duffield 25th Nov '10 - 2:32pm

    “VAT – or any transactions or sales tax – is a truly pants way of raising revenue.”

    Spot on. It is yet another tax on jobs, penalising enterprise, endeavour and trade – the very things we are supposed to want to encourage. Not only is it regressive, it is also – logically – unsustainable and immoral.

  • David Allen 25th Nov '10 - 2:34pm

    When the IFS say that VAT is mildly progressive, they’re saying it is mildlily (new word!) more progressive than a flat tax. A flat tax being a uniform percentage rate of income tax irrespective of your income level, much promoted by US far right politicians as being just about as rich-guy-friendly as it is possible to get.

    So by supporting a VAT rise, we’ve placed ourselves to the left of Sarah Palin. But not very far to the left. Happy now?

  • @David Allen

    “When the IFS say that VAT is mildly progressive, they’re saying it is mildlily (new word!) more progressive than a flat tax.”

    It isn’t though. VAT is regressive when compared to a flat rate of income tax, which therefore puts you to the right of Sarah Palin.

  • Colin Green 25th Nov '10 - 3:31pm

    Steve ,

    “The liberal parties have talked about introducing a land-value tax for over a century”

    The problem with an land tax is that small holders and small farmers generally own the land they work but make so little profit from farming they don’t make enough to pay their own living, let alone a land tax. Pressure from supermarkets and Dairies mean that payments to farmers are perenially squeezed. Taxing income ensures the ability to pay.

  • Andrew you are completely right!

    Vat is a terrible way to raise revenue.
    Apart from that the zero rate list is a joke.
    Full of favours for political backing.
    And not containing truly essential items.

    (The term PLEDGE has been copyrighted by Clegg & Co. Proper use of this word is strictly prohibited. Use of this word does not have any binding contractual obligation. Any damage caused to your reputation by the use of this word is not the responsibility of Clegg & Co. This does effect your statutory rights.)

  • tonygreaves 25th Nov '10 - 4:07pm

    The zero-rated items are zero rated for everyone; therefore they are not relevant to the issue of whether the VAT that is actually charged is or is not regressive. Comparing the amount of VAT paid by different income deciles (or whatever), as actual payments or as a percentage of income, is irrelevant. What is relevant is looking at the impact on the poorest people.

    The fact that postage is exempt and ordinary food and children’s clothing is zero-rated is irrelevant to the fact that other necessary and reasonable purchases are taxed at a high rate, soon to go even higher. That is regressive and undesirable for poorer households.

    I am also generally against VAT because it is a tax on production (jobs) and trade. What we should be taxing are income, wealth, resources and undesirable things.

    Tony Greaves

  • @Colin
    At the risk of pointing out the obvious, a land value tax is based on the value of the land, so for agricultural land the rate would be much lower than residential/commercial land as it is worth much less. It would be paid by the land-owner, so tenant farmers would not pay a penny as it would be economically impossible for them to pass on the costs to the tenant. If the farmers own their land then they would probably be no worse off as the land-value tax would be a replacement to the income tax they pay (all proponents of land-value tax see it as a tax to replace other taxes, not as an additional tax), so they wouldn’t be worse off, provided they were doing something productive with the land.

    The tax in itself would drive down land values anyway, as well as preventing the kind of land price speculation that caused the financial melt-down and is currently crippling our economy as developers hold on to land, at no cost to themselves, in the hope that prices will recover sufficiently for them to sell above the (inflated, speculative) price they paid for it. I live next to such a plot of land that is former-residential, empty and has had planning permission for three years. It is still standing empty. The unemployed construction workers will be sitting around waiting until we either have hyperinflation or the developers go bust. Absolute madness, but with a land-value tax, the developers would never risk owning land and leaving it empty, thus the speculation wouldn’t have occurred in the first place. House prices wouldn’t have rocketed over the last decade, so home-buyers would have been better off, with more disposable income. The current system encourages landowners to try and profit by creating an artificial scarcity of land through non-development.

    There would be winners and losers (most homeowners would likely be better off throughout their lives), but the real losers would be those that own/hoard valuable land and don’t use it productively, whether that is a single person living in a mansion or an agricultural land-owner that isn’t using their land for anything.

    Quite often, land-owners gain or lose in a manner that is not related to their own effort – e.g. if an area goes downhill then the land-value tax would go down, or if an area improves (gentrification, transport infrastructure investment decisions favouring their area, etc) then it would go up. As the system presently stands, land-owners can make windfall gains through no effort on their own part. A land-value tax encourages a more meritocratic system and is economically efficient with no deadweight loss (given the fixed supply of land).

