The VAT rise: a refresher course for Labour

Today’s increase in VAT from 17.5% to 20% — announced in the Coalition’s emergency budget last year — has triggered a fresh burst of opportunism criticism from Labour. The “wrong tax at the wrong time” claims their leader Ed Miliband.

How Labour’s last Chancellor backed a VAT rise

I suspect there’s a Labour MP we won’t be hearing from today, though: Alistair Darling*, Chancellor until the party’s defeat in May. As Mark Pack noted here last July, Mr Darling was a strong advocate of increasing the rate of VAT in order to tackle the UK’s massive deficit, with The Guardian noting that Lord Mandelson’s memoirs showed

… that Brown and Darling rowed over economic strategy. He “vetoed point-blank” a proposal from Darling to raise VAT up to 18% or 19%. The then chancellor then blocked a proposal from Brown to rule out VAT rises under Labour in the course of that parliament.

Have the Lib Dems U-turned on VAT?

Labour claim the Lib Dems have U-turned on VAT, ruling out increases before the election before bringing them in under the Coalition. It’s a false and misleading argument.

The Lib Dems did not rule out increasing VAT if we were in government. Vince Cable could not have been more explicit on this — here’s a BBC News report from 8th April: “Vince Cable has repeatedly said his party would not rule out VAT rises”.

What the party did say — accurately — was that Lib Dem spending plans did not need any increase in VAT, a point back up in April by the IFS. As keen observers will have noticed, though, the Lib Dems did not win a majority at the last election, and some of our proposed public spending cuts and tax increases haven’t made it into the Coalition Agreement.

The money has to come from somewhere, though. Labour, it seems, would prefer increases in National Insurance over increases in VAT — an argument Vince Cable challenged head-on here on Lib Dem Voice last summer:

No decision to raise tax is taken lightly, but VAT is more contentious than most. One reason is that VAT is often denounced as if it were the most regressive tax of all. However, the truth is more nuanced. As a proportion of expenditure, it is in fact mildly progressive, as the IFS have recently explained. This stems from its exemptions for certain essentials, such as food and children’s clothing, which take a bigger chunk of the spending of poorer households.

VAT is far less damaging for growth than most other taxes, like those on income or employment. It is preferable to even steeper spending cuts that would hurt the vulnerable or damage our ability to grow the economy. Restoring sustainable growth is the essential remit of the Ministry I head, the Department of Business, Innovation and Skills.

There are other far more regressive taxes, and our raising VAT has enabled us to do something about them. For example, under Labour, the poorest decile suffered a 90% rise in council tax, compared to 75% for the richest, which is why we have sought to freeze council tax in England for next year. It also let us increase significantly the Child Tax Credit, fund a £1,000 increase in the income tax allowance and triple-lock annual increases in the state pension – while all the time setting a course that returns the public finances to surplus.

What Lib Dem blogs are saying:

“Wrong tax, wrong time”, says Milliband. And the right tax, right time would be? (Mark Valladares)

At every stage, Labour have decried the cuts as too fast, too soon, without ever suggesting what they might cut and when. And it really is becoming tiresome. During the election campaign, Labour talked about £44 billion of cuts. They weren’t alone, although none of the three major parties were entirely clear about how they would do it. But now that they don’t have a general election to salvage, all is quiet on the prudence front.

Why spoil a good VAT story for the sake of the facts. (Michael Gradwell)

Well the rise in VAT to 20% is upon us and according to Ed Milliband it will cost families £389 per year. He didn’t work this figure out as he just took it from a Liberal Democrat poster from the general election. As this figure is at least eight months old and was based on what the Tories would have to do in order to pay for their other tax promises and as we have had so much turmoil in the government finances, it would seem to me that this figure is out of date. It has not only been arrived at in the most lazy way but is also inaccurate, but why spoil a good story for the sake of the facts.

Old and Sad – having wrecked our economy Labour now tries to block recovery (Nick Hollinghurst)

Old & Sad may be a jokey abbreviation for Oldham & Saddleworth – but it also suits the discredited Labour Party. The Coalition has been forced to put right Labour’s disasterous financial mismanagement using a variety of painful, but unavoidable, measures. … With their careless attitude to figures and finance it’s not surprising Labour got us into the mess we’re in!

* UPDATE: I underestimated Labour’s chutzpah. As Andrew Sparrow reports in the Guardian, Mr Darling has made a virtue out of being over-ruled by his ex-boss.

Note, though, that he doesn’t retract his widely-known view that raising VAT was the best way to help reduce the deficit. Note, too, that Mr Darling is guilty of being economic with the actualite: all three parties refused before the election to rule out a VAT rise after the election.

If Labour were in government now, rather than in opposition, does anyone serously doubt that whoever would now be their Chancellor would also be defending a VAT rise?

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  • I think to be fair to Labour there are other views to take on VAT one is that the top quintile of earners, with an average income of £75,615 (including benefits) pay on average £3,300 pa in VAT. That’s 4.4% of income.

    The bottom quintile, with income of £11,401 (including benefits) pay an average of £1093 in VAT, 9.6% of income.

    Tax Research UK showsit to be regressive too:

    A new Tax Briefing from Tax Research UK examines that Institute for Fiscal Studies claim and finds it is a statement of political dogma, but not of fact.

