Ed Miliband’s recent declaration that a future Labour government would seek economic growth through a VAT cut is a disappointing deviation from the recent raft of progressive policies announced by Labour.
Miliband has charted a carefully centrist course for his party- embracing economically liberal ideas, such as the mansion tax, and agreeing with the Liberal Democrats on Heathrow expansion, and ID cards.
In these and other areas Miliband has shown himself to be closer to the Orange Book than the Red Flag, that’s why his proposal to cut VAT is a deeply disappointing return to the “conservative” (Tony Blair’s own description of his views on economics) roots of New Labour.
Labour argue that this policy will increase purchasing power in the economy as cutting taxes increases the supply of money in circulation. I argue that such measures don’t work in times of economic malaise because consumer confidence is sufficiently low that the instinct of market participants is to horde, rather than spend, and this particularly applies to discretionary spending, which is the area of spending where VATable goods are most likely to be consumed.
VAT is a tax on discretionary spending, largely on non essential items, there is no VAT on groceries, but there is on restaurant meals for example.
There is a place for tax cuts in a growth plan, but they must be framed within a matrix of ensuring both social justice and economic progress-and cutting VAT achieves neither.
The more money you earn the higher your discretionary income is likely to be. Thus the higher your income, the more likely it is that you will pay a greater proportion of your income in VAT, so VAT cut benefits the better off.
On the second Matrix, that of economic efficiency, cutting VAT is unlikely to deliver any increase in aggregate demand. There are several reasons for this. Firstly, a higher earner is proportionally less likely to spend the extra income received from a tax cut, as their previous income level is already high enough to meet their immediate consumption needs. A lower earner is more likely to spend any additional tax cut, as the lower their earnings the less likely they are to have been meeting their basic needs. A VAT cut encourages the rich to save more, rather than invest more, and as Keynes articulated decades ago, savings and investment do not have the same impact on the economy. .
Thus a tax cut on VAT is less likely to increase demand than an income tax cut targeted at the lowest earners, which is of course what the coalition has implemented.
The final consideration is that a great many items which incur VAT are imported, and reducing the tax on imports is likely to be inflationary without creating significant new employment opportunities within the UK.
Labour’s embrace of Liberal Democrat policy is very welcome and bodes well for the future of both our parties, but their VAT reduction plan has all the hallmarks of a grubby grab for populist appeal without regard to the consequences, and there is nothing progressive about that.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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54 Comments
I agree with a lot of these arguments. There is some dispute about whether the original increase on VAT was regressive. In theory it should not be, because the kinds of things poor people spend their money on ought to be VAT zero rated. However the IFS published research showing that the lowest income decile spent a far greater proportion of their income on VAT, which implied that the targeting of zero rated VAT goods was not as good as the theory suggested. But the IFS also pointed out that this could be explained by the make up of the bottom decile. It included people like students who will go on to earn high incomes, and business directors with temporary cash flow problems, or ill people living on savings. In other words it is hard to say whether VAT is regressive or not, more research needs to be done.
There are 2 things that would be far better; more capital spending as Vince Cable and Nick Clegg suggested, and much more than the £3Billion allocated at the last budget. And redistribution of wealth. People on low incomes will spend their money in local shops that helps the local economy. Rich people spend their money abroad on holidays and investments. So tax cuts and benefit increases that benefit people on low incomes would be beneficial and that is what needs to be advocated by someone, anyone please…
It would also have a beneficial impact on retailers, as to the extent they do not cut their prices it will boost their profits, and so through that mechanism could be beneficial to a struggling sector. I’d be a bit wary of saying it won’t help aggregate demand – this would mean raising it doesn’t harm aggregate demand, and I can’t believe that is true.
When Labour cut VAT before the last election it was for a determined short period. Naturally this will distort spending patterns, with a boost over the period followed by compensatory drop afterwards. Of course if you time it right, it can help you make dubious claims about an improving economy in your last few months of office.
“In other words it is hard to say whether VAT is regressive or not, more research needs to be done.”
Obviously, it’s a matter of how you define “regressive”. If you define it as taking a larger percentage of the income of low-income groups (which I’d suggest is the standard definition), then there’s no doubt VAT is regressive.