    And you can’t hide land offshore! (so no evasion)

  • toryboysnevergrowup 25th Nov '10 - 4:45pm

    But if you look at what is said the analysis ignores the impact of inheritance and also it doesn’t seem to recognise that cost of house purchase is also VAT exempt. Perhaps it might be worth remembering what Keynes said about the long term and recognise that most people’s perception of what is progressive or regressive will be formed over a considerably shorter period than a lifetime. The fac t that the poor have to pay now while the rich should be left to paid later didn’t use to figure very highly in LIbDem propaganda.

  • @niklas smith

    I see your point and perhaps you are right in some instances but it doesn’t necessarily have to always be thus. What I was trying to point out was that there are assumptions here that don’t stand up. Firstly that wealth is not only a result of earnings and that secondly not everyone spends exactly what they earn over a lifetime.

  • David Allen
    “When the IFS say that VAT is mildly progressive”

    But that’s not what they said. What they actually said is that “We believe that increasing the standard VAT rate in the current system is mildly progressive.”

    It must be the case that charging VAT on gas and electricity (unchanged at 5% rate) is regressive, which is why it is important to be clear whether you are talking about VATas a whole or about the Coalition Government’s increase in the standard rate to 20%.

    I reckon that is also where Steve has got it wrong.

  • Anthony Aloysius St 25th Nov '10 - 6:43pm

    “In general, over a lifetime people’s expenditure must match their income (the main difference being inheritances), …”

    It is a bit worrying that the IFS can come out with such a blatantly self-contradictory statement. “A equals B, the main difference between A and B being …”

    Surely it’s rather obvious that many wealthy people do save large amounts of money and/or do buy large amounts of equity or property.

  • Anthony Aloysius St 25th Nov '10 - 6:45pm

    A sales tax taxes consumption, whereas an income tax taxes work. If part of the reason we’re in the current mess is we’re consuming too much for the amount of productive work we’re doing, it makes sense to discourage consumption and encourage work.

    Any of you got a response to that argument?

    Well, obvious the IFS’s answer would be that lifetime expenditure has to match lifetime income, so there’s no way you can discourage one and encourage the other!

  • Actually I have been doing some research in a related area and according to the Family Spending report, in the lowest income decile, food and non alcoholic drinks make up 17.2% of spending versus just 7.6% for the highest income decile. The lowest decile also spends much more on Housing (rents net of benefits), fuel and power – 23.% versus 6.9% for the richest – which as a category is either zero rated or reduced rate. Looking at it on an expenditure basis, then it would look pretty progressive then.

    I have to add that for those in the lowest deciles tend to be dis-savers i.e. students borrowing or pensioners living off savings. There are also those whose declared income does not match their actual one i.e those on the fiddle. Looking at the amount of VAT actually paid relative to income is not really very informative in these instances, so the lifecycle distinction is an important one to make.

    Overall, I believe the IFS is right in its assertion that VAT increases are progressive.

  • Anthony Aloysius St 25th Nov '10 - 8:51pm

    “I have to add that for those in the lowest deciles tend to be dis-savers i.e. students borrowing or pensioners living off savings.”

    Isn’t it curious, then, that in the lowest expenditure decile according to the IFS figures average income is about three times as big as average expenditure? Do you think it makes sense to classify this group as “poor”?

  • Andrew Duffield 25th Nov '10 - 8:56pm

    “In an ideal world, I’d prefer to raise income tax. It’s the most progressive kind of tax…”

    NO, NO, NO, NO, NO!

    Income tax penalises work, discourages employment and destroys jobs. It is passed on in higher prices, with most harmful incidence on the poor. Progressives used to understand this reality as an article of Liberal faith!

  • Isn’t it amazing that we are raising the rate of VAT, when Osborne is reducing the rate of bank levy because he fears it will raise too much money. So bankers who caused the financial crisis are being let off lightly and the rest of us have to pay through our nose.

  • I meant of course Osborne raising the rate of VAT and not we.

  • Tony Dawson 25th Nov '10 - 9:06pm

    It is a matter of choice, when considering whether a tax is ‘regressive’ to determine whether you are considering ‘regressiveness’ in relation to the high-income, high-wealth or high-spending groups involved – or some peculiar combination of the three.

