Labour had been considering it for months before the General Election. The Coalition decided it was necessary after they’d seen the books – much to the discomfort of many Lib Dems. It’s the VAT rise – to 20% on 1st January 2011.
Many people have said that it’s a regressive tax and we should have increased basic rate income tax instead, suggesting that would be fairer.
Is that really true? Partly, but in reality the case is less clear cut.
We don’t pay VAT on food, children’s clothes, books, newspapers, magazines or sporting activities nor will the VAT rise affect our utility bills. VAT also isn’t charged on specialist equipment for disabled people.
If I look at everything I buy over a month and exclude all those items, there’ll be a certain amount I pay in VAT, and that will increase by £2.50 for every £100 I spend on non-vatable items. That tempting flat-screen TV costing £300 before VAT will cost me an extra £7.50 from January.
If you’re on a low income, the total amount of extra VAT you pay on other items is likely to be a good deal lower than someone who’s wealthy, as you’ll be buying a lot fewer of them.
If you’re a high earner, your disposable income after the “essentials” is likely to be higher still and so you’ll pay more VAT.
If we just look at people with taxable incomes, increasing VAT is probably more progressive and proportionate than raising the basic rate of income tax (though there will always be exceptions).
What about people with no taxable income
The sums change when we look at people without a taxable income, both poor and rich.
People on welfare, along with pensioners, wouldn’t be affected by an increase in income tax, but will be hit by any rise in VAT.
How much they’re hit depends on the amount they spend over and above the non-VAT-rated items. Large families with teenage or older children and low, or no, incomes may find themselves paying a good deal more tax than if there had been an income tax rise. A pensioner trying to get by on the basic state pension, just about finding money for food, rent, bills and a weekly trip to play Bingo won’t see much difference.
At the other end there are wealthy people spending savings, bequests, trust funds and investment money who wouldn’t pay a penny more if income tax were increased but will pay a little more of their fair share with a VAT rise.
The essentials
Another long-standing issue is whether VAT should be charged on women’s sanitary products (tampons, sanitary pads). For those who prefer not to use a menstrual cup, they’re pretty much essential, and yet have VAT charged on them. I first campaigned against that back in the early ’90s, but unsuccessfully, and no government since has seen fit to change it.
The verdict
The overall picture on the VAT increase is far from clear.
The losers will be people on low incomes, small pensions or welfare who – though choice or necessity – find themselves spending significant amounts on vatable items.
People with high disposable incomes, and – even more – those with lots of money that wasn’t subject to income tax at all will also mostly lose out compared to an income tax rate increase.
The winners will be those paying income tax for whom budgets are tighter. If you earn between £10,000 to £40,000 most of which goes on food and bills, you’ll probably come out better than the alternative basic rate income tax increase.
Given the need to raise large amounts of money from the general population, should the Government have increased basic rate income tax instead of VAT? To be honest, I’d probably have said “yes” if you’d asked me that a few weeks ago. But having looked at it in more detail, I’m a lot less sure.
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94 Comments
“But having looked at it in more detail, I’m a lot less sure. “
If you’ve really looked at it in detail – meaning calculating some numbers – why not post the results? All I see above is a lot of waffle about generalities, which doesn’t tell us anything.
Remember that the IFS has tried to look at this precise question in quantitative terms, and to calculate the effects on each decile of the population, classified in different ways and interpreted in different ways. Unfortunately it turned out that – seemingly – the data on household expenditure were so uncertain as to make the exercise meaningless. That being the case, what chance do you stand of coming to a meaningful conclusion without doing any calculations at all?
I looked at this yesterday and found some charts showing VAT as a proportion of income versus decile and quintile income groups. The trend was broadly neutral – neither regressive nor progressive. The exception was the lowest income group which the commenters said was due to some anomalies like students who have zero income but still spend money on VATable items.
If VAT was charged at a single rate on everything then it would be regressive – but we don’t. Some things are VAT free and some more are charged at a marginal rate. The effect is that a would-be-regressive tax is changed into a broadly neutral tax. Perhaps we could do better but it could be a lot worse.
“The Coalition decided it was necessary after they’d seen the books ”
SORRY that will not wash, you had the books before the election you and the Tories new the borrowing amounts ,
Why then did you have the big VAT poster ,IF IT DIDNT HURT POOR PEOPLE,AND OAP,S ,POOR MOTHERS
The Tories decided to put up vat and nick said “YES DAVID ANYTHING ELSE ”
If the vat retreat dosn,t learn you nothing, next Mays elections will, WHEN YOU GET WIPED OUT
Lib Dems are sell outs.
The LDV ability to re-write both history and fact is amazing. You were the party that published thousands of posters promising a “Tory VAT bombshell” before the election. Did you do that because you thought a VAT rise was progressive? Before the election every IFS report was seized upon by Clegg with glee to attack Labour. Now the IFS have said your party is regressive, what’s your response? To claim the IFS are wrong.
How regressive is the VAT rise? Very.
Next question?
Did Nick Clegg promise to retain Universal benefits before the election. Yes. Is he retaining them now? No.
What’s the conclusion?
LDV will post anything to pledge support to a leadership who are abusing, destroying and walking all over any contrary view to theirs – as it changes daily.
Didn’t the IFS conclude that the VAT increase was neutral and possibly slightly progressive.
Cuse
“How regressive is the VAT rise? Very.”
Could you provide evidence for this assertion please?
@Colin Green
Evidence?
Could you provide evidence that it’s progressive? Evidence, not opinion?
http://www.taxresearch.org.uk/Blog/2010/07/12/is-vat-regressive-and-if-so-why-does-the-ifs-deny-it/
Cuse you tell us you are a high income earner, no wonder you hate the coalition; the rich have did extremely well under Labour, whilst the poverty has increased. After 13 years of Blair/Brown Labour government, the UK has higher levels of inequality than after 18 years of Thatcher/Major Conservative government.