If people like David want to argue the opposite (that cutting VAT would be “deeply regressive” (!)), they need to (1) come up with an alternative definition of progressive/regressive and (2) cite some data to back up their claim in the light of that definition. David has done neither, but has just produced some qualitative verbal arguments about “discretionary spending”, with no data whatsoever to back them up.
I would place more weight to this arguement had not that poster presaging the tax rise been part of Lib Dem strategy.
VAT is an innately regressive Tax not just because it taxes the poor, People of all incomes buy clothes, not just, children’s clothes, They also do things like eat takeaways, purchase DVDs and blah blah blah, The further down the social scale you get the more such purchases impact on the percentage of income paid in tax, So someone buying a DVD or a pair of underpants who earns 100, 000k pays less of a percentage in tax on the sane items as someone who earn 15, 000k , Throw in fuel duties, Tax on energy etc and the effect gets more amplified, Basic maths. This is why fans of flat rate and low direct taxation are usually wealthy,. It cost them much less as a percentage of their income. , A few years back the Daily Mail pointed out that a cleaner earning a low wage could be paying as much as 33% or so in tax. They might drink, they might smoke and the more they do either the more tax they pay, The idea that VAT is a progressive Tax relies on average and low income earners living like puritans. In fact they are likely to spend more on Taxable items because they consume more of them in the form of pop culture, leisure and fashion. You do not get a tax break for being a hip hop fan, but do if you sport the Arts, VAT is the naked self f interest of financial elites masquerading as fairness, Jees, if you Reilly wanted to help the local economies you would raise import duties not VAT, Furthermore VAT was only introduced in the 1970s and has been extended to more and more items since then. It’s a regressive Tax and is popular with economic liberals precisely because it is regressive,
aside from the research showing that vat IS regressive, who does the author think will benefit from a busier retail sector? Does he think the retail workers whose hours cuts might be reversed are not the low paid?
So Labour’s VAT Bombshell is threatening reduce it ? I wonder what the poster will look like…
I have what could be classed as a comfortable income level at present, but spent my childhood and two thirds of my adult life in what I what describer as poor(ish) family circumstances. Savings were not an option for my parents or earlier in life for me. You paid your bills and then allocated your income to essentials (as Geoffrey Payne has already highlighted these are not all VAT exempt) and hopefully some niceties. You had X £’s to spend and it was generally spent. It was hopefully enough for what was needed, but never enough for even moderate levels of the “nice to have” things.
If you made some goods 5% cheaper there would have been a few less weeks where there was not enough money for requirements and a few more nice things in the house, certainly not more savings. So whilst I accept that a change in VAT would not change my current spending habits significantly (although for major purchases it might), it would have done so a few years ago.
It’s also worth pointing out that the income tax cut to the lowest of earners has, to some degree, been clawed back in reducing their benefits / tax credits accordingly. Leaving the same amount in their pockets, but allowing it to provide greater purchasing power has some attraction if you fall into this category.
#’ jennie- workers will only have their hours increased if demand increases-if that happens then I will hve been proved wrong andmilliband proved cortrect-and the economy would benefit-but I dtn believe that will happen
I puzzle as to why the original intention of Vat is not pursued, ie that different rates are applied for different things, depending on how much we want to promote them or discourage them. Playing around with the rate, as a flat rate, as some sort of electoral toy is not on, but adjusting the rate so that it suits the particular commodity does.
But nothing is worse for business planning than a rate which keeps changing!
VAT is fundamentally an undesirable and illiberal tax. It is a tax on jobs (a large amount of “value added” consists of wages and related costs) and it is a tax on trade. It is however easy to collect and more difficult to avoid than some.
The income tax cuts on lower incomes while welcome do not help the poorest people. The poorest people are either on benefits or have wage incomes too low to pay any tax, so they don’t benefit from cuts. (Or of course many people are on both very low waage incomes and benefits).
A really good way of stimulating the economy would be to increase benefit levels, together with a significant increase in the minimum wage. Poor people spend most of what they get. But don’t expect either from this government.