    As Simon Shaw has pointed out, above, the only issue worth considering is whether the raising on NON-STANDARD VAT is regressive or not. It is clear that raising this tax in this way will raise disproportionate amounts from those with higher ‘disposable’ incomes pro-rata compared with those who have less to spend on ‘VATable’ non-essentials. In this way, it is progressive compared to the status quo. It is also clear that an even higher amount of increased impact on the high income groups could be raised by increasing higher rates of income tax, providing that this could be done in a way which eclipsed increased tax-evasion and avoidance (yes, I know these are different but they have a similar effect on government revenues) . And it is even more clear that those who have high capital wealth can sit back and laugh at the whole lot unless a Capital Tax, such as Land Value Taxation, is introduced.

    But yes, the most regressive tax of all (except the Poll Tax) has been Council Tax, which is presumably why Labour pumped it up so much to avoid placing too much of a burden on their rich friends while they were increasing the gap between rich and poor to a level even greater than Mrs Thatcher ever dared do.

  • Philip Rolle 25th Nov '10 - 9:19pm

    Sorry to break up the fiscal party to go off topic, but most surprisingly there is no LIBDEMVOICE thread on yesterday’s demonstrations and the implications and legitimacy of police kettling.

    I find it sad that the Lib Dems, who would once have been concerned with the freedom to protest and police conduct, have today been all but silent on these issues.

  • A good article on the VAT regressive/progressive debate:

    http://www.taxresearch.org.uk/Blog/2010/07/12/is-vat-regressive-and-if-so-why-does-the-ifs-deny-it/

    The lifecycle argument for considering VAT as a proportion of expenditure is clearly a nonsense, given that the higher income deciles save more (as a result of regressive taxes suh as VAT). Those on the higher salaries can therefore retire earlier than those on the lower salaries and over the course of their lifetime they may indeed have spent a similar or slightly greater net VAT/income ratio, but that completely misses the point. Those in the higher deciles can RETIRE EARLIER as a result. That means that VAT improves the quality of life for those in the higher income deciles at the expense of those in the lower deciles. There is only one fair method to measure VAT and that is in comparison to income (not least because it can then be compared to the effects of income tax changes). Anything else is just sophistry in support of an agenda.

    The VAT rise will almost certainly result in hundreds of thousands losing their jobs. They will be hit with a double whammy of having to pay increased VAT on their reduced incomes.

  • I forgot to mention that VAT rises are dreadful for several reasons, not least the fact that it gives an even greater competitive advantage to those that evade paying it over those that do.

  • conservative 25th Nov '10 - 9:33pm

    It is interesting to see a Lib Dem forum considering whether raising VAT is progressive when before the election you knew what your answer was…Is there any fundemental belief at the heart of this party which won’t be changed by the meanderings of government?

  • @Philip
    Quite agree – I was completely disgusted by the behaviour of the police and the absence of debate is shameful. From the accounts that I have heard it seems that the police moved to forcibly block the path of the protestors BEFORE any of the vandalism occurred to the police van (which had been conveniently left in the kettle with the demonstrators). It was clear that the police intended all along to imprison the demonstration on the slightest evidence of any wrongdoing (which was always likely, given that in a large crowd someone is going to react to the police or just have a go at them anyway). As for the rest of the scuffles on the police lines, it was nothing more than you would expect from people being denied the freedom to leave.

    I find it deplorable that thousands of innocent people were imprisoned in the freezing cold for several hours. It’s the kind of thing you would expect from a tin-pot dictatorship.

  • @conservative

    Quite

  • I am not surprised that the LibDems have kept silent. They are ashamed of all the lies they are peddling. They are helping the Cons to raise fees and cut the benefits of the poor in this country all in the name of we don’t have any money. It can’t be true we have no money because Osborne and Alexander have reduced the bank levy as it would raise too much money.

  • @BB
    The fact, on the bank levy, you say the same thing twice doesn’t mean it isn’t rubbish.

    What you are saying is that the Chancellor doesn’t want to cut the deficit too fast! Really?

  • conservative
    “It is interesting to see a Lib Dem forum considering whether raising VAT is progressive when before the election you knew what your answer was”

    A rather strange observation. An increase in standard rate VAT (rather than in both standard and reduced rate VAT) was equally mildly progressive before the election as it was after. Are you suggesting a Lib Dem spokesperson was saying something different pre General Election?