    As the Tax Research briefing argues, a regressive tax is almost universally agreed to be one where the proportion of an individual’s income expended on that tax falls as they progress up the income scale. VAT is a regressive tax. This is shown, quite dramatically, in the graph below which is based on UK official data :

    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.

    The IFS claim is, however, consistent with persistent IFS recommendations that VAT be increased (to replace corporation tax, for example, and on food and children’s clothing to pay for “desirable tax reductions”) all of which, together with their recommendations that Inheritance Tax be abolished and tax on interest income be abolished suggest a systematic bias towards making recommendations that favour redistribution of taxes from those who work for a living or who are the poorest in our country towards those with wealth and who enjoy income from capital.

    None of which makes it easy to see how the IFS can sustain the claim that it:

    maintain a rigorous, scientific approach to research, while offering scope for timely, independent, well-informed contributions to public debate.

    Finally, this may help you re – Alistair Darling as he put out a statement today:

    It is simply not right for George Osborne to say that I would have raised VAT if we had won the election. There was a debate within government in 2009 about the best way of getting the deficit down. My views on that are well known. But we decided to raise [national insurance contributions], not VAT. And, unlike the Tories, I did not go through the election campaign promising one thing and intending to do quite another.

    Sorry my post is a bit cut and paste but it’s in reply to what seemed like, in my opinion, a pretty chaotic and overly defensive blog – what’s the panic?

    Anyway, I think as a LibDem, in the context of the incredibly high levels of tax avoidance/evasion anything looks regressive unless more is done to tackle this scourge.

  • The coalition government has set out its stall – it has identified the mix of tax rises and expenditure reductions needed to repair the damage done to th public finances by Labour.

    The question now is will it work?

    If we end this Parliament without a deficit on the public finances, with economic growth and being able to demonstrate that the wealthiest contributed proportionately more to repairing the damage than the poorest then the poverty of Labour’s response to the fiscal crisis will have been exposed.

  • Once again – as in the signing of that ludicrous NUS pledge on tuition fees – we Lib Dems have shot ourselves in the foot by alleging prior to te election that a 2.5% VAT increase would cost the average family £389 per annum.

    Given that the actual increase in the price of VATable goods (including the VAT) is increasing by 2.13% and not 2.5% I calculate that our allegation (thrown back at us by Labour) means that we are saying the average family spends £18,652 per annum on VATable goods i.e. excluding food, children’s clothes, books, mortgage payments, rent, utility payments etc. Come off it! In fact I think the overall effect of this VAT increase – particularly on lower income families has been greatly exaggerated.

  • Andrea Gill 4th Jan '11 - 6:33pm

    Don’t blame Darling, he was the only sensible Labour front bencher…

  • I think what the problem is… is the utter twisted untruths, that is given at elections to win votes to gain more power… and the electorate has no way of recalling those MPs or political parties, after what happened at Oldham (by-election) maybe the law should be changed to hold all accountable at election times and force re-elections if lies are told to gain votes.
    Nick Clegg holding a pledge to the camera.
    Nick Clegg revealing the Liberal Democrats poster, “stop the Tory vat bombshell”.

    “It’s the Tory VAT bombshell. Under the Conservatives, the richest 3,000 families in the land will be £233,000 better off because of inheritance tax cuts.”
    “And everyone else will be stung for nearly £400 more in VAT.”

    And yet here we are with the Liberal Democrats supporting the rise in Vat, no matter what Liberal Democrats say about cleaning up politics, they have shown themselves to be the worst of the bunch.

    Liberal Democrats may SPIN as they will, but the one sure thing no one will believe, it is not Nick Clegg that has become toxic, the whole Liberal Democrats have become the Toxic brand.

    I hate to say this but the Liberal Democrats are becoming despised and the more the SPIN trying to make everything look good the worse it gets.

    Liberal Democrats need to behave like adults, not like children trying to blame anyone but themselves.

  • John Martson 4th Jan '11 - 6:53pm

    This is pathetic. Stop putting the blame on everyone else, and accept some responsibility.

  • The bbc did a much more balanced investigation where they showed how statistics could be used to make it look progressive either way.

    Personally having heard all the arguments I believe it is regressive. Using just a proportion of expenditure it is clear that the non-vat items will makeup a higher porportion of lower income families expenditure. This is one reason why traditionally income and not expenditure was used as the definitive factor.

    I also believe that Brown would have continued to veto a VAT rise had he won the election. That’s not to say I agree with his fiscal policies, just that he showed how stubborn he could be previously. I think we all also know that Darling was leaving the Treasury (probably with Balls to replace him) in the event of a Labour victory. Darling just had too many of those pesky idea things for Brown to put up with…..

    The Lib dems may not have U Turned on VAT, but they did campaign in such a way as to give the impression they have. It’s not so much the fact they have had to accept it as a compromise, more the fact that they now spin it as progressive and the right choice.

    I have yet to hear one re-state publically that had they been running the economy this would have been avoided and that it is not the best choice for the country…

  • In my earlier post I included a statement made by Alistair Darling today, however, it was a bit buried:

    “It is simply not right for George Osborne to say that I would have raised VAT if we had won the election. There was a debate within government in 2009 about the best way of getting the deficit down. My views on that are well known. But we decided to raise [national insurance contributions], not VAT. And, unlike the Tories, I did not go through the election campaign promising one thing and intending to do quite another”.