Capital investment is a good way of stimulating the economy and was Liberal/Alliance/Liberal Democrat policy for decades, including in the 1980s. But it takes time to get going and the poorest people in this country are fast running out of time. It should nevertheless be done (about ten times what the govenrment is doing might be useful).
Meanwhile I would put VAT down to 15% immediately for 6 months, with the promise that after 6 months it will go back to 17½%.
Tony Greaves
@ Tony Greaves
May I ask how you would pay for your three measures?
Capital expenditure in 2011-12 was about £50bn – a ten-fold increase would therefore cost £450bn.
VAT raises about £100bn a year, so on a rough estimate a 5 point reduction for 6 months would cost about £25bn and the 2.5 point permanent reduction about £13bn.
Welfare spending excluding pensions is about £90bn – by how much would you like to increase this?
With retail sales already rising (up 1.3% in the first quarter excluding petrol, despite the coldest March in 40 years) and new car sales up 15% in April, the last thing we want to be doing is to cut VAT and waste valuable government revenue. The last VAT cut under Labour merely shifted discretionary spending into 2009 and 2010 and out of 2011 and 2012, costing billions and leaving no net benefit, apart from sucking in imported consumer goods and worsening the balance of payments deficit. The multiplier on this form of tax cut is particularly low.
This is the worst form of Labour policy making: short termist, useless and gimmicky.
Sorry but the premise that “the higher your income, the more likely it is that you will pay a greater proportion of your income in VAT” is fundamentally incorrect. A higher income earner may well pay higher amounts of VAT, but they will pay a smaller PROPORTION of their income on it, hence it is by definition a regressive tax and hits the poor hardest. As far as I know this is not even a seriously disputed fact, and the ONS and others have plenty of research on it if you are in doubt (see http://www.bbc.co.uk/news/business-15519727).
Also, despite being “discretionary spending, largely on non essential items”, VAT does apply to the majority of everyday goods in the real world, as well as some essential such as adult clothes and fuel (including petrol). Unless you live in a cave and wear a loincloth, it’s pretty difficult to avoid it.
That all said, I agree with Peter Tyzack that the VAT rate shouldn’t keep changing. As well as causing business instability and costs associated with changing price lists and tills, there is a misleading notion that a VAT cut will put money in the pockets of consumers. Some businesses may knock off the 2.5% or whatever of VAT, however most businesses won’t bother reducing their prices and will simply pocket the difference. I certainly don’t remember Poundland changing its name to “97.5p Land”. That’s fine if you want to give a tax break to small businesses, but if that’s the case then govts (or opposition parties) shouldn’t mis-sell it as help for “hard working families”.
During this and pretty much every month, the Federal Reserve will pump about $50 Billion into the US capital markets through POMOs. For an example set of POMO purchases (for the coming month) take a look at the list as shown on the New York Fed website : http://www.newyorkfed.org/markets/tot_operation_schedule.html which shows about $50 billion of POMO activity for this month.
With this amount of liquidity being sprayed at the markets, it’s not surprising that the Wall Street mantra is “don’t fight The Fed”. Everyone knows that the current record markets have nothing to do with fundamentals. Everyone knows that it’s just central bank intervention. Nobody wants to jump off first because they might miss further upside and no-one but no-one wants to call market top.
Here in the UK we have already had £375 bn of QE in the UK and when Carney takes over that number is expected to skyrocket. Abe and Kuroda on Japan are printing like crazy and the Nikkei is up to over 14000, despite the continued lethargy of Japanese business.
So what has this got to do with this article? Well, quite a lot actually. People who are heavily invested in the markets are seeing gigantic nominal increases in the price of those assets, which are completely unjustified by market fundamentals. The rich are getting richer through central bank interventions, while the poor are told to eat the scrapings from their fridges and to live on static or declining incomes even as inflation on basic items skyrockets.
It’s the same the whole world over, It’s the poor what gets the blame, It’s the rich what gets the pleasure, Isn’t it a blooming shame?
Same old same old.
