The Spectator's Coffee House blog today picks up a blog post by Robert Peston about Monday's Pre Budget Report, in which Peston predicts:
Sales taxes are regressive taxes - those on lower incomes tend to spend a higher proportion of their income on goods and services, and so spend more on VAT as a proportion of their income than those on higher incomes.
Necessary goods - food, energy, transport, children's clothes - are either zero-rated or reduced-rate VAT items, which admittedly accounts for some of the more significant expenditure by households. But zero- and reduced-rate VAT levels recognise the regressive nature of ad-valorem taxation.
Which is why it is puzzling a deferred rise in VAT might feature in a Labour budget. Ultimately, those on lower incomes will pay a higher proportion of their income in sales taxes in order to fund a stimulus for all today. This seems peverse to me.
If anything, the Chancellor should cut VAT to the lowest permissible rate under the European VAT area, which is 15%, as part of the stimulus to encourage greater expenditure. Exactly how he would pay for it is quite another question...
UPDATE: I've just discovered an interview with former Chancellor Ken Clarke in this morning's Times in which he advocates a temporary cut in VAT to 15%. I hadn't read the article before making my post, but the reasons Ken Clarke makes his suggestion are essentially the same as mine - a reduction on taxation on expenditure is more likely to stimulate spending, than tax rebates (which are more likely to be saved...).
So which taxes will rise?
Well my prediction is VAT.
For the sake of transparency I should say that I don't know that there will be a VAT rise.
But a deferred increase from 17.5% to 22.5% in the VAT rate would raise around £20bn.
And it's one of the few future tax rises which might actually stimulate a bit of increased economic activity ahead of its implementation, rather than encouraging us to save.
To use the economic cliche of the moment, it would give us all quite a "nudge" to spend now, before the swingeing increase in VAT would kick in.
Sales taxes are regressive taxes - those on lower incomes tend to spend a higher proportion of their income on goods and services, and so spend more on VAT as a proportion of their income than those on higher incomes.
Necessary goods - food, energy, transport, children's clothes - are either zero-rated or reduced-rate VAT items, which admittedly accounts for some of the more significant expenditure by households. But zero- and reduced-rate VAT levels recognise the regressive nature of ad-valorem taxation.
Which is why it is puzzling a deferred rise in VAT might feature in a Labour budget. Ultimately, those on lower incomes will pay a higher proportion of their income in sales taxes in order to fund a stimulus for all today. This seems peverse to me.
If anything, the Chancellor should cut VAT to the lowest permissible rate under the European VAT area, which is 15%, as part of the stimulus to encourage greater expenditure. Exactly how he would pay for it is quite another question...
UPDATE: I've just discovered an interview with former Chancellor Ken Clarke in this morning's Times in which he advocates a temporary cut in VAT to 15%. I hadn't read the article before making my post, but the reasons Ken Clarke makes his suggestion are essentially the same as mine - a reduction on taxation on expenditure is more likely to stimulate spending, than tax rebates (which are more likely to be saved...).
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