It is telling that Labour leader Ed Miliband’s hollow argument against VAT rising to 20% from midnight tonight extends only to families being hit and an alternative-free assurance that he wouldn’t make the same decision in David Cameron’s position. Yes there is a need for the entirety of the coalition’s policies being tested for the existence of progressive merits but, in isolation, there is little to argue against a VAT-rise.
Ed calls it “the wrong tax at the wrong time”. He of course has to take an opposition stance at these times but nonetheless this soundbite seems a little too strong. What is the “right” tax and, given our record deficit, when is the “right” time? With Corporation tax decreasing and income tax rates staying resolutely in place due to our Governments past and present being too timid and too ideologically stuck to alter them, it was always going to be VAT that had to move.
Noone enjoys paying tax but a misdirection created by something rising is the suggestion that the previous level, the status quo if you will, is more likely to be correct because it is what people are used to. However, a VAT rate of 20% brings the UK more in line with rates in Austria, Belgium, Czech Republic, France, Germany and Italy and still a good 3-5% below Sweden, Finland, Norway, Iceland and Denmark. Maybe we’ve had too good sales rates for too long a time and, to coin a few phrases, ‘we could not go on like this’, ‘we’re all in this together’ and ‘are you thinking what Merkel/Sarkozy/Berlusconi’s thinking’.
It is quite clear that had Labour won a fourth term, with or without coalition assistance from the Lib Dems, that VAT would have increased at some point during this parliamentary term. There are simply too few other palatable measures that Gordon Brown and/or Ed Miliband had at their disposal to plug the deficit. This likelihood is further compounded by the lack of explanation in the Labour manifesto as to how the party aimed to fulfil its promise of halving the(ir) deficit.
I don’t like the sight of students having to triple the amount of fees they pay each year, I don’t like the sight of charities having to close down at a worrying rate and I don’t like corporation tax decreasing when super-profits still exist for numerous British companies out there, but the nececssity of an increase in VAT when your finances are in such a parlous state, without cutting jobs, is difficult to avoid.
(And yes, this all puts the Liberal Democrats in yet another tight spot but there is a difference between overpromising/underdelivering and bringing in a policy that is actually quite reckless. Thankfully it is only the former, this time)
#1 by Calum W on January 3, 2011 - 7:11 pm
I disagree. While in continental Europe VAT is higher, Income tax is also much higher in almost every successful European economy than here, so the balance between ‘progressive’ income tax and ‘regressive’ VAT is actually slightly more ‘regressive’ than in other continental European countries at the moment, and the rise will make this worse. Sweden, for example, has an average income tax rate which is 15% higher than in the UK. Additionally, the UK is a less equal society in terms of opportunities and income than Scandinavian countries, so in the majority of countries with higher VAT rates VAT is a less regressive tax than in the UK.
#2 by Jeff on January 3, 2011 - 7:22 pm
Good points Calum, I didn’t think of it that way and (as I said in the post) a look at how progressive all of these myriad of policies from the coalition are is much needed.
I do agree that, of the two, income tax would be a much preferable tax to increase but I guess, in my mind, I have completely written off any likelihood of that tax increasing in these next four crucial years given it is the Conservatives who hold most of the power. From that unfortunate assumption onwards, VAT-rise is “unavoidable”.
#3 by Calum W on January 3, 2011 - 9:40 pm
Fair point. And I would agree that Labour are being opportunistic by not even mentioning what they would do to reduce the deficit instead, which suggests that had they got in they would’ve done exactly the same thing!
#4 by mav on January 3, 2011 - 10:03 pm
I think we can blame Blair to an extent. I saw a list recently of all the taxes that went up under Labour. The tax take went up and up, as every imaginable tax increase was levied and re-levied. Except 4. He entered with VAT at 17.5%, income tax at 23%, the upper level at 40% and corporation tax over 30%. VAT ended up back at 17.5%. The 40% tax band arguably went up, due to a series of freezes that expanded its scope. Corporation tax and income tax both fell. Of the 3 key taxes, one was too high and will continue to fall, another was tinkered with, but the last, income tax, became shibboleth that can only move one way. No matter that NI went up.
By creating this shibboleth, Blair/Brown made our ssytem ever more complex, ever more full of double taxes and loopholes. Until a govt is forced to move it up, our tax system is doomed to become ever more complex. Osborne has a commission looking at simplifiying our tax system. One thing he could do woudl be to sweep away a whole range of side-taxes, and put a penny on the pound to pay for it.
#5 by NoOffenceAlan on January 4, 2011 - 1:38 pm
Jeff, I’m a bit confused now. Two topics ago you were arguing for Corporation Tax to be devolved to Scotland, and lowered. Now you are saying you don’t like cuts in Corporation Tax. Which is it?
#6 by Jeff on January 4, 2011 - 7:16 pm
Fair challenge Alan but I think my two points stack up.
Scotland having the power to lower its corporation tax for certain companies would allow it to be more competitive relative to the rest of the UK (specifically London). There are few incentives for new companies to set up in Scotland rather than closer to the better connected, more prestigious UK capital so, given how long Scotland has lagged behind the rest of the UK in terms of growth and vibrant marketplace, maybe a more flexible approach is required.
The decrease in Corporation Tax that Osborne is planning all across the UK will be applied to the country as a whole and will do nothing for Scotland’s apparent disadvantaged position. Yes, these lower rates will apply to new start-ups but it will also apply to the large super-profit making companies that Scotland is in short supply of (not aided by the laissez-faire approach in allowing some of our biggest companies be gobbled up by overseas rivals – Scottish Power, Scottish & Newcastle, British Energy). How can a company making billions in profits and paying less tax be fair? Particularly when energy prices and food costs rise?
One could then say that the UK benefits from lower corporation tax rates as it attracts more business to these islands and that will then directly benefit Scotland but I don’t see that having been the case in decades gone by (even home-grown oil revenues have been of questionable benefit to Scotland over the piece) and this also allows the banks, Tescos, energy companies (mostly not Scottish-based) to rake in huge profits at a lower tax rate than before, something I would not subscribe to even if corporate taxation was devolved.
So, yes, fair challenge but I think there is a subtle justifiable difference.
#7 by Hamish on January 4, 2011 - 8:21 pm
This may sound almost a frivolous consideration, but I prefer a round percentage number for something like VAT where I regularly have to do sums in my head.
I guess 10% is out of the question, so I will settle for 20.
Conversely, I would like to see Income Tax being truly progressive, starting at 1% and increasing by 1% to whatever maximum is decided.
Among other reasons:
(a) Everyone who has any income should pay some tax; it is patronising to talk about lifting people out of the Income Tax net.
(b) Step-function changes in tax rates always create anomalies, and foster tax avoidance schemes.
BTW Jeff, sorry to be such a bore, but Labour did win a third term. I know I should get out more, but I did have a pleasant Christmas, thanks.
#8 by Jeff on January 4, 2011 - 8:26 pm
Crikey, maybe I should be asking for a VAT rate in single figures if I can’t count to four accurately.
Cheers for pointing out…
I do agree 17.5% is tricky. I work out 10% (easy enough), take half of that, take half of that again; add up the 3 numbers, and that’s 17.5% total…
Now who is being a bore!
#9 by NoOffenceAlan on January 4, 2011 - 10:33 pm
I work in IT. When VAT changed from 15% to 17.5% the ‘magic number’ used for calculations changed from 23/20 to 47/40. I guess the equivalent now would be simply 6/5. The point is to use the smallest possible whole numbers.