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Started by mingmong on May 28, 2019 10:44:24 AM
Costs and benefits of lowering VAT from 20% to 15%

While I feel taxes on unearned wealth are far too low in this country, and that income tax (at all levels) could do with a rise, I also feel VAT (a direct and regressive tax) is too high and should if possible be reduced.

However, obviously, it is an enormous and reliable source of public finance.

But what would be the effect on high-street spending and small business viability? Is there a potential 'laffer curve' effect here where bringing the tax down could actually raise total revenue?

mingmong - 28 May 2019 16:41:18 (#1 of 33)

No-one biting then?

I thought there might be more armchair economists out there to offer their wotireckons

Wot I reckon is that there would be a net loss in revenue, but if it was undertaken while the economic winds were favourable, in the context of a wider stimulus, there could be some cushioning. As well as supporting low-income households and small businesses, it would be politically useful for a Labour government to be able to define their tax policy as 'rebalancing' rather than 'raising'. Another area where taxes should be revised, and perhaps reduced, would be local Business Rates which (in towns like mine) is cripplingly many small business.

It would need to sit alongside a policy of an extra 1% on the basic rate, a 50% new top rate for 6 figure earners, a restoration of the bonus tax, a rise in IHT and the levying of a 1% on residential property value over 500K. VAT, while being reduced in most categories, should also be raised in others, e.g. air travel.

PostmodernToss - 28 May 2019 16:43:49 (#2 of 33)

As long as the right things (food, children’s clothes, etc etc) are exempt then I think VAT is a very fair way to tax. Some of the Scandinavian countries are big fans of taxing consumption in this way.

Bonusy - 28 May 2019 16:48:14 (#3 of 33)

Whilst it does have the obvious regressive downside, the advantage of VAT is that it is harder to evade/avoid for anything other than cash-in-hand transactions. Anything which through a till is recorded and thus taxed

Gotout - 28 May 2019 16:50:17 (#4 of 33)

One problem with VAT has been the way that some crooks have claimed back VAT on non existent goods when they are exported and imported.

Hilary - 28 May 2019 16:50:24 (#5 of 33)

If VAT were genuinely a luxury tax, a rate of 20% or even 30% would not be unreasonable. When it is levied on manifestly non-discretionary things like, say, repairing a roof - the costs of which are already eye-watering - it is a scandal.

mingmong - 28 May 2019 16:51:38 (#6 of 33)

Tom, thanks for helping get the ball rolling

VAT has the disadvantage (if you regard it as such) of being regressive, that is of hitting the low-income households proportionately harder than those with more money to spare. In a country in which there are working people who are struggling to afford food, this is a real consideration

One could argue that no-one 'needs' the extras that are not VAT-exempt, but in reality this is not the case. People need smart clothes, dry-cleaning services etc. just in order to present themselves effectively for an interview to get a job. No-one can be expected to participate in the modern job market without a smart phone or internet-connected computer. Owning and running a car already costs £3000+ per year, but is difficult to avoid if you live outside a city

mingmong - 28 May 2019 16:56:14 (#7 of 33)

Anyone here run a small but VAT-registered business?

What, if any, would be the effect on a 5% cut on your income stream?

Moschops - 28 May 2019 17:01:32 (#8 of 33)

Income stream? Not sure if its the same for everybody, but the income from it is the difference between you much you charge, and how much you pay.

mingmong - 28 May 2019 17:04:55 (#9 of 33)

that would be profit, surely, which is also relevant of course

But what I'm wondering is whether any small businesses here feel they would sell more stuff if VAT (and therefore their prices) were slashed by 5%, recognising of course that this would also apply to their competitors

moto748 - 28 May 2019 18:49:07 (#10 of 33)

I do. In fact I was on the so-called "flat rate" system (a kind of simplified VAT), but since the Chancellor recently removed all the advantages of it, I'm thinking about deregistering from VAT altogether.

And yeah, VAT is regressive, but govts like it cos it's cheap and easy to collect, and reasonably hard to avoid.

moto748 - 28 May 2019 18:52:33 (#11 of 33)

The difficulty with switching from indirect to direct taxation is that direct taxation is already widely avoided (or use whatever verb matches your political view), and a rise in rates would accelerate that. That in itself is not an argument for not doing it, though.

thisonehasalittlehat - 28 May 2019 18:53:29 (#12 of 33)

Just tax land.

mingmong - 28 May 2019 18:54:48 (#13 of 33)

moto - presumably then a lowering of the VAT rate could potentially increase compliance?

TinyMcSmith - 28 May 2019 19:00:33 (#14 of 33)

I run a small business, but as a consultancy it’s just administrative between me and clients. I charge and claim, they pay and claim. Accountants do the sums and it works itself out for all sides.

I'd abolish it for most