Forty per cent of the extra income enjoyed by British households over the Labour years has accrued to the richest 10%. Inequality in the United Kingdom is now higher than at any point since consistent records began, in 1979. Labour shifted taxation from the rich to the poor. It cut capital gains tax from 40% to 18%
There are now 700,000 more people in poverty than when Labour took office, and more than at any point since records began! The average real incomes of the poorest tenth declined by 2% in the ten years to 2007/8; these figures remember pre-date the credit-crunch and recession.
So please don’t lecture us – we known you for what you are.Which is why this former union rep and low paid worker is still backing the Liberal Democrats.
“If you earn between £10,000 to £40,000 most of which goes on food and bills, you’ll probably come out better than the alternative basic rate income tax increase.”
Actually, most of it probably goes on rent or mortgage payments, but they’re also not VATable.
But, don’t forget the govt are raising the income tax threshold, reducing the tax burden for people earning £7.5k+ by £200. This offsets the VAT increase for the first £8,000 of VATable goods. People earning between £6.5k and £7.5k will also benefit to a lesser extent, but none of these will regularly be spending £8,000 on VATable goods.
Colin
The conclusion of the article you’ve just cited is this:
“The result is that far from the IFS claim being justified, it is vey obviously wrong, and very poor quality research. As a matter of fact VAT is regressive.”
That’s even granting the IFS’s desire to exclude the poorest 10% of households from consideration (the data cited show that the 10% of households with lowest incomes pay 19% of their income in VAT compared with 9.5-13.5% for the rest of households).
You will stick up for anything NICK does
When student fees go up to £10.000 and Trident gets replaced ,cant wait til L.D.V still try,s to stick up for Nick
Not one proper Cabinet job or one policy fully implemented so far
Can L.D.V find out when Nick new about FAMILY BENEFITS getting stopped ,as he is not saying much
andy edinburgh
An interesting thing here- http://duncanseconomicblog.wordpress.com/2010/10/07/osborne-to-cut-more-slowly/
Rumours abound that the coalition plans to slow the deficit reduction down. Having originally campaigned on a slower timetable, then agreed to a quicker one, then admitted to have never believed in a slower timetable, having called Labour deficit-deniers for proposing the same- how will the Lib Dems respond if this happens?
In my view, the VAT increase is not wholly regressive, but it is not a good thing.
It is not wholly liberal/progressive/radical at this stage either.
I will only be happy about this once the list of exempt items is expanded to include a wider selection of what we view as basic needs or items fundamental to basic capabilities. Children’s clothing should be exempt, but so should most adult clothing, as should a great deal more. And there are some things that shouldn’t be that are predominantly used by the well-off. Useful to look here: http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm
@Andrew – shouting in capitals is not helpful and as for ‘you had the books before the election’ this is not true, Labour held off on the Comprehensive Spending Review they needed to do so that you could justify still supporting them to yourself. However, I agree that the VAT-rise as it stands, whilst not as bad as it may be painted is not a good thing by any means.
@Cuse – all manner of topics have been published on LDV, some questioning the party leadership others not. There can, however, be an interesting debate.
Just for people who forget:
Labour would probably have raised VAT, would have had to cut, potentially more or less depending on debt and growth, but this is a debatable academic point not about principle. Under the Labour Government, inequality went up, banks continued to be de-regulated, and the gender equality gap grew (and yes I am concerned about the impact of the Comprehensive Spending Review [CSR] on women). And a global recession which was made worse by bankers who had been de-regulated by Labour and then didn’t hold a CSR before the election.
Meanwhile, this government will a) increase Capital Gains Tax (Darling refused), b) raise the tax threshold to £10,000 (Fabians alleged this was regressive) and c) introduce a banking levy (the people Labour keeps trying to say are getting away with it – they’re not).
@Henry:
“b) raise the tax threshold to £10,000”
Are you sure about that? The much-vaunted Lib Dem concession on this is to take the threshold up to £7,475 in April 2011 – ie a rise in the PA of about £500 on what could normally be expected each tax year (April 2010 being exception for having no PA increase ).
But the Tories haven’t indicated that the £10k threshold will be coming anytime soon, have they?
It seems to depend on your understanding of progressive. If you translate it from meaning the percentage of the money you pay in tax from your total income, in which case VAT is regressive, to meaning the amount of money you pay in cash terms, then VAT can be made to look progressive but that would be sophistry.
If we were to translate your logic of relative cash terms on to income tax, i.e. that those with higher incomes pay more cash in VAT than those with lower incomes due to their more expensive tastes thus making it progressive in absolute terms of how much money is paid, then a case could be made to say that marginal rates of taxation could be reversed so that the rich actually pay lower rates of income tax than the less well off and still call it progressive as they would still pay more in absolute terms.
Your conclusion seems to rest on the point that an income tax rise would be avoidable by the wealthy but VAT would not so therefore it can be considered progressive because it results in greater returns to the state from that particular tax bracket, but that it would be regressive for those who do not recieve taxable incomes. The winners you say would be those with low disposable income but who have taxable incomes. Whether VAT is progressive then, you seem to say, depends on whether or not income tax is paid and how an increase in income tax would compare.
So, if we were to set income tax at zero and only consider VAT would it be a progressive tax regime? No.
If we add in a progressive income tax regime does that reverse this? No.
Do the anomalies of the combined tax regimes entirely reverse the non-progressive effects of VAT? No.
Do the anomalies of the combined tax regimes alleviate some of the imbalances of the VAT only system? Yes.
Is this sufficient to recategorise VAT as progressive? No.
The facts are simple if you pay a higher percentage of your income in tax than someone else who is richer than you then the tax regime is regressive. That poor people pay a higher rate of their income in tax than better off people because of VAT makes VAT regressive. This is not negated by the fact that the situation between the better off and the very well off reverts to a progressive situation when you balance the overall situation by including notional rises in income tax, especially when you take the middle out and the comparison between the top and bottom is still regressive. Your verdict argues that those on taxable incomes with lower disposable incomes are better off with a rise in VAT than with a rise in income tax but with either they will be paying a higher overall percentage rate of their income than those with large disposable incomes. So the best case is that between the wage earners and the idle rich VAT can potentially be called slightly more progressive than a situation without VAT.