    Sorry to add the same thing again.

  • The point being missed here is the reason for the VAT rise. If we believe the Government it is to help reduce the deficit. I imagine that we all accept that some tax rises have to be implemented along with cuts to achive this. We can disagree about the pace of cuts etc but the facts require both cuts and tax rises.

    Why then does Osbourne state that this is a permanent rise?

    Surely once the deficit is paid down (in this parliament if he is to be believed) VAT could revert. The FSB and retailers are asking for this, it does not seem unreasonable so why has the coalition chosen a permanent rise?

    If it is purely to reduce the deficit there is no justification for making it permanent, so clearly there is some ideology here that needs to be explained.

  • Steve Way – “Personally having heard all the arguments I believe it is regressive. ”

    In other words, why let the facts get in the way of personal prejudice?

    VAT is a tax on EXPENDITURE, not on INCOME. Hence it makes no sense to look at people’s income when you decide whether it’s progressive or not.

    A higher proportion of expenditure for low income families is non-discretionary, but this non-discretionary spend tends to be VAT exempt or at a lower rate. Which is why the BBC’s graph show’s that they suffer the least.

  • @Tabman
    “In other words, why let the facts get in the way of personal prejudice?”

    Economists are also divided on this as are political parties and commentators. IT HAS NOTHING TO DO WITH PREDJUDICE AND SAYING INCOME AND EXPENDITURE IN CAPS MAKES NO DIFFERENCE IT IS JUST RUDE!

    If you had read the BBC’s breakdown you would see that the “facts” can be spun either way. The reason that income is important is that it allows you to use Vat as a proportion of expenditure as a proportion of income. At lower income levels expenditure is related to income in an almost linear way. This trails off as income rises.

    “A higher proportion of expenditure for low income families is non-discretionary, but this non-discretionary spend tends to be VAT exempt or at a lower rate. Which is why the BBC’s graph show’s that they suffer the least.”

    It show nothing of the sort. It shows they pay the least not suffer the least. It goes on to say that some goods classed as non-essential for VAT are viewed as essential by low income families such as petrol. If you earn 100K then the increase in petrol will not hurt, it will annoy but not hurt. If you earn 10K and just about keep your car on the road it hurts.

    Clearly you are now happy to say that those who for years have argued that VAT is regressive were purely using their predjudice. I think you’ll find a fair number of Lib dems amongst them.

    It is not straightforward and any amount of accusations of predjudice or use of caps will not make it so. I am merely in line with Lib Dem views prior to the coalition. Selective use of statistics nearly always produces a skewed report. Hence why I, at the outset, pointed out the BBC had shown how both sides could be argued. I have decided to agree with one of those.

    I would also assume that the IFS stats are only to be trusted when they support your viewpoint ? The Lib Dems have argued against them as much as they have for them in this parliament, sometimes I agree other times I don’t.

    I also raise the issue about the permenance of the change, another issue that has yet to be fully explained.

  • @Tabman

    I’m afraid it’s you who seems to be dodging the evidence. The lowest paid pay a higher percentage of VAT than the wealthy – it’s just obviously less in total.

    Here’s another source that disagrees with you and the IFS (who, let’s remember said it was ‘slightly’ progressive):

    Anyway, George Osbourne has indicated that this is now a permanent measure although he’s indicated that he will look to cut the highest rate of tax in future. To me, it sounds as though Osbourne knows it’s not progressive but because the IFS are on his side, he’s happy to milk it.

  • the fact that it permanent makes your whole argument a lie and a waste of time.

  • @Steve Way

    I think most LibDems would agree with you post-coalition too!

  • Man on the Bus 4th Jan '11 - 8:20pm

    “VAT is a tax on EXPENDITURE, not on INCOME. Hence it makes no sense to look at people’s income when you decide whether it’s progressive or not.”

    Just as the poll tax was a tax on people’s HEADS, so it made no sense to look at people’s INCOME (or EXPENDITURE) when deciding whether it was progressive or not. Only the number of heads they had.

    According to the Lib Dem Newspeak currently in vogue, the poll tax was actually MILDLY PROGRESSIVE because of exemptions.

  • @Larry

    “the fact that it permanent makes your whole argument a lie and a waste of time.”

    Do feel free to explain where my argument is a ‘lie’ and ‘a waste of time’.

  • @Mark Pack
    Sorry that should have been qualified as those with low income and low expenditure, i.e. the families I am concerned about are those with low incomes, who cannot get or do not want credit and are required to spend the vast majority just to stand still….

    You are quite right that there are those with low income who are wealthy, and those who are continuing to spend in excess of their income. But, the IFS found VAT midly progressive “over a lifetime”.

    referring back to a previous post

    The IFS said

    “In general, over a lifetime people’s expenditure must match their income (the main difference being inheritances), so if someone is spending (and therefore losing) a lot relative to their income at the moment – either borrowing or drawing on past savings – they must be spending (and therefore losing) little relative to their incomes at other times.”

    This suggests that in the long term spending is linear except inheritances.

    It also does not mention savings here, which are not (in any meaninful way) an option for the low income families. I would suggest that the same logic would apply, i.e. over a lifetime spending plus investments and savings (which would make up any inheritance) cannot outstrip income. Therefore is it not logical that those who invest (to provide the inheritance or non earned income) are not linked in the linear fashion of the lower earners who cannot.