  • Anthony Aloysius St 25th Nov '10 - 11:22pm

    “Are you suggesting a Lib Dem spokesperson was saying something different pre General Election?”

    Well, are you really suggesting those “Tory Tax Bombshell” posters were meant to convey to the electorate that the Lib Dems thought a rise in VAT would be progressive?

    This kind of thing really is an insult to the intelligence.

  • @Anthony Aloysius St
    Why don’t you go away and find out what the “Tory Tax Bombshell” poster actually said and then come back and tell us.

    When you do so, you will be able to confirm that the poster was about whether or not the Tories’ tax plans added up.

  • Anthony Aloysius St 26th Nov '10 - 12:30am

    Simon

    Now you really are being naughty and trying to avoid the question.

    We’re all “dead familiar” with the poster. We all know perfectly well what it said. Thanks to the magic of the Internet, it’s only a click away:
    http://blogs.ft.com/westminster/2010/05/does-the-tory-vat-bombshell-need-rebranding/

    The question is, are you really trying to tell us that the poster was meant to convey the message that Lib Dems thought a rise in VAT would be progressive?

    I mean, would anyone who looked at that poster really have imagined that a few months later they’d be looking at a row of nodding Lib Dem dogs saying, “Yes, VAT is progressive. Oh yes, we fully support raising VAT. Yes. Ooohhh yes!”

    Really?

  • To claim that the progressiveness of a tax can be judged on its lifetime consequences is absurd. The measure of whether a tax is progressive can only be meaningful when set against the disposable income that individuals have on a daily, weekly, monthly (whatever the individuals pay cycle) basis. If a poor person spends a higher percentage of their present income in tax than a wealthy person because of a particular tax then that tax is regressive. If a calculation of tax progression depends upon an assumption of the future self of an individual in order to proclaim it mildly progressive then that implies the case for that individuals present self must be regressive.

    George, here’s a response for you, see if it fits:

    “A sales tax taxes consumption, whereas an income tax taxes work. If part of the reason we’re in the current mess is we’re consuming too much for the amount of productive work we’re doing, it makes sense to discourage consumption and encourage work.”

    We are not consuming too much for the amount of productive work we are doing we simply aren’t being paid the correct value for that work. Income taxes do not tax work they tax income. Work and income are not directly proportional. Income is directly proportional to power in the market place it has much less to do with work done. The decline of trade union effectiveness through anti-worker legislation has undermined the main negotiating hand of employees so that the rewards for productive work stay higher up the industrial chain, those further down the chain have had their power removed. The slack has been taken up with personal debt and tax credits.

  • @Anthony Aloysius St
    Interesting that you cannot bring yourself to relate what the poster says – of course to do so completely undermines your angle.

    I’m talking about the last 18 words:
    “The Conservatives would have to raise the average family’s VAT by £389 to pay for their tax promises.”

    I am sure you will now be willing to concede that I was correct when I said: “… the poster was about whether or not the Tories’ tax plans added up.”

  • @Steve
    From your last posting you have clearly not read what the poster actually says. You, too, would do well to read the poster.

    Also, why do you think you know better than (for example) the IFS what is the definition of “progessive tax”? What arrogance!

  • @Simon Shaw

    Who’s being arrogant? The IFS have redefined the definition of a progressive tax to suit their own agenda. I know what the definition is, as it is in every economics textbook (I learnt it at school over half my lifetime ago – I’ve checked numerous sources recently and the definition has not changed). I’m not being arrogant, I’m just being informed.

  • vince thurnell 26th Nov '10 - 9:15am

    To put it bluntly, most of the general public couldn’t care less whether you consider it progressive or not. All they know is, its more money they have to fork out. You people really have lost touch with reality, its like your all in a little bubble totally detached from the outside world. But hey carry on with the imprtant question as to what is progressive and what isn’t.

  • Anthony Aloysius St 26th Nov '10 - 9:33am

    Simon

    So – for the third time – are you really trying to tell us that the poster was meant to convey the message that Lib Dems thought a rise in VAT would be progressive?

    That they thought raising it would be a jolly positive thing, and that the point they were making was a purely technical one about the accuracy of Mr Osborne’s arithmetic?

    I’m sure this kind of ludicrous retrospective spin only makes things worse for the party. “We didn’t win the election” sounds inspired by comparison.

  • Anthony Aloysius St 26th Nov '10 - 11:19am

    “The fact is poorer people spend all of (sometimes more than) their income. Richer people on the other hand are able to save money.”