The answer to your question; ‘How Regressive is the VAT Rise?’ then is: very, unless you are in the specific circumstances that make your comparative overall marginal tax rate lower than some notional figure that avoids income taxes but spends money on luxury goods, in which case it could be described as a little less than very.
@ Mike (The Labour One) I will say thank God for that. The party should too, although they are beginning to look schizophrenic.
@Andrew I agree with you to some extent, I am disappointed at how tribal activists are appearing (I’m certainly not and would be off if I didn’t agree with party policy (as set by conference), as it is I’m struggling with the government).
Yes, Paul, it’s in the Coalition Agreement. The threshold will be £10,000 by the end of this Parliament.
@Paul B – no, I know, you are right. I expect it by the end of the parliament – sorry if that looked wrong… But is is certainly increasing in incremental stages upwards with the aim of (I think) £10,000.
@andrew, you are not right, party leadership is challenged on LDV, and whilst some posts are tribal (often opinion) others are not.
And you statement ‘not one proper Cabinet job or one policy fully implemented so far’ is a bit unfair. I think the leadership should continue to push on Trident – we wait and see how the Cabinet public war with words goes on this, and if fees do go up to £10,000 I will happily write a piece explaining why this would be utter [].
Dale, I am not tribalist, however, I do not think it schizophrenic to change economic policy based on economic fact.
And for Mike (the Labour one): You are right that Clegg is/was wrong to change his mind before the election. In this regard, I doubt he represents the party. However, the overall policy (in the manifesto) was clear and it was one of ‘economic context matters’.
One thing the extra scrutiny of VAT since the second rise (the first being LABOUR’S RISE in January (which they would have found some other way to raise the money if VAT was really so evil) has shown is that its effects are really very complex, and depend to a large extent on personal spending patterns and circumstances. I’m no longer sure if it is regressive or not! What would be even better as a result of this scrutiny would be if some work was done on what tweaks might be made to VAT ratings to make it more progressive than it currently is, whatever that progressiveness is.
This maybe is an over simplification but if you have £10 in your pocket and you need to buy a light bulb and the price has gone up because of VAT you will feel the increase more than if you have £100 in your pocket (admittedly a tiny amount but the principle is there) to argue that the poor spend most their disposable income non-vat goods therefore will not ‘feel the pinch’ as much is patronising to say the least.
It could be argued that the VAT raise has only served to put luxuries out off reach of the poor and the rich will have to buy a 36inch TV instead of a 38inch one, by using that you could say the poor are better off as they are only spending money on food and keeping their ‘loose change’ in their pocket instead of ‘wasting’ it of the stuff the rich take for granted, in other words the rich cut down and the poor do without
So is the VAT raise regressive or progressive?…. I suppose how you answer that depends on if your rich or poor
The Lib Dem tax commission concluded that VAT is regressive, so it seemed odd at how rapidly the party leadership was able to change it’s mind on this.
However Vince Cable published an article justifying the VAT on LDV which cited the IFS report.
The IFS report show that the bottom decile pay substantially more VAT than everyone else, but the figures were misleading. The IFS pointed out that a lot of people in the bottom decile had volatile incomes. They included students, many of whom will go on to get well paid jobs. Businessmen will sometime have very low income, only to get very high income later. Some people were “between jobs”.
So the upshot is that more research needs to be done that separates out people in these difference scenarios.
Mike(The Labour one)
“Rumours abound that the coalition plans to slow the deficit reduction down. Having originally campaigned on a slower timetable, then agreed to a quicker one, then admitted to have never believed in a slower timetable, having called Labour deficit-deniers for proposing the same- how will the Lib Dems respond if this happens?”
Thanks for that link. I hadn’t heard that.
I’m pro-coalition, but I’ve said on this site, on a number of occasions, that’d I’d like the deficit reduction programme slowed a little. If this happens, I’d be pleased.
Personally, I’ve never called Darling a deficit denier. My problem has been with the rhetoric of other Labour politicans, especially Ed Balls, who argue for a much slower programme even than Darling. And who, in their rhetoric, refuse to concede that there would be any pain under Labour plans (as in his exchange with Andy Burnham on Question Time).
As for the politics of it. Frankly, I don’t think most people will care. They just want the right policy.
‘So the upshot is that more research needs to be done that separates out people in these difference scenarios.’ Spot on Geoffrey.
@andrew Please try and control your CAPS LOCK. The continual SWITCHING between CAPITALS and LOWER case MAKES your POSTS very DIFFICULT to TAKE seriously.
@ Henry I don’t think that it is a case of seeing the books and changing ideas accordingly – Keynesianism is a fundamental principle upon which we built our economic policy – the economic plan we’re backing is far from that. I’m all for changing mind on the basis of evidence, not the principle though! (Rumour has it that Vince wouldn’t serve as CSTT under Osborne because of this, he would have served that position under a more like-minded Chancellor, Ken Clarke?)
I’m a bit surprised anyone references http://www.taxresearch.org.uk/Documents/VATRegressive.pdf as if it were an objective article. It came over to me as an irrational rant against the IFS, with remarks like: “They (the IFS) have… abandoned their credibility in the process because, as all the evidence shows, VAT is a regressive tax.” And “(the IFS article) can be seen not as an error but as part of a pattern of justification for this programme of recommending tax reform for a particular, and privileged segment of society”.
He also attacks on those critiquing his article with comments like: “Debating this is not worthwhile with you though: your contempt for both reason and ordinary people is apparent”.
He seemed to have two main arguments:
(1) That using income deciles is an obvious and necessary convention to define progressive and regressive. For the IFS to use expenditure deciles renders the terms meaningless as a consequence.
(2) And that, because savings rates are low among those among those with low income, there therefore can’t be anyone with in the low income decile who is living off savings.