    It goes on to say..

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

    This is where I take the biggest issue with definition of midly progressive. As I stated in my earlier post petrol is not low or zero rated, nor are adult clothes (which unlessI am to break some indecency rules at my weight are not a luxury). If these were factored in would it still be mildly progressive ?

  • I am amazed at the cognitive dissonance on display here. It seems to have multiplied since I last visited.
    To all those arguing that it is progressive we are fortunate to have Cameron’s very definite opinion on the matter. He is on record as saying:

    “You could try, as you say, to put it on VAT, sales tax, but again if you look at the effect of sales tax, it’s very regressive, it hits the poorest the hardest. It does, I absolutely promise you. Any sales tax, anything that goes on purchases that you make in shops tends to . . . if you look at it, where VAT goes now it doesn’t go on food obviously but it goes very, very widely and VAT is a more regressive tax than income tax or council tax.”

  • richard heathcote 4th Jan '11 - 9:11pm

    although a lot of goods such as kids clothes etc are tax exempt i think you will find that increases in fuel prices and transportation costs and costs of raw materials, where people will have to pay vat on these items, will make these more expensive for shops to buy so even without vat i dont expect these to remain at todays prices. vat will have a knock on effect down the line making everything more expensive to buy.

    i feel this will make it harder for people on the lowest incomes who already have tight budgets to manage. i do think people who spend every penny of their income to survive will have to cope without essential items whereas people with at least some disposable income probably wont even notice. in effect the poorest will feel the pinch more than the richest. is this really progressive taxation, to me it seems like the poorest getting hit the hardest. this taxation will be felt by people on the lowest incomes and who survive on benefits, an increase on NI or Income tax at the higher rates seems the more progressive option as it will protect the lowest earners in society just its not going to please the core tory voters.

  • Man on the Bus 4th Jan '11 - 9:14pm

    “If these were factored in would it still be mildly progressive”

    Obviously if there are any exemptions at all VAT will still be PROGRESSIVE expressed as a percentage of expenditure. Even if there are NO exemptions it won’t be REGRESSIVE!

    That’s STILL according to Lib Dem NEWSPEAK, of course.

  • Frank
    “As a matter of fact VAT is regressive.”

    So what?

    The key question is whether the increase in VAT is progressive or regressive.

    And the IFS confirms that it is “mildly” progressive.

  • @Simon Shaw
    “So what?
    The key question is whether the increase in VAT is progressive or regressive.
    And the IFS confirms that it is “mildly” progressive.”

    They also state other options are more progressive (in direct opposition to he who gets slaps on the back from Clegg Osbourne). The quote below from channel 4 News..

    VAT is “slightly progressive”, the Institute’s senior research economist Stuart Adams said, “Particularly when you look at it over a lifetime.

    “But income tax and National Insurance (NI) can potentially be much more progressive because they have a tax-free allowance for the first amount of earnings and because you have things like a higher rate of income tax which can be used specifically to target richer families.”

  • So, Steve, would we agree that the Coalition Government’s increase in the standard rate of VAT makes VAT (slightly) more progressive than it was under Labour?

    Isn’t that a good thing?

  • @Simon Shaw
    “So, Steve, would we agree that the Coalition Government’s increase in the standard rate of VAT makes VAT (slightly) more progressive than it was under Labour?

    Isn’t that a good thing?”

    In my opinion no, because as i stated earlier, when things that are to most people essential, petrol etc. are taken into account I do not believe it is progressive.

    In 2009 the IFS realised that using other forms of taxation was more progressive.

    “Whilst all three policies would be expected to be progressive to some extent, the increase
    in the rate of VAT would be least progressive as it applies to all expenditure on standardrate
    goods, whilst the increase in the additional rate of National Insurance above the UEL
    would be expected to be most progressive as it only affects relatively high-earning

  • I think that far too many people are getting hung up on this, ‘progressive/regressive,’ argument. Those words have been used so much they have lost all meaning, and to be totally honest I doubt that anyone outside of these talkboards really thinks in terms of progressive/regressive.

    All that this thread has really shown is that the numbers are, at best, debateable. I suspect that what most voters on the ground think in terms of is whether or not something looks, feels and smells fair. The IFS can get as scientific as it wants to. After all, abolishing the 10p tax band was, in one sense, progressive – I don’t remember anyone going into bat for that.

    I actually believe that this will not be that big an issue with the voters. I doubt it will be much noticed in the short term. Indeed, when Labour cut VAT to 15%, wasn’t the main complaint that no one really saw any difference. The people who will get most hurt is the people not registered for VAT – mostly small businesses – who will not be able to claim back VAT paid. The public will move on though.

    But can we all now stop banging the progressive drum – I can’t think of anything more likely to switch voters off.

  • @Steve Way
    I thought you agreed that the VAT increase is “slightly progressive”.

    You seem to agree with the IFS some of the time, but then disagree some of the time.

  • So…let me get this right…

    A summary to justify this latest Lib Dem U-Turn is:

    We didn’t win the election. True. But pre-election, Nick Clegg did say VAT rises were regressive. What’s changed?