    That, in a nutshell, is what the IFS doesn’t believe. Strange but true.

  • The IFS was founded by four financiers as a reaction to the 1965 Labour government’s tax plans. It continues to push policy agendas, which in itself indicates that their ‘analysis’ of anything is likely to be non-objective.

    Their ‘definition’ of progressive is not just inconsistent with everyone else, but it is also lacks consistency between the different reports they produce. Their report on the Browne proposals described the tuition fees as progressive on the basis that those on higher salaries pay more; not pay more as a proportion of income, not pay more as a proportion of expenditure, but just simply pay more. They are a joke.

  • Anthony Aloysius St 26th Nov '10 - 11:53am

    Of course, it’s also worth bearing in mind that on the criterion of percentage of expenditure (rather than income), a flat purchase tax in all goods (with absolutely no exemptions) would still not be regressive, because it would represent the same percentage of each household’s expenditure.

    Are people really going to deny that a flat purchase tax with no exemptions would be regressive?

  • Anthony Aloysius St 26th Nov '10 - 1:08pm

    George

    “I agree that the phrase “progressive tax” sounds odd when applied to VAT, but the IFS are using it as a technical term.”

    But they’re not really, because they are also applying the same criterion (percentage of expenditure) to other tax and benefit changes that have nothing to do with purchase taxes.

    The point is that there are two quite different definitions of progressive/regressive being used – one based on a comparison with expenditure and the other based on a comparison with income.

    If you’re pushing percentage of expenditure as more appropriate, the first thing you need to do is to give us some arguments why that should be the case.

    I’d suggest starting with a hypothetical case in which we compare two households:
    (1) A poor one with an income of £10,000 and an expenditure of £10,000
    (2) A rich one with an income of £100,000 and an expenditure of £50,000.
    A tax change results in the poor household losing £100 a year and the rich one losing £600.
    So in terms of expenditure, the poor one is losing 1% and the rich one 1.2%.
    But in terms of income, the poor one is losing 1% and the rich one 0.6%.

    Is the tax change progressive or regressive, and why?

  • @ Steve

    You say the IFS is a joke. So what is your source of perfect, unbiased fiscal analysis then?

  • Anthony Aloysius St 26th Nov '10 - 2:18pm

    George

    Sorry, but you’re completely missing the point.

    There are two quite different measures of “progressiveness” here. They mean quite different things. The question is which is the appropriate one to use when evaluating the effects of the government’s actions. Obviously there’s no “right answer.” It’s essentially a political question, not an economic one

    It is not a question that a degree in economics makes you any more able to answer (and it is emphatically _not_ a question about which measure is easier to evaluate given the data we happen to have access to).

    The question is, in slightly different terms, whether a tax change with the effect I outlined above – taking a smaller percentage of a poor family’s expenditure, but a larger percentage of its income – is that tax change a good or a bad thing? Unless you have an opinion on that, what’s the point of arguing endlessly about the finer technical points of the IFS analysis?

  • @Robert C

    In the IFS’s report on the Browne report “A progressive graduate tax after all?” :

    http://www.ifs.org.uk/publications/5307

    a discussion is given as to whether the Browne poposals are (a) progressive and (b) equate to a graduate tax. This document was instrumental in shaping the debate surrounding the Browne proposals. However, the definition of progressive they used is not consistent with their definition for progressive/regressive for VAT or the standard definition of progressive/regressive taxation as a proportion of income. If a scientist behaved in this manner they would be laughed at and nobody would take them seriously. This, however, is far more serious as their propaganda has had a huge bearing on the debate on the Browne/tuition fee proposals. If it isn’t deliberate propaganda then they are incompetent. Either way, it is a cause of serious concern that such an organisation should be allowed to influence public debate.

    “You say the IFS is a joke. So what is your source of perfect, unbiased fiscal analysis then?”

    I don’t have to provide a source of of perfect, unbiased fiscal analysis to prove that the IFS’s presentation of their analysis is seriously flawed. How is that question relevant?

  • David Allen 26th Nov '10 - 4:02pm

    “couldn’t the same argument be made of most tax increases, that they would reduce the disposable income of the poor more than that of the rich?”

    Well, precisely. That’s why most people used to believe that a neutral tax regime was not good enough. The overall balance of taxation should not simply be a little bit more “progressive” than a flat tax. it should be a lot more “progressive”, in terms of income fraction. Unless the tax regime is strongly “progressive”, on the definitions being used here, it will be unfair to the poor, in that it takes a greater share of their (small) disposable income than it takes from the rich.