The second point assumed that just because only 9% of the poor have £20,000 savings or more, they couldn’t skew the statistics, and it wasn’t worth using expenditure deciles to remove that distortion.
@Geoffrey Payne
“The IFS report show that the bottom decile pay substantially more VAT than everyone else, but the figures were misleading. The IFS pointed out that a lot of people in the bottom decile had volatile incomes. They included students, many of whom will go on to get well paid jobs. Businessmen will sometime have very low income, only to get very high income later. Some people were “between jobs”.
So the upshot is that more research needs to be done that separates out people in these difference scenarios.”
I think the chapter of the IFS Green Budget is the article you are referring to is http://www.ifs.org.uk/budgets/gb2009/09chap10.pdf (page 4). As well as providing a graph, based on income deciles, which showed the bottom decile pay substantially more VAT than everyone else, they show a graph based on people’s expenditure, which showed the bottom decile spent less VAT than everyone else.
It seemed to me to make a lot of sense. But I’d be interested in other serious articles on the subject.
Does anyone have a link to the Lib Dem tax commission report, which accesses VAT?
there may not be VAT on food, clothes and equipment, but there is VAT on road haulage so an increase on the costs of bringing the goods to market, which will impact on the price the customer pays for the goods.
david thorpe wrote
there may not be VAT on food, clothes and equipment, but there is VAT on road haulage so an increase on the costs of bringing the goods to market, which will impact on the price the customer pays for the goods.
Very good point and one that seems conveniently forgotten by many
Yes, I agree – good point. Needs investigating.
Why is it that every commenter on here seems to be bending backwards to justify every policy they opposed during the election.
Do you all change your beliefs purely based on what the official party line is. A dearth of intelligence and critical thinking.
Just for a little help for @Rob, I think it is fairly clear above that I do not support the VAT rise. So your statement ‘every commenter’ is false.
There are others above who similarly are concerned and disagree with the policy, but do not necessarily reject the interesting debate above.
@Rob
Not every commenter – but most.
It is frightening how quickly LDV manages to change its stance on their party’s previously publicly-stated + published core policies. What is equally frightening is how convinced they are that they never held their party’s original publicly-stated + published policy position – not even for a second.
“As well as providing a graph, based on income deciles, which showed the bottom decile pay substantially more VAT than everyone else, they show a graph based on people’s expenditure, which showed the bottom decile spent less VAT than everyone else.
It seemed to me to make a lot of sense.”
As a matter of fact, the IFS figures grouped by expenditure made so little sense to you previously, that you emailed them to ask why the households in the “poorest” 10% grouped by expenditure had on average an income three times larger than their expenditure!
The reply they sent you can be seen here:
https://www.libdemvoice.org/opinion-making-vat-fair-20066.html#comment-132588
The explanation for the factor-of-three discrepancy between income and expenditure was that it “is likely to be due to measurement error and/or because they happen to have very low expenditure in a particular week in a way which might not reflect consumption (so they may be running down supplies of food they have in their home in that particular week, for example).”
Either way, they seem to think that some kind of a methodological error is responsible for expenditure being underestimated by a factor of three on average in these households. Given that, it surprises me that the study was considered publishable, let alone a sound basis on which to argue that VAT is not regressive.
david thorpe wrote
there may not be VAT on food, clothes and equipment, but there is VAT on road haulage so an increase on the costs of bringing the goods to market, which will impact on the price the customer pays for the goods.
No it won’t (in virtually all cases).
As long as the final retailer is VAT-registered (which virtually all are), the VAT on road haulage is fully reclaimable as “input VAT”. So even if the rate of VAT on road haulage were doubled it would have no impact on the price of goods in the shops.
(Incidentally, there is VAT on adult clothes)
Rob
Why is it that every commenter on here seems to be bending backwards to justify every policy they opposed during the election.
Cuse
It is frightening how quickly LDV manages to change its stance on their party’s previously publicly-stated + published core policies.
Both these imply that we opposed an increase in VAT before the election. Not so.
Let us also not forget that it was recently revealed that Alastair Darling had (privately) proposed an increase in VAT to 19% before the election.
“Both these imply that we opposed an increase in VAT before the election. Not so.”
So the “VAT bombshell” poster during the election campaign was really intended to convey support for an increase in VAT? Well I never!
@ Anthony Aloysius St
Have you actually read what the poster says?
If you haven’t, why don’t go away and find out?
Then you could come back and apologise.
The Lib Dems campaigned heavily on the idea that the Tories would raise VAT and that this would be a bad thing. They managed to stick to words that show no definitive commitment either way, but it’s only with the benefit of hindsight that we can see how they were trying to have their cake and eat it too. When they say “before the Tory VAT bombshell” you wouldn’t automatically assume that they would support raising VAT I don’t think.
Anyway, we shouldn’t also forget that Alastair Darling didn’t get his way and was overruled.
@Mike(The Labour one)
The same goes for you; have you actually read what the poster says?
Anyway, we shouldn’t also forget that Alastair Darling didn’t get his way and was overruled.
That was until after the election – if Labour had won, they would have increased VAT (although to 19% rather than to 20%). I suppose that 1% makes all the difference to the Labour apologists we welcome on here.
Simon Shaw
“Have you actually read what the poster says?
If you haven’t, why don’t go away and find out?
Then you could come back and apologise.”
Of course I know what the poster said. I thought – and said – it was a load of rubbish at the time, but I didn’t realise quite how hypocritical and dishonest it was.
Moreover, Vince Cable said at the time that Lib Dem plans would not require a rise in VAT. Of course, it was sheer claptrap.
Anthony Aloysius St
Of course I know what the poster said.
I don’t believe you.
Why don’t you go away and find out? Then you could confirm what it actually says, rather than what boring Labour hacks would like everybody to think it says.
Simon
“I don’t believe you.”
Why on earth not? It was quite a talking point during the campaign. In fact, if you can be bothered to look you’ll find I was the first person to comment on it on LDV.