Rather than engaging in a volte face (relative to your message during the general election campaign) on a regressive tax such as VAT how about the Liberal Democrats recognize the gross injustices in this whole wretched system and propose measures to tax the wealth accruing to the rich through QE and other liquidity operations?
Investment is the key. A good investment costs nothing. It makes money. A truly awful investment that sees no return whatsoever is still putting money into the economy and will probably have a higher multiplier than a VAT cut because much of the money will in the first instance go through the wage packet of someone who might otherwise have been unemployed. The correct level of fiscal stimulation of the economy is highly contentious, the relative multipliers of different types of taxation and expenditure far less so. We should be prepared to take more in low-multiplier taxes (e.g. land tax, inheritance tax, even VAT) and spend more in investments and cuts in higher multiplier taxes (e.g. raising NI allowance).
I am disappointed this is the best Labour can do. The VAT cut in 2009 did very little except add to the national debt.
The problem with blanket cuts in VAT in that it’s based on the assumption that “markets know best” , an assumption which has been thoroughly discredited in recent years (though still supported by right wing politicians and media) . For example a VAT cut would benefit Chinese exporters as much as UK industry.
A targeted VAT cut would be a different story. For example making the labour cost of domestic plumbing/decorating/building jobs under a threshold of say £2000 should generate a lot of business.
@peter.tyzack
There are two reasons we don’t adjust VAT rates to promote or deter specific activities.
1) Most such changes are prevented by EU treaty.
2) There is a strong political pressure to have higher rates on items enjoyed by the rich and lower on those needed by the poor. The desire to encourage energy efficiency and that to end fuel poverty produce directly opposite pressures.
I doubt that a future Labour government would seek economic growth through a VAT cut. I think their proposal is for a temporary reduction for one year only now i.e. in this parliament. While this measure was an appropriate response to the economic conditions prevailing in 2009, I would agree with the author that their current VAT reduction plan has all the hallmarks of a grubby grab for populist appeal without regard to the consequences, and there is nothing progressive about that.
We need to be able to chart a careful course to recovery that seeks to simultaneously reduce the deficit and closes the widening income and wealth inequality that has been exacerbated since the onset of the financial crisis.
My view is that the Mirrlees proposals on indirect taxation can best achieve this dual aim. Indirect and environmental taxation. These include: two guidelines for indirect taxation – Tax final consumption only and tax goods at the same rate.
Zero-rating of most food, water, books, children’s clothes is clearly for distributional, not efficiency, reasons but fails to achieve its primary purpose. Removing almost all zero and reduced rates raises £24bn (with a 17.5% VAT rate) if no behavioural response.
I would advocate applying the estimated 24 billion raised to simultaneously introduce a non-means tested citizens income (to replace personal tax allowances and unemployment benefits) and a miniumum wage job guarantee to address involuntary unemployment. Such a policy could serve as both a direct stimulus and redistributory measures and would address the issues raised by Tony Greaves i.e. The poorest people are either on benefits or have wage incomes too low to pay any tax, so they don’t benefit from cuts. (Or of course many people are on both very low waage incomes and benefits).
@Andrew Colman
“For example making the labour cost of domestic plumbing/decorating/building jobs under a threshold of say £2000 should generate a lot of business.”
Nooooo, this would push the tradesman into partial VAT leading to more expensive and complex accounting to ensure that the reclaiming of input VAT is correct. They would only be able to reclaim the VAT they pay on work that is “VATable”. Remember VAT is self administered so adding complexity to the administration often hits the service or goods provider that should be benefiting from the increase in trade. Remember as well as allowing people to spend more the intention of Labour appears to be to help the providers employ more people through increased trade.
@ joe bouirke #
thansk for the comment-are you proposing putting VAT on more items?
@ tony greaves
if only it were the case that the poorest in society were all on benfits-that is not the case the poorest are those working omn zero hour contarcts for major companies
Dave,
“are you proposing putting VAT on more items?”. Yes, that is the recommendation of the Mirrlees tax review linked in the comment, but only in conjunction with redistributive measures to ensure that lower income deciles were fully compensated by way of enhanced incapcity/state pension benefits, job guarantees and tax & NI reductions.