    I guess it’s because the IFS says it is mildly progressive OK. But they also said it would take 1% out of the pockets of the 10% most wealthy, but 2.25% from the pockets of the poorest 10%. Also – Tax Research UK says it’s regressive. The House of Commons produced a briefing note saying it was regressive. David Cameron thinks it is very regressive. Nick Clegg pre-election said it was regressive. The Times published their reserach today that suggests it will add £600 per year to middle class bills. How has it now become progressive? I just don’t get it…

    Labour would have raised VAT And? Is this really an adult defence of your own policies? Yet again the party seeks comfort, like Gideon Osborne, in trying to discuss hypothetical situations involving Labour rather than saying “Yes, we did produce lots + lots of campaign posters pre-election which denounced Tory VAT rises. We were wrong – we should have seen a VAT rise coming”.

    No wonder Ed Milliband has commanded the news cycle today. The Coalition response has been more than weak…

  • @Simon Shaw

    You seem to agree with the IFS some of the time, but then disagree some of the time.

    A bit like Clegg then.

    IFS says Coalition budget is regressive “they’re just plain wrong”. IFS says VAT rise mildly progressive “they’re right”.

    Which Nick is right?

  • Cuse
    “Nick Clegg did say VAT rises were regressive.”

    I’m quite sure you’re telling the truth there, but just for the record when did Nick Clegg say that?

  • Simon Shaw

    7th April 2010. On Today.

    “the only way you can avoid a huge hike in VAT, which let’s remember is a regressive tax, is by making sure that you take some of the decisions that we’ve done”. (Nick Clegg, BBC Today Programme, 7 April 2010 )

  • And by the way Simon – Simon Hughes was even more caustic in his appraisal of VAT as a regressive tax:

    “I hope we don’t have a VAT increase because it is the most regressive form of tax, it penalises the poor at the same rate as the rich” (BBC Daily Politics, 15 June 2010)

  • @Cuse
    Just a bit surprised you omit to say what Vince Cable said about increases in VAT.

  • Simon.

    Why omit Vince Cable? Not by design, more from a lack of respect in anything Vince says about anything really.

    Aren’t your leader and deputy leader’s views enough? Would Vince’s pre-election view negate theirs? Would the Prime Minister’s?

  • Aad by the same token – the fact that Vince + Nick publicly disagreed on the progressive or regressive nature of VAT rises pre-Coalition kind of negates the claim that Alistair Darling shouldn’t make a virtue out of his boss disagreeing with him doesn’t it?

  • TheContinentalOp 4th Jan '11 - 11:07pm

    @Simon Shaw

    Vince Cable: “I suspect that Messrs Darling and Osborne, given half the chance, would love to slap big rises on VAT. It would raise shed-loads of money and avoid some painful choices over cuts. But a big, sudden jump in VAT would stall any early recovery and hit shops hard. Also, some companies have learnt how to dodge VAT.” (Sept 09)

  • @Simon Shaw
    No I don’t agree with the IFS on VAT, I was quoting, sorry if speed typing made that unclear. My reason for quoting is that they point out various options that are truly progressive.

    @George Kendall
    “I’m afraid that doesn’t work. You can pay down a debt. But if you pay down a deficit and then reverse your deficit reduction measures, the deficit will immediately reappear.”

    Sorry I could be missing something here, but the deficit was caused, according to the Government, by Labour overspending which will have been stopped. Once it’s cleared, if the Government are not going to go back to Labours rash spending why would it reappear.

    My point on this whole issue is simple really, I’m now on what I consider to be a very good wage but I remember years of struggling on a lower wage. I know how this would have affected my family, what “luxuries” we had were exactly that. Adding 2.5% onto them would have made my family suffer. It would have made us go without.

    I would much rather pay more on income related taxes now then see families that are on lower incomes, as I used to be, pay that extra amount. Whatever label that gives me, be it liberal, lefty or prejudiced (according to some) I know I will go to my grave believing that those of us able to pay more should do so, and not just because we’re buying goods or services.

    Truly progressive taxes hit people like me and those better off than me..

  • This is getting really silly, the Lib Dems did not support a VAT rise prior to the election, to try and argue that it’s a good idea is absurd. The argument should be why this is a better move, which is extremely debatable.

    However VAT isn’t going to be the kicker, it’s the rising inflation that will lead to rising interest rates that will be the kicker and part of the reason for that rising inflation is going to be the VAT rises which won’t end up being 2.5%, there’s already talk of it being 5 – 8 %. That’s what’s going to hurt.

  • Ed The Snapper 4th Jan '11 - 11:26pm

    VAT is definitely a regressive tax. The price of clothes, fuel and many foodstuffs will rise. The cost of most household and personal goods will rise. The poor will have to pay more for these items but their incomes will not rise to cover the increase in costs. VAT is definitely a regressive tax.

  • The lead article demonstrates how Lib Dems have completely lost their compass.

    ‘Simon says’ ought to be re-named ‘Nick says.’ You blindly follow whatever Nick Clegg says.

    During the election, Nick Clegg and the Lib Dem party machine warned about a: “TORY VAT BOMBSHELL” in their literature.

    But now Nick Clegg says different, so you all change your mind.