But I suspect your fatuous remarks are just a way of trying to avoid the point. You’re not really trying to tell us that this poster was intended to convey a message of support for an increase in VAT? That the electorate could be expected to guess from it that if the Tories proposed such a rise, then the response of the Lib Dems as coalition partners would be “Yes, fine – go right ahead”?
Absurd.
Simon
And as for your claim that the Lib Dems didn’t oppose an increase in VAT during the election campaign, here’s a snippet from the Telegraph’s coverage of the poster launch:
“When questioned, Mr Clegg himself repeatedly declined to promise explicitly that VAT would not rise under the Lib Dems, before eventually saying it would not.”
http://www.telegraph.co.uk/news/election-2010/7569399/General-Election-2010-Nick-Clegg-accuses-Conservatives-of-VAT-bombshell.html
All the to-ing and fro-ing on the detail is actually irrellevant. Having fairly recently returned to UK I realise we are indeed a nation of whingers …even those who do accept the economic realities seem simply to say ‘yes everyone must tighten their belts, but not me because I am special’ !! For those of us running small businesses, who have spent well over a year not drawing a salary so that suppliers and those working for us get paid, the whining on drives us wild ….until we realise that those complaining are probably just not very bright, cannot see the whole picture, don’t know how to manage their finances, know their rights but have long since forgotten these all have attendant responsibilities, and assume that the only way to be seen to be ‘special’ is to ‘flash their wad’ about. VAT is a sensible tax for a Government to raise in times like these, not least because it is pretty straightforward to implement (there is little point introducing a change that is more expensive to implement than the revenue it brings in). Interestingly it also catches those working in the ‘black economy’ (I hadn’t realised the extent of this) as well as the rest of us. Actually VAT is the only tax where you have a degree of choice over how much you pay …if you no longer drive the kids 600 metres to/from school in your Audi Q7 (yes I do know someone who does this!) and walk instead you can save a great deal more than the VAT on the fuel! The point is, some of us have had to review our lives and ‘cut our cloth’ some time ago and actually feel happier and healthier for it …time for the rest to take the opportunity to catch up perhaps!
Anthony Aloysius St
“I don’t believe you.”
Why on earth not?
Because I have twice offered you the chance to actually go and read what the poster says and confirm back to us all on LDV what it says.
The fact that you haven’t suggests that you haven’t the faintest idea what the poster said.
So just go away and do a bit of research on the internet and don’t come back until you are able to tell us what the poster actually said.
We wouldn’t want to think that Labour hacks are gulity of misrepresentation, would we?
@Simon Shaw
Gosh, you’re right. It’s quite clearly saying that Liberals not only agree with Gideon ‘n’ Dave’s VAT plans, but that they too are campaigning to raise VAT when they form a dodgy Coalition of Losers with the Tories, isn’t it?
Simon
Welcome to Lib Dem Voice. You’ll fit in just fine.
Any Lib Dems in the the slightest bit surprised that Cuse misquotes the poster?
What it actually said is this:
TORY VAT BOMBSHELL.
You’d pay £389 more a year in VAT under the Conservatives.
The Conservatives would have to raise the average family’s VAT by £389 to pay for their tax promises.
The fact that our Labour Party “tribalist” Cuse omitted that last line indicates that he recognises that it completely undermines his ( and his fellow-travellers like Anthony Aloysius St) arguments.
In fact that poster was nothing to do whether with whether VAT should go up, down or stay the same.
It was about whether the Tories’ tax promises in other areas stacked up.
@Simon Shaw
Brilliant.
You’re right. That’s why the headline was TORY VAT BOMBSHELL.
Political posters are so clever!
Simon
Evidently you didn’t read my post at 10.01pm.
Let’s try again. This is what Clegg said when the poster was launched:
“We will not have to raise VAT to deliver our promises. The Conservatives will. Let me repeat that: Our plans do not require a rise in VAT. The Tory plans do.”
https://www.libdemvoice.org/nick-clegg-reveals-tories-13bn-vat-bombshell-18755.html
@Cuse
And the reason you (so cleverly) omitted those last 18 words was….?
Not another example of Labour Party lies and distortions?
@Anthony Aloysius St
Most sensible people (which obviously excudes Labour Party “tribalists”) would regard Nick’s quote as saying the same thing as the poster.
He and the poster were both attacking the fact that the Tories’ tax promises didn’t stack up.
One other point: what Cuse and Anthony Aloysius St have singularly failed to mention is that Vince Cable specifically declined to rule out an increase in VAT on BBC1’s Politics Show over 3 weeks before the election.
On the 11 April Politics Show, the BBC’s Jon Sopel asked Vince “Would you rule out raising VAT?”
Vince’s reply was “No, I don’t.”
So a massive apology from the Labour “tribalists” would now be appropriate.
@Simon Shaw
I’ve just read the LDV article which heralded the launch of the ‘VAT Bombshell’ poster. Stephen Tall is pretty explicit in what he views as the message behind the poster. It’s the same message mugs like me were sold on the doorstep. I’m not sure who you are trying to convince with your ranting but if you go back to that article and the clear message contained within it then you will find that it’s not the ‘Labour Tribalists’ who should be apologising.
@TheContinentalOp
I wasn’t aware of any Stephen Tall articles on this subject, but having done a search I found three of them. All three (from April) seemed to be saying pretty much what I have been saying – that the poster was an attack on the Tory tax promises which didn’t add up.
You say that “It’s the same message mugs like me were sold on the doorstep.” Are you saying that you were a Conservative-inclined voter who was persuaded to vote Lib Dem because of Lib Dem canvassers who were focussing on the “Tory Tax Bombshell” concept.
All sounds rather unlikely, but where was that?
I dont support the VAT rise for a number of reasons.
I think perhaps a VAT rise on only certain goods or services might have been more equitable.
as for the coalition of losers remark.
The number of votes won by the Lib Dems went up by a million.
The number of votes won by the toreis went up.
They are the coalition parties.
The party which lost votes was labour, a coalition involving them at this stage is a losers coalition, anything else is not.