Mirrlees suggests the treasury will net 3billion on tax efficiency grounds after fully compensating the affected groups.
@ joe
thats interesting-but I would be worried about doing anything to increase the cost of food at present-climate conditions have driven food prices higher and if VAT pushed it yet higher I would wonder what would happen
I think it would be better if David Thorpe answered some of the substantive questions.
If he is claiming – and it would be an absolutely remarkable claim – that VAT is a progressive tax, then he really does need to (1) define what he means by that and (2) produce some quantitative data to back up his claim. Otherwise I think people will stick with the findings of the IFS and others that it is clearly regressive.
First you should reassess your understanding of the meaning of ‘liberal’. The mansion tax is not in any way definable as ‘liberal’ it is ‘a Liberal Democrat policy’, these are not identical. Then; ‘economic’. The third runway at Heathrow is not an economically liberal issue, nor are ID cards; they are respectively an environmental issue and a civil liberties issue.
My recollection is that Tony Blair described himself as basically liberal on all issues other than law and order.
It is true that in times of economic malaise those with money are more likely to hoard. This is the problem that a VAT cut is designed to help break. Your logic is that making things cheaper will not make hoarding less likely so we should maximise the take from those who have no choice or those purchases that the hoarders do make. So we want people to make more purchases but they wont so we keep the prices high because they wont. This is an argument to maximise the tax revenue from purchases but not one to benefit the growth of the economy, nor is it in the interest of social justice.
On the second matrix, your logic appears to be this; a high earner would simply save a tax cut, a low earner would spend more. This misrepresents how anyone achieves any benefit from lower VAT; any cut to VAT is only of benefit to those who make purchases, there is nothing to save unless one has already made a purchase. Your argument relies upon those who benefit from a lower purchase price treating the price difference as income and only applies if all discretionary purchases are considered as luxury purchases, £5 could mean the difference between putting up with a dodgy picture on the telly or buying a new one. The argument you employ to dismiss the benefits of cutting VAT is specifically not applicable to purchase taxes but is to income taxes. It is an argument against cutting income tax rather than VAT.
On your final consideration; that a lot of the increase in sales would be of foreign imports and would therefore be inflationary and not produce jobs, selling imports is a job. However, if it is the case that a cut in VAT would not result in greater spending, as you claim, then this could not be a consequence. Inflation would only rise if the policy produced growth; selling the same number of imports for a lower price cannot be inflationary. It would therefore only be a consideration if all of your other arguments are wrong.
Given the ridicule that this policy was subjected to in 2009 even though it coincided with higher growth than at any subsequent time, it is hard to make the case that this is a grubby grab for populist appeal, unlike the mansion tax.
@ jrc
your right-I dont think the mansion tax is liberal-and have written on this site previously arguing why-as for heathrow-there are I suspect liberal perspectives on both sides of that argument…
It doesn’t matter what the IFS says about VAT progressivity. What matters is the definition (here especially we shouldn’t trust the IFS as they frequently change their own ‘definiton’) and the evidence. Progressivity means that the percentage of income taken by a particular tax increases with income. The data from the ONS demonstrates clearly that VAT is regressive across all income deciles.
VAT is a tax on consumption and is a very bad tax to increase in uncertain economic times as it leads to excess hoarding – a positive feedback mechanism that makes things worse. If VAT is to be cut then there needs to be a discussion about what needs to be put in place to replace the lost revenue. A fair and good solution at this time would be to lower the income tax threshold to pay for the reduction in VAT. This would have the most impact on the low paid, who don’t pay income tax anyway and would see lower prices in the shops, and would prevent the excess hoarding. However, increasing income tax revenue is bad as it discourages people from working. What would be good is to reduce VAT by levying a tax on unearned wealth, such as LVT.
In summary:
(a) decrease income tax/raise the income tax threshold and replace with VAT increase – bad
(b) increase income tax and lower VAT rate – good
(c) decrease income tax and replace with wealth tax – very good
(d) decrease VAT and replace with wealth tax – very good
(e) introduce a populist mansion tax on wealthy – very bad and undermines concept of good taxes like LVT by suggesting that ‘wealth’ taxes are just targeted in an envious manner at the wealthy.