    ” Today Nick Clegg is showing that NI cuts may be popular with business – but they have to be paid for by someone, and the most likely people to pay the price of the Tories’ cuts will be ordinary voters through increases in VAT. Here’s the press release (and accompanying billboard poster) which the [Lib Dem] party has just released:
    Nick Clegg reveals Tories’ £13bn VAT bombshell ”



    “The money has to come from somewhere, though. Labour, it seems, would prefer increases in National Insurance over increases in VAT ”

    You’ve gone from a bold campaigner to a meek apologist.

  • Can someone explain what impact the increase in the personal tax allowance for all will have on all this ‘vat hike impact’ mullarky? Surely everyone stands to benefit from an extra 200 pounds a year – so hence some families will be 400 plus better off in take home pay. Will this not more than cancel out the vat rise impact for most lower to middle income households? This is a lib dem policy being delivered which will make a huge impact over the next few years, starting in April. The party should be shouting it from the rafters!

  • @RichardSM

    You’ve gone from a bold campaigner to a meek apologist

    Ouch. The truth hurts.

  • @Mark Pack
    I would say that a progressive tax takes a percentage of what you have available to spend, rather than a percentage of what you spend. For example it is hard to call income tax (with proper allowances and an increasing rate), NI (up to the 1% band), inheritance tax, capital gains tax etc anything but progressive. With the exception of NI only those with excess are taxed, and even NI only takes a proportion of what you have.

    The VAT exempt group is not a true indicator, taking into account things like petrol, rail tickets, clothes etc those on lower income must surely pay a higher proportion of their income on VAT on items that they cannot realistically avoid. That, and the fact they do not take into account income but rely on expenditure, is why I simply don’t agree with the IFS that it is progressive.

    The fact a chelsea footballer may have to pay more VAT on his Aston Martin does not equate to the single mother paying more VAT on the fuel she needs to get to work. Take another penny in the pound off the footballer and increase the threshold on the single mother and you’re really talking progressive…

  • From The Independent today:

    “The Chancellor tied himself in knots yesterday trying to defend the VAT rise as a “progressive” measure – contradicting his leader David Cameron who has warned that it is “very regressive, it hits the poor hardest”. ”

    “On fairness, the IFS verdict is a damning one; by 2012, apart from the richest 10 per cent of the population, the tax and benefit changes will cost the poorest tenth of the nation twice what it will cost those close to the top of the tree, as a proportion of their incomes.”

  • Really amusing listening to all the spin about what a great progressive thing it is to raise VAT and how it will either help the poor or be of so little effect that they won’t notice.

    I just wonder why the Tory Government hasn’t stated this will be a temporary rise until the economy is back in balance and I wonder why if it is so wonderful why Cameron and Clegg didn’t embrace it enthusiastically before the GE?

    Still, what is wonderful is that Milliband has struck the right note with poor, working class and middle class voters yesterday – he really is starting to motor. He was their voice yesterday and they have switched off the incessant ‘noise’ that it’s all Labour’s fault. People ain’t stupid and they know Labour got things wrong but this Tory coalition is not only hurting them more but frightening them worse as well for the future.

  • Have looked through all the comments and go back to my original point that the VAT increase cannot ever be progressive in the context of £120bn tax gap. Why are so many rich people/corporations avoiding and/or evading tax? It’s just staggering in a civilised society.

    If Osborne was progressive, he would concentrate on the tax cut before anything else.

    There’s also the context that banks are getting a massive corporation tax cut on the day the levy kicks in – as a LibDem, I’m disgusted.

  • Nick(not Clegg) 5th Jan '11 - 1:08pm

    I find it really depressing to read my fellow LibDems trying to defend the indefensible.

    Osbourne’s first statement as Chancellor was the first test of the coalition. The announcement that he was going to raise VAT (a highly regressive tax) signalled that the coalition had failed that test. It was the first confirmation that this is a Tory government and that LibDems had made a huge mistake by agreeing to support it. Everything that has happened since has further confirmed that view.

    I hope you all had a good Xmas. I would have liked to wish you a happy new year, but I am sure that 2011 will be no such thing.

  • @Chris Jenkinson

    Hmmmmm, but Osborne doesn’t seem to have a problem with lowering the highest rate of tax in due course, which would cause a fall in income and a return to deficit. Puzzling.

    Oh, of course, this VAT rise has little to do with economics but rather a lot to do with politics. Hallelujah, the argument is resolved!

  • @Chris Jenkinson

    Then the Bank Levy needs to go up more than the miserable 0.075% to pay for the debt they’ve created.

    If we’ve got pay an additional 2.500 % out of our disposable income, the banks should have to pay a similar amount of theirs – permanently.

    The Bank Levy needs of 0.075% needs to be increased by 33 times to bring it on a par with our VAT increase.

  • @Chris Jenkinson
    Thanks for your post, when I talk about clearing the deficit I should have have said eliminate. However sloppy my language, the Government claim there will be a surplas of 0.8% GDP in 2015-2016, the Chancellor has already indicated they wish to reduce the level of income tax (the progressive one). So clearly there is scope to reduce tax in some areas.

    He is counting out any future reduction in VAT.

    So who is right you or them?
    Will there be a surplas for Osbournes income tax cut?

  • Man on the Bus 5th Jan '11 - 2:51pm

    “The IFS says otherwise”

    Actually the IFS says that the rise in VAT is REGRESSIVE when compared with INCOME, but is mildly PROGRESSIVE when compared with EXPENDITURE – and that it is “probably” (or “arguably”) better to compare with expenditure.