@ Rob
The official party line re VAT Increase was that it couldnt be ruled out.
“The official party line re VAT Increase was that it couldnt be ruled out.”
Again, that’s disingenous.
What happened was this:
(1) The party launched a high-profile attack on the Tories, saying “you’d pay £389 more” in VAT under them (“you” supposedly being the average household; the numbers were made up, but turned out to be only 0.5% away from what the Tory/Lib Dem coalition did in the end).
(2) Of course, this was accompanied by an insistence that the Lib Dems would not need to raise VAT. What would have been the point of it as political advertising, otherwise?
(3) No doubt the party line was to go no further than “would not need to,” coupled with the usual “but of course we can’t rule anything out,” but according to the Telegraph article I quoted above, under the pressure of questioning Clegg did eventually say VAT would not rise under the Lib Dems.
It’s ridiculous to pretend now that the party didn’t publicly oppose a rise in VAT during the election campaign.
Now, weren’t we having a marginally more sensible discussion about how regressive VAT is, before we got side-tracked onto this nonsense?
@Anthony – correct. A Lib Dem Government would not have raised VAT and said it wouldn’t.
Is it time to introduce a means to rate contributions on LDV so we can filter out the mindless arguments about who said what when and which tribe is being most tribalist? Then we might be able to read intelligent contributions to the debate such as Cris Scott’s without so much distraction.
Is the government’s response to the financial crisis as progressive as I would like? No its not. But I am convinced that is far more progressive than if the Tories had been left to their own devices. If we could only get them to abolish higher rate tax relief on pensions… but if we can’t lets move on.
@ Dale
the coalition inherited a supply side financial crisis, somehting fairly unprecdented.
Keynes solutions are for a demand side crisis.
I am an ardent keynesian, but he was writing in response to inadequate demand, the credit crisis was a crisis of supply. #
Thats not to say that some jkeynes cant be part of the solution, and indeed it has been, but this crisis was unprecedented and novel, just as the great depression was and inspired keynes to his arguments
Cuse
How regressive is the VAT rise? Very.
I note that over 30 hours ago Colin Green asked Cuse “Could you provide evidence for this assertion please?”
Still no response – is that normal for people like Cuse?
What I can see, the evidence is that Cuse is seriously in error.
Anthony Aloysius St
the data cited show that the 10% of households with lowest incomes pay 19% of their income in VAT
Am I alone in thinking that there is something seriously wrong with that figure? If everything that a household purchased were subject to standard rate VAT (currently 17.5%) then 14.9% of all their spending would go on VAT (14.9% = 17.5/117.5).
Of course, part of what any household buys is subject to less than standard rate VAT.
Either at 5% – mainly gas and electricity.
Or zero-rated or exempt, things like:
Most food
Public transport
Children’s clothing
Rent
Council Tax
Most of us would be fairly confident that poorer households spend a higher proportion of their total spending on energy costs (at 5% VAT) or on food etc (at 0% VAT/exempt) than do more affluent households.
So how on earth do the very poorest allegedly spend 19% of their income on VAT.
Shome mishtake, shurely?
Simon
Yes, there’s something badly wrong with the IFS data. See comments above.
@Anthony Aloysius St
So are you now saying the VAT rise is NOT regressive?
Cuse claims it is “very” regressive, but with justifying that claim.
@Simon Shaw
re: data cited showing that the 10% of households with lowest incomes pay 19% of their income in VAT
“Am I alone in thinking that there is something seriously wrong with that figure?”
It would be nonsense if it were 19% of expenditure, but it isn’t. A minority of those with the lowest income have much higher expenditure than income – due to living off savings, or having temporary low income. In a separate graph, the IFS say they pay 10.5 % of their expenditure in VAT (see Figure 10.2).
For a good overview of the issue, I’d recommend reading the IFS’s document itself. http://www.ifs.org.uk/budgets/gb2009/09chap10.pdf (pages 4 and 5). It’s only two pages, and it’s well written.
Anthony and I discussed this issue at great length a while back. To try to resolve our disagreement, I wrote to James Browne of the IFS, and he very kindly replied:
https://www.libdemvoice.org/opinion-making-vat-fair-20066.html#comment-132588
From reading Mr Browne’s reply, it was obvious to me that we were over-analysing the graph, and that, without access to the raw data, and the methodology that the IFS had used, it was pointless continuing the discussion. Anthony and I have an honest difference of opinion on this, and he regarded the reply as evidence that the IFS had produced bad research.
Because the IFS has a high reputation in academic circles, I still think the IFS paper is a strong indication that VAT is either neutral, or slightly progressive. Anthony disagrees.
George, I completely agree with you.
I had also noted that figure 10.2 shows that VAT is mildly progressive, not regressive, and certainly not “very” regressive as Cuse has claimed, without any justification (despite repeated requests).
For the very poorest households, around 10% of what they spend goes in VAT, whereas for the very highest households this rises to around 12%.
Simon Shaw and George Kendal, so do I get you right? The figures you are using say that VAT is mildly progressive because taken as a percentage of spending the least well off are taxed 2ish% less than the wealthiest households on their expenditure, nothing to do with income at all (fig. 10.2). Whereas as a percentage of income the percentages are reversed from decile 2 onwards with a couple of anomalies along the way but mostly a downward trend, from 12 (decile 2) to 9.5ish (for the wealthiest) but with a huge difference between the poorest and decile 2 (fig. 10.1). The report and the letter you cite both seem to go no further than to say that the anomalies that show VAT is very regressive in their calculations are ironed out by some balancing calculations and by looking only at expenditure and not income but that they would go no further than to say that it was better than income tax because the wealthy can’t avoid VAT. These levelling calculations are based on the assumption that over a lifetime the rich would spend a lot more than the poor. They don’t account for the fact that the rich would also save significantly higher amounts of their income left after expenditure in increasing amounts throughout their lifetime.
I don’t see how this demonstrates your case. On balance it seems to show the opposite.
an analysis of VAT will of course look at expenditure rather than income, its a tax on consumption not a tax on income.