    So – IFS claim that VAT is mildly progressive relative to the flat tax, Steve argues that IFS are wrong and that VAT is regressive relative to a flat tax. In a sense it doesn’t matter that much which of these views is right. Even if the IFS are right, a VAT increase hurts the poor more than it hurts the rich.

  • Anthony Aloysius St 26th Nov '10 - 4:03pm

    Steve

    Yes indeed, I _should_ have said “There are three quite different measures of “progressiveness” here…”

    Maybe it would be safest to take a leaf out of Monty Python’s book and say “Among the IFS’s analytical techniques are such diverse measurements of progressiveness as …”

  • David Allen
    “So – IFS claim that VAT is mildly progressive relative to the flat tax”

    Sorry to make exactly the same observation again, David, but that is NOT what they said. What they actually said is that “We believe that increasing the standard VAT rate in the current system is mildly progressive.”

    The are talking about the increase in standard rate VAT, not VAT as a whole.

  • David Allen 26th Nov '10 - 5:58pm

    Simon,

    Well, the difference that you pointed out is that VAT on fuel didn’t go up. So the increase is marginally different from the total in its overall distribution. Does that really make a significant difference? Doubt it!

  • David Allen 26th Nov '10 - 6:11pm

    George,

    “A sales tax taxes consumption, whereas an income tax taxes work. If part of the reason we’re in the current mess is we’re consuming too much for the amount of productive work we’re doing, it makes sense to discourage consumption and encourage work.”

    Well, if we spend more than we earn, we incur debt. Personal as well as state debt has of course been a bit of a problem (in fact, the blessed Vince used to be worried much more about personal debt than state debt, before the latter gained prominence and everybody told him how clever he had been to foresee it!) However, people normally look to direct influences like interest rates to control the level of debt, rather than indirect factors like changes in the kind of tax levied. Presumably that’s because changes in the kind of tax levied have too indirect and weak an effect to do anything very useful about debt.

    If we suppose on the other hand that the level of personal debt is roughly constant, so that income equals expenditure, we can think about what a switch from income tax to VAT might feel like. You get (say) £10 extra in your weekly pay packet, and your significant other tells you that the bills are going up by £10 per week because of the rise in VAT. Does this make you want to race down the pub and drink away your windfall gains? Does it make you race up to the attic to hide away that £10 under the floorborads instead? i’d say neither – it mostly leaves you pretty much unmoved.

    So my conclusion is – There are other things that matter more, when deciding whether to income-tax or VAT-tax, than its possible weak influence of the levels of debt and expenditure.

  • Norfolk Boy 26th Nov '10 - 7:04pm

    I feel like I have entered an alternative reality in recent weeks with all this changing of basic meanings and understanding

    Of course VAT is a regressive tax. Anyone who says otherwise is talking out of the top of their head. It really isn’t worth a thought more.

  • @David Allen
    I would assume the issue about VAT on fuel not going up is crucial.

    The reason why the IFS is intuitively correct to say that the increase in standard rate VAT to 20% is mildly progressive is that the poorest in society wil logically spend a very high proportion of their income on the following: Food, Childrens clothing, Rent, Gas, Electricity, Water, Council Tax and Public Transport.

    Most food and all of the rest are either VAT zero-rated, VAT exempt or 5% VAT rate (Gas and Electricity). So none of the above (apart from a small proportion of food) are subject to any extra VAT. That is the intuitive reason why increasing the standard rate VAT to 20% is mildly progressive.

  • Anthony Aloysius St 26th Nov '10 - 10:49pm

    “That is the intuitive reason why increasing the standard rate VAT to 20% is mildly progressive.”

    It may or may not be “mildly progressive” if the criterion is the percentage of expenditure – unfortunately the quality of the data is too poor to say for sure. It’s much clearer that it’s regressive if the criterion is the percentage of income.

    The question that remains unanswered is why you should prefer the former criterion.

  • “In general, over a lifetime people’s expenditure must match their income (the main difference being inheritances),”

    I think the issue here is whether you think these should be measured over a lifetime or a point in time.The IFS are right as long as higher savings (whether in property or financial assets) which are zero-rated outweigh the zero-weighting of necessities. But a tax that takes more money off people (the same people perhaps) when they are poor than when they are rich might still be considered regressive, I’d think.

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