The coalition, in its wisdom, went for (a)
@david thorpe @ joe
The beauty of the citizen’s income that Joe is proposing is you no longer have to judge every exemption on its progressive / regressive effect. If you thing a change is hurting poor people, you just use part of the money raised to raise C.I. and problem solved. Surely it makes more sense to define poverty in terms of income rather than what proportion of income they spend on food sold below ambient temperature to be consumed off the premises.
@ chris-the view that VAT is regressive because it taxes all at the same rate is traditional and not wrong-but I take the counter view-that its progressive because it only applies to discretionary spending wghich the rich do more of….
“@ chris-the view that VAT is regressive because it taxes all at the same rate is traditional and not wrong-but I take the counter view-that its progressive because it only applies to discretionary spending wghich the rich do more of….”
The view that VAT is regressive is based on the fact that those on low incomes pay a larger percentage of their incomes in VAT than those on higher incomes. That fact is not in dispute, as far as I know, and I would suggest that that criterion of regressiveness is the standard one.
You say now that this view is “not wrong”, but your claim that cutting VAT would be “deeply regressive” implies that it is completely wrong. So presumably you have in mind a different criterion of progressiveness/regressiveness, and you know of data to prove that on that criterion VAT is – contrary to the standard view – a progressive tax. That’s what I’m asking you (for the third time) to explain.
@david thorpe
“the view that VAT is regressive because it taxes all at the same rate is traditional and not wrong”
Eh?
1. It isn’t a view
2. It isn’t described as regressive because it taxes all at the same rate as that would be a proportional tax.
The reason VAT is described as regressive is because it IS regressive – i.e. the proportion of peoples’ incomes that gets spent on VAT reduces with increasing income.
Here’s what the IFS says on whether VAT is a regressive tax:
“Another commonly-cited ‘fact’ is that VAT is a regressive form of taxation: poorer
households pay proportionally more in VAT than do richer households. Figure 10.1
shows the average amount of VAT paid as a percentage of average household current net
income by current income decile. It shows that the percentage of net income paid as VAT
varies relatively little across most of the income distribution, with the biggest exception
being that the bottom decile group does pay a higher fraction of its net income on VAT
than do other income groups.”
See page 197 here http://www.ifs.org.uk/budgets/gb2009/09chap10.pdf
And measuring VAT paid as a proportion of expenditure rather than income, it is actually clearly progressive – see Figure 10.2 http://www.ifs.org.uk/budgets/gb2009/09chap10.pdf
“And measuring VAT paid as a proportion of expenditure rather than income, it is actually clearly progressive”
But why would it be measured as a proportion of expenditure? Why not measure it as a proportion of bananas or any other randomly selected metric? Nobody defines income tax progressivity as an increasing proportion of expenditure so why would anyone consider doing the same with VAT?
@Nick Thornsby – that IFS report has been critiqued to death. It is based on some extremely dubious premises. For an example dissection try http://www.taxresearch.org.uk/Documents/VATRegressive.pdf which was contemporaneous with the original.
I do not believe that there is a serious commentator who can argue (except as an exercise in sophistry) that VAT is anything other than a regressive tax.
I also return to my previous posting: the effects of QE has been to provide rentier incomes for the rich, even as the poorest are fed the easy, but self-evident lie that “we’re all in this together”. No we are not.
Given the historical attachment of Liberals for taxation on rentier income such as LVT – why aren’t you shouting from the rooftops that unearned income acquired as a consequence of central bank liquidity operations should be taxed at 100%?
@ Steve
It is interesting; as a proportion of bananas it is unlikely to be.
@ Paul
It seems to me that all that piece does is replot the same IFS data in a different sort of graph – it still shows the same thing. VAT is clearly not a progressive tax, but it is not clearly regressive either.
“It is interesting; as a proportion of bananas it is unlikely to be.”
Interesting it may be (or not), but what is not is ‘progressive’ which is the conclusion you came to by using a proportion of expenditure:
“And measuring VAT paid as a proportion of expenditure rather than income, it is actually clearly progressive”
Steve, that’s not my conclusion, it is the IFS’s, and it is true on that measure. You might not like the measure, but you can’t dispute what it shows.