And its not about simply spendng versus saving.
Over a lifetime the rich will spend more on VATable items than the poor because the poor can afford less of theseluxuries.
Both will spend money on the essentials, which are by and large not VATable, and spend their surplus, or a prortion of surplus on VATable items, as the poor have by definition, no or less of a surplus than the rich, the reich are the ones spending suprlus.
Yes the rich save as well, but no one who is rich lives wihtout luxury.
“So are you now saying the VAT rise is NOT regressive?”
No, I’m saying that the IFS data are flawed. It’s not safe to draw a conclusion either way on the basis of data that contain errors as large as a factor of three.
“Because the IFS has a high reputation in academic circles, I still think the IFS paper is a strong indication that VAT is either neutral, or slightly progressive. Anthony disagrees.”
That’s rather like saying that because a mathematician has a high reputation in academic circles you still believe his proof of a theorem, despite the fact that you know there’s an error in it.
How can the IFS assess the effects of a tax on expenditure when there is an unidentified methodological error causing its estimates of household expenditure to be out by as much as a factor of three?
JRC
Simon Shaw and George Kendal, so do I get you right? The figures you are using say that VAT is mildly progressive because taken as a percentage of spending the least well off are taxed 2ish% less than the wealthiest households on their expenditure
Yes, you’ve got it right! Based on Figure 10.2, VAT is indeed a progressive tax.
We all agree that Figure 10.1 is clearly ludicrous – even if everything the poorest decile spent their money on was standard-rated VAT-wise, then only 14.9% would go on VAT, not the 19% shown in Figure 10.1.
In practice a much larger proportion of the poorest households’ spending will go on 5%-rated or zero-rated/exempt items than for richer households – things like food, gas/electricity, public transport, rent, water rates etc.
So it is really hardly surprising that VAT is a (mildly) progressive tax.
I think it’s a waste of time discussing the IFS interpretation in detail when the data it’s based on are so flawed, but really this idea of saying a tax is regressive only if it costs the poor a higher percentage of their expenditure than the rich is a very strange one indeed.
On that criterion a flat-rate sales tax on all purchases without any exemptions at all would still not be regressive, because everyone would pay the same proportion of their expenditure. I think that would a very peculiar conclusion.
Anthony Aloysius St
How can the IFS assess the effects of a tax on expenditure when there is an unidentified methodological error causing its estimates of household expenditure to be out by as much as a factor of three?
But, of course, the only “unidentified methodological error” relates to Figure 10.1, not Figure 10.2.
I actually don’t think that either Figure has an error on the estimates of household expenditure – I imagine it is far more on the income side where the problem occurs. In other words, the proportion of spending/income going on VAT is a fraction, and it is the bottom of the fraction where the distortions occur.
I have just constructed a model of a poorest-decile household, with assumptions on the balance of spending as between standard-rated, 5%-rated and zero-rated/exempt items.
On the assumption that the spending of the average poorest-decile household is £15,000pa, I estimate an amount of £783 spent on VAT within that £15,000. SO the “top of the fraction” is £783.
In order to arrive at 19% of income going in VAT, as per the dubious Figure 10.1, the “bottom of the fraction” would have to be £4,100 (as £783/£4100 = 19%).
So, in my model, the poorest-decile households have, on average, an income of £4100pa and spending of £15000pa.
I’m sure we would all love to know how that works! Charles Dickens clearly got it wrong in David Copperfield (“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness etc”).
And that’s why Figure 10.2 is the one to use.
Cuse
How regressive is the VAT rise? Very.
Colin Green
Could you provide evidence for this assertion please?
It is now over 2 days since Colin asked Cuse to justify that assertion.
I am new to posting on LDV, but from what I have seen Cuse normally has a lot to say (mostly inaccurate). Wouldn’t it be nice if these “Labour tribalists” (his own words) were required to justify themselves occasionally?
“But, of course, the only “unidentified methodological error” relates to Figure 10.1, not Figure 10.2.”
No. Obviously, if they can’t estimate household expenditure accurately, then they don’t know how much VAT households are paying, so none of the figures will be accurate. Nor will the classification of households by expenditure be correct, clearly.
As to where the error lies, if you follow the link and read what James Browne said, you’ll see that he clearly suggested that it’s expenditure that is uncertain, not income.
In any case, if your interpretation is based on VAT as a percentage of expenditure (as in Figure 10.2), then you’re automatically going to conclude that almost any sales tax is “neutral” or “progressive” – even a flat-rate tax with no exemptions whatsoever would be “neutral.” The only way to make a tax regressive in these terms would be to exempt only luxury items! I’d suggest that’s a clue that this isn’t a sensible way to interpret the data …
@Anthony Aloysius St
I hadn’t actually read what James Browne of the IFS said in correspondence to George, but having now looked at it it seems to exactly confirm my view – the VAT is mildly progressive.
To quote the exact words of the IFS:
Either way, the conclusion is that increasing VAT is mildly progressive (so it is not as progressive as increasing income tax or National Insurance, for example). This is because, although the goods subject to the standard VAT rate form a larger proportion of total budgets for the lifetime rich, there is no tax free threshold or allowance in the same way as there is for income taxes.
Unless anyone (still looking at you, Cuse) has any other, contrary evidence, that seems fairly conclusive to me.
Simon
“Unless anyone (still looking at you, Cuse) has any other, contrary evidence, that seems fairly conclusive to me.”
Well, it’s already been pointed out to you about half a dozen times that the data these conclusions are based on are subject to large errors of as much as a factor of three, owing to an unexplained problem with the methodology.
And it’s already been pointed out to you twice that on the IFS’s interpretation – which expresses the cost of VAT as a percentage of expenditure – even a flat-rate sales tax without any exemptions at all would not qualify as regressive.
And you can see for yourself that on the normal interpretation – which expresses the cost of VAT as a percentage of income – even on the IFS’s figures, and even if the anomalous bottom decile is excluded, then VAT is regressive.