    But the implication of that is that a flat sales tax without any exemptions is also NOT regressive. Do you REALLY believe that?

  • Has anyone seriously looked into VAT, and the effect it has on UK manufacturers.
    It is one of the very few taxes that apply to Imports, and can be considered as a roundabout Import tax.
    If foreign imports have a higher Import Tax, then UK manufacturers will have a more competitive edge, which in turn means, more Profit, more jobs, and ultimately more Tax revenue for the Country.
    Surely, this is more relevant argument than whether VAT is regressive progressive, or whatever.

  • Man on the Bus 5th Jan '11 - 7:14pm

    “Your implication does not hold.”

    Of course it does. The calculation couldn’t be more trivial.

  • Man on the Bus 5th Jan '11 - 7:45pm

    Sorry, but if you can’t be bothered to read the comments you’re responding to, I certainly can’t be bothered to repeat them for you.

  • Man on the Bus 5th Jan '11 - 8:31pm

    The whole point is that the IFS is saying you shouldn’t calculate things as a proportion of INCOME, as you suggested above in your comment above, but as a proportion of EXPENDITURE. Obviously on that basis, a flat-rate sales tax will represent exactly the same proportion of everyone’s expenditure, so it will be neither regressive or progressive. Precisely the same is true of a rise in a flat-rate sales tax.

  • @Chris Jenkinson

    Sorry not sure where you stand now is it

    “I hope this helps in your understanding of why increasing VAT cannot just be temporary in the absence of other spending cuts or tax increases.”


    “If, under the current plans, we result in a budget surplus of 0.8% of GDP in 2015/6, then there is some limited room for spending increases or tax cuts.”

  • Ed The Snapper 5th Jan '11 - 9:06pm

    @ Mark Pack “Ed The Snapper: The IFS says otherwise, because (in a very brief summary) poorer people spend a higher proportion of their expenditure on goods that are exempt from VAT or zero-rated. I’m certainly not one for taking the IFS as automatic gospel, but what are the flaws in their argument that make you reject it so confidently and absolutely? For example, is it that you think their figures on the proportion poor people spend on VAT exempt goods are wrong – and if so, what are the figures you think are right?”

    No, the IFS does not say that VAT is progressive. The IFS says that the rise in VAT is REGRESSIVE when compared with INCOME, but is mildly PROGRESSIVE when compared with EXPENDITURE – and that it is “probably” (or “arguably”) better to compare with expenditure. I disagree with that comparison. The poor will now be spending a higher proportion of their income on VAT. There is no doubt that more of the income of the poor will now be spent on paying tax following this VAT rise. Why should the poor pay more tax now than before? Why did the ConDem coalition not raise more taxes on the higher paid rather than on the poor? Or confine the VAT rise to genuinely “luxury goods” (like Ferraris and yachts) not petrol, foodstuffs, household goods and clothes? The first thing that someone said at work at my call centre this morning was that fuel was no more expensive and that it would be more expensive for him to get to work. There is now a scary Dickensian mentality creeping into the arguments supporters of the VAT rise: that somehow the poor are only entitled to the most basic amenities of life and they should not have cars, decent clothes, comfortable homes or holidays. A very scary way to think. One reason I used to vote LibDem is that they drew attention to regressive taxes such as VAT and Council Tax.

  • Man on the Bus 5th Jan '11 - 9:43pm

    “Myself, I think it’s a much more nuanced question than your earlier comment – and many others – paint it.”

    But do you really think the IFS’s preferred criterion can make sense, when it implies that a flat-rate sales tax with no exemptions is NOT regressive?

    I mean, would you really be suggesting such a thing if you didn’t feel you had to, in order to defend the party’s actions?

  • Ed The Snapper 5th Jan '11 - 9:45pm

    Nick Clegg and Simon Hughes said VAT is a regressive tax before the election. One way of looking at it is this. A person on a low income has a limited amount to spend on the goods/services that he/she needs or wants. If the price of those goods/services increases then the poor person needs a higher income in order to be able to afford those goods/services without running out of money to spend. However, a person with a high income can still afford to buy the goods/services that he/she needs/wants and does not require more income in order to be able to afford those/goods services. The high-income person is therefore less adversely affected by the VAT rise than the low-income person. What is Nick Clegg’s opinion now on whether VAT is regressive or not? Has he spoken about the issue? What is Simon Hughes opinion on VAT, now? Has he spoken about the issue?

  • @Mark Pack
    “the problem with judging a tax’s impact by income (rather than expenditure) is that when looked at by income someone with an income of £5,000 a year and no savings looks richer than someone who (say) has sold their firm last year and this year has an income of £0 but savings of £1,000,000.”

    So I take it that local income tax is no off the agenda ? Because the same example makes a mockery of that plan.

    For those that will truly suffer as a result of this, and that will not be those of us with well paid jobs, it will not matter that “over their lifetime” this will prove progressive, they will just know that it hits them hard and others hardly at all.

    As for “All the hyperbole along the lines – well of course it’s regressive and anyone who thinks otherwise is a baby eater – ”

    I think if you look at the entries you will see that a great amount of condesention and hyperbole has been aimed at those who believed before the election that VAT was regressive (and there are plenty of quotes from senior Lib dems and Tories saying just that) and still hold to that view now.

    In my very first post I mentioned that it would not be so bad if the Lib dem Ministers explained it as a compromise. Instead they are desperately trying to show how fair it is and are being joined by many who would have screamed regressive from the rafters had either a majority Tory or Labour government imposed this tax.

  • @Chris Jenkinson
    “An increase in VAT cannot be temporary as a level of 17.5% is not sufficient to achieve a balanced budget or budget surplus.”

    I think it probably is if the Governments own figures are to be believed (big if). Osbourne just wants to help his richer friends. A phased reduction in VAT would be preferable to this.

  • Man on the Bus 5th Jan '11 - 10:56pm

    “And I’ve yet to come across someone who has said, “You know what’s wrong with political discussion in this country? Not enough hyerbole, that’s what’s bloody wrong with things”…!”

    But I bet you’ve heard a load of people complaining that politicians always avoid answering awkward questions …

  • David Allen 5th Jan '11 - 11:26pm

    Lib Dems are making themselves look ridiculous by supporting a tax rise now which they scaremongered against at election time.

    Labour are making themselves look ridiculous now with their massive hyperbole against a tax rise which Darling also advocated.

    Neither a VAT rise nor Labour’s alternative ( a rise in NI ) is more than mildly regressive or progressive. Other feasible changes (e.g. changing the rate structure of income tax, or raising or lowering inheritance tax) would have a much greater progressive or regressive effect, if anyone was really interested in achieving either end.

    (Oh I forgot, yes, the Tories are indeed interested in being more regressive, hence the benefit cuts and the shift from universal to privately managed services).

    Storm in a teacup. Goalless draw between LD and Lab. Both sides deserve to be disciplined for dirty play. Meanwhile, Tories quietly getting their way on everything that matters to them. Now let’s move on.

  • @Chris Jenkinson

    Actually they’ve increased VAT by 14.3%.

    But if you want to be pedantic, then in little over a year the government have increased taxes on most goods and services by a massive 33.3 %.

  • @Mark Pack
    I’m not sure where you believe I suggested it was OK to add insulting comments just trying to get some balance. After all, if you read your post, it is only the anti VAT hyerbole that “hides the real issues”.

    @Chris Jenkinson
    (I’m going from memory as I don’t have acrobat on this PC to re-check so forgive me if these are wrong)
    If you look at the Budget 2010 (treasury website) they state that GDP will be at 115% (?? please check) of 2009. Times the current GDP by 1.15 then 0.008 and then look at the figure the government claim will be raised by VAT per year. But like I said can their forecasts be trusted ? that depends on the Government being right about both growth and deficit reduction.

    My main point is that Osbourne is determined to drop income tax on higher earners but will make the VAT rise permanent. You would prefer to use any surplas to clear debt, which whilst not where I would go, at least make sense. Osbourne seems to want to do the classic Tory reverse Robin Hood.

  • Quartiles, Quintiles, Deciles……you can fudge stats to come up with whatever conclusion you want to promote.

    Is it ‘progressive’? Stats say yes.
    Is it ‘regressive’? Stats say yes!

    (both meaningless terms of course though).

    I don’t want to see VAT go up, I think there are better ways to raise money such as higher inheritance tax and a form of land value tax. But a VAT increase is preferable to an income tax increase or an NI increase, which were the realistic alternatives.

    Most of Europe has a 20%ish VAT rate, so I can see the logic in making it permanent, but if 20% VAT is to stay, the income tax threshold should rise year-on-year even when it reaches £10,000.

  • Man on the Bus 6th Jan '11 - 9:55am

    OK then. PLEASE will you answer my question? PRETTY please.

  • Man on the Bus 6th Jan '11 - 1:02pm

    “any flat-rate tax without exemptions is by definition neither regressive, nor progressive – it is applied evenly.”

    Oh dear, oh dear.

    The whole point of the discussion is that (at least) TWO DIFFERENT DEFINITIONS of regressive/progressive taxation are under discussion!

    According to one of these (expressing the amount paid as a percentage of expenditure), a flat-rate sales tax without exemptions is neither regressive nor progressive. According to the other (ditto ditto as a percentage of income) it is highly regressive.

    The question is whether, given that, it really makes any sense to use the first of these definitions. Meaning, obviously, as a measure of whether the taxation is “fair,” “protecting the vulnerable,” “broadest shoulders bearing the heaviest burdens,” and so on.

  • Man on the Bus 7th Jan '11 - 12:28am

    “So I’m pretty completely certain you will be disappointed to note the overall impact the result of the VAT rise is progressive … A position supported by the IFS back in June when it responded to the budget.”

    It seems you missed the parts of my comments where I pointed out that:
    (1) TWO DIFFERENT DEFINITIONS of regressive/progressive taxation are under discussion, and
    (2) the IFS explicitly acknowledged that the VAT rise was REGRESSIVE when considered as a percentage of INCOME.

    As for your comments about VAT not being a flat-rate tax without exemptions, of course it isn’t, and no one ever claimed it was. At the risk of repeating what’s obvious to everyone but you by now, my point is that on the IFS’s preferred definition of progressiveness A FLAT-RATE TAX WITHOUT EXEMPTIONS WOULD BE NEITHER PROGRESSIVE NOR REGRESSIVE.

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