@ steve tiu have phrased the point I was trying to make better than I have-I was merely coming at it from the angle that VAT is 14% or whatever-for everyone no matter how rich or poor-and thats regressive(income tax rate is higher for higehr earners)
but the difference is that people dont really have to buy Vat able goods-I mean it was deisgned as a tax on luxuries-and I dont think its that-‘luxury’ is an inprecise and therefore non economic term-but it is a tax on discretionary spending-ie no one should have to pay Vat to acquire the basic necessities necessray to sustain life-they pay VAT from the income they have left after that-ie their discretionary income-and the rich are likley to have more of that than the poor-
From that IFS doc:
VAT as a percentage of net household income for those in the bottom decile : 19%.
VAT as a percentage of net household income for those in the top decile; 9%.
That doesn’t look terribly progressive does it?
Perhaps the similarity of VAT as a percentage of household expenditure might in part be explained by the propensity for things that the very rich buy (e.g. second homes, private education, private healthcare, antiques, financial services, gold bullion) to be strangely free of VAT.
“Steve, that’s not my conclusion, it is the IFS’s, and it is true on that measure. You might not like the measure, but you can’t dispute what it shows.”
It doesn’t matter whether I like the measure or not – or whether you like the measure or not. What matters is that the measure is the standard definition used consensually by economists. The IFS does not follow that convention and, as such, deserves to be held to ridicule. You cannot conclude that a tax is progressive by adopting a definition that is different to the standard definition. It might as well be measured in bananas.
Furthermore, from a point of view of basic logical reasoning, it is impossible to conclude that something is ‘true’, as you do, if the metric used to derive that conclusion is not consistent with the standard metric.
It’s like measuring the height of the Gherkin in feet and concluding that it is taller than the Empire State Building as measured in metres. No doubt you will now point out to me that the Gherkin is taller, whether I like it or not.
Steve, perhaps you could post the “standard definition” of the term “progressive” as it applies to taxation – that would aid this discussion I think.
@Nick Thornsby
There’s a great search engine called google I think you would be interested in. It gave me the following results:
http://financial-dictionary.thefreedictionary.com/Progressive+Tax+System
http://www.investopedia.com/terms/p/progressivetax.asp
http://answers.yahoo.com/question/index?qid=20100331165701AA8Fg2z
Are you seriously trying to tell me that you don’t understand why having more than one definition of “progressive taxation” (a) renders the term meaningless and (b) allows individuals and organisations to put their own spin (a deliberate attempt to conceal the underlying truth) on the term?
Steve, that’s very interesting, because all of those definitions are different.
You (I think) define a progressive tax as one that is levied at progressively higher rates according to income.
But that is not the definition given in some of the links you provide. The final link says: “A progressive tax is a tax where the tax rate (i.e., percentage of payers total resources paid) increases as the amount subject to taxation increases.”
That of course is very close to the definition being used by the IFS to justify the conclusion that VAT is a progressive tax if measured by the amount people spend, and is certainly a different definition from the one I think you are applying.
The point, of course, is that it is reasonable to measure how progressive a tax system is according to the item being taxed.
So it is reasonable to judge the progressivity of a consumption tax in proportion consumption spending, just as one measures the progressivity of an income tax based on proportion of income taxed.
Would you measure a the progressivity of a property tax based on the proportion of income paid, or on the rate applied to the value of the property?
“The point, of course, is that it is reasonable to measure how progressive a tax system is according to the item being taxed.”
It isn’t reasonable in the slightest in the same way it isn’t reasonable to compare something measured in feet with something measured in metres. If we are to compare income tax with VAT, for example, then it absolutely necessary to compare progressivity with reference to the same tax base. You cannot compare the progressivity of one tax with reference to one tax base with another tax with reference to another tax base for obvious reasons. For example, people with higher incomes are much more likely to save a higher proportion of their gross income. This means they can retire earlier. For that reason, it would be completely absurd to compare progressivity of one tax in relation to income with another tax in relation to expenditure as the IFS do (in the manner of children that haven’t yet received a secondary education). It would completely distort things – as actually demonstrated by the difference in the IFS plots with different tax bases. The links I gave from google all describe progressivity as being in relation to income anyway. What exactly is the point of comparing two things with a different reference (definition)? It can’t be done. The only reason anyone would do that is to conceal the truth rather than to understand.