I think the moral of this story is that some people will believe what they want to believe, regardless of the evidence.
Simon Shaw,
the underlying point I was making is that a debate on the progressiveness of a tax system only makes sense when applied to overall income and wealth. That your demonstration shows that it is mildly progressive when applied to expenditure shows only that over a lifetime rich people buy more tax rated goods than poor people. It has little bearing on whether it is progressive or not and even if it did you only demonstrate it to vary between 10% and 12%. Would an income tax system that progressed from 10% to 12% be taken seriously as progressive?
@Anthony Aloysius St
But if you read the full IFS response (which you were good enough to direct me to) you will see that it acknowledges the difficulties presented by the data and offers some explanation for the apparent anomolies.
Having done that, it then goes on to say: “Either way, the conclusion is that increasing VAT is mildly progressive…”
You say that “on the IFS’s figures…then VAT is regressive”. The problem for you is that the IFS say exactly the opposite.
JRC
Would an income tax system that progressed from 10% to 12% be taken seriously as progressive?
Yes! That’s what progressive taxation means.
I would say it is mildly progressive, which is why you will note I have used that expression repeatedly.
Simon Shaw,
A progressive tax policy is one that increases the percentage of income taken in tax as income itself increases. The sources you have cited have shown that VAT only has a mildly progressive effect when taken as a proportion of expenditure, not income, it explicitly states that this is not a calculation related to income. As such all it testifies to is the fact that rich people spend more than poor people. The same source also shows that if VAT is calculated as proportion of income for those from decile 2 up to the wealthiest it is mildly regressive. It also shows that if the poorest are included then VAT is very regressive but for some reason it has been decided to discount that huge difference (19%-9.5%) on the absurd basis that it only applies when poor people act in the peculiar way that they do as a result of being poor i.e. by spending more than they recieve in income.
You say that an income tax regime that progressed from 10-12% would be taken seriously as progressive as that is what progressive means, I concede that 10 does indeed progress in order to get to 12 but what would be the point of an income tax system built on such a minimal progression. So i ask again would it be taken seriously? Most flat tax proposals would result in a broader progressive range of total income tax than that and not many would propose such tax regimes on their progressive credentials.
@JRC
May I suggest you reread what has been said.
You appear to be basing your comments on graphs published by IFS which are widely held to be misleading.
My statement that VAT is mildly progressive derives from the statement “Either way, the conclusion is that increasing VAT is mildly progressive…” This is a statement made by James Brown of the IFS. This would mean as a percentage of income – for that is what progressive taxation means.
JRC
You say that an income tax regime that progressed from 10-12% would be taken seriously as progressive as that is what progressive means, I concede that 10 does indeed progress in order to get to 12 but what would be the point of an income tax system built on such a minimal progression.
I suppose the point of it would be if you wanted a mildly progressive tax system, but that’s not what you asked me. I was merely confirming that a tax system that takes a higher proportion of income of the more well off as compared to the less well off is called progressive.
@Simon Shaw “I am new to posting on LDV”
I’m not sure anyone has welcomed you to LDV.
Welcome 🙂
Hi call me old fashioned but since when did a rise in indirect taxation become progressive?
I earn £100 and pay £15 in indirect taxation at the standard rate. You earn £200 and pay £30.
The VAT rate increases by 10% so the £100 earners burden becomes £16.50 and the £200 earner pays £33.
Surely the point is that in this case the £1.50 is more critical to the £100 earner than the £3 to the higher earner. He may be buying food rather than a new sun lounger.
This is before you take into account that the poor spent more as a proportion of their income.
I thought this was a well established economic principle and seems fairly clear to me or are we trying to rewrite accepted economic principles.
Happy to hear the counter arguments.
Boris: the main counter-argument is that the less well off you are, the higher the proportion of your spending that goes on items which don’t have VAT (either exempt or zero-rated) such as food and children’s clothing. So in your example it’s not that both people spend all their money on goods on which VAT is charged, but the person spending £100 spends a smaller proportion than the person spending £200.
Mark,
I hear the argument but am not convinced. An increase in VAT from any given position will not be progressive under this argument. It is the change from the position from now that matters surely and how can this be progressive? The absolutely best it could be is neutral and that is pretty unlikely.
When compared to an increase in income tax this must become more obvious. If you could raise the same revenue from raising the marginal tax rate on higher income earners (let us say those earning £500,000+) then that is a (more) progressive way of raising taxation.
Is this a fair representation of the choice you have just made.
Boris: That partly depends on what you define as “progressive”, because imagine the very simple scenario where VAT is only levied on the sales of new cars that cost over £200,000. In that scenario, increasing VAT would be progressive for many people’s definition of the term – because the tax would hit the richest people whilst leaving the less well off no different. Now of course the actual VAT change is much more complicated because it’s levied on a wide range of goods, and some of the data about who spends how much on what is survey-based data that has margins of error over it which may swamp the actual effect trying to be measured. But hope that example illustrates the underlying point clearly.
Mark, I define progressive as a tax which takes a greater proportion or percentage the higher the income of the taxpayer. VAT is not that for me although I can accept that for the lowest income if only the essentials oif life were available to them and VAT was not levied on these essentials there may be a degree of progressiveness but as you move up the income the tax is regressive and takes a greater proportion from the lower income group.
The example you give would be regressive so would removing tax exemptions from higher income groups. However the change just made is more generalised and the vast majority of goods will attract it.
To return to my point that it is the effect of the change or the choice as to how you raise the revenue that matters. Even a change in the rate affecting new cars costing over £200k could be considered regressive. The household with an income of £200k buys a car at £220k then the extra £20K is 10% of their income. Now a household with an income of £400 buys same car. the extra £20k is a mere 5% of this household’s income. If you generalise this and take the true world situation i think the tax change is regressive.
Perhaps we could agree that raising taxation in this way rather than remove an existing tax exemption affecting only those on incomes above the mean average household income is a less progressive way of raising revenue.
I apologise for the typos careless typing in my above. But I hope my point is made, albeit carelessly.