Nick Thornsby,
You are incorrect in your reading of that definition as regards the IFS figures. On the definition you give VAT is flat not progressive i.e. reletive to that liable to tax, the rate does not progress. That, however, is only true if you ignore that part of the definition that states (i.e. percentage of payers total resources paid). If you include that part then the IFS figures in the chart you cite show absolutely that VAT is regressive as only the first chart conforms to that definition. The IFS figures show that as a proportion of spending a greater amount of the purchases of the wealthiest attract VAT. Those figures are not contradictory they actually both support the conclusion that VAT is regressive. If taken together the proportion of VAT to spending whilst greater for the wealthy is still proportionally far lower as a proportion of income, therefore the wealthy, for all of their extra spending cannot get close to spending enough to get close to the proportional tax to income spend of their poorest neighbours.
The error that you make is that you are considering the resources paid in that definition to be the amount spent in consumption when you should be counting it as resources paid to the individual. You cannot define tax as progressive or regressive if it is only in relation to that part of an individual’s income that they choose to put into the equation. It’s the whole taxable resources or nothing.
Or in other words; the definition you ascribe to Steve is identical to the one you try to contradict him with.
@ JRC
Your definitions are contradictory. You first of all say that the first IFS chart – VAT paid as a proportion if INCOME – shows it to be regressive, then say that one can only measure how regressive a tax is against total taxable resources, which of course is not the same as income.
Nick Thornsby,
You are correct I have said that. It is however not contradictory to say both, simply an error. I should have said it is the whole income or nothing.
I genuinely do not get this argument though. What is the point of trying to prove that VAT is progressive when it obviously and demonstrably isn’t? What gain is there for you to have us believe the opposite of the truth?
david
“@ steve tiu have phrased the point I was trying to make better than I have-I was merely coming at it from the angle that VAT is 14% or whatever-for everyone no matter how rich or poor-and thats regressive(income tax rate is higher for higehr earners)
but the difference is that people dont really have to buy Vat able goods”
OK. I think most people can agree that a flat rate of VAT on all goods would clearly be regressive, according to the usual criterion of the percentage of income paid in tax for different incomes groups (though on the alternative IFS criterion that Nick is pushing, it would not be regressive – which suggests that criterion is really of very little use). In that sense, sales taxes have an inherent tendency to be regressive.
Equally, a sale tax restricted to certain luxury goods might be progressive. A caviar tax, or a yacht tax, or something like that. But to find out whether a given sale taxis progressive, you have to look at the actual figures to see what the effect is on different income groups. In order words, to see whether the range of goods taxed is restricted enough to overcome that inherent tendency of sales taxes to be regressive.
VAT fails that test, according to the IFS figures, because low income groups still buy a lot of goods that are subject to VAT. So I say you were absolutely wrong to claim that a cut in VAT would be regressive.
It doesn’t matter whether VAT is defined as ‘progressive’ or ‘regressive’, what matters is whether the overall fiscal policy is balanced.
Labour’s record shows they have no credibility to talk on this issue – under Blair and Brown income inequality expanded to record levels, while their financial and legislative mismanagement resulted in the biggest collapse in living memory.
Labour produced a more regressive economy than any Conservative regime, so I don’t think any serious commentator should be taking advice from them.
Like it or not, the coalition government has reestablished economic security – no sane person would throw that away for a gamble on an untargetted temporary growth blip.
“It doesn’t matter whether VAT is defined as ‘progressive’ or ‘regressive’, what matters is whether the overall fiscal policy is balanced.”
I’d have hoped that Lib Dems would be concerned both about the overall fiscal balance and about achieving that balance in a fair way . It’s a shame that so many seem to share your lack of concern about fairness.
Chris,
balance implies fairness, so your criticism is baseless and a waste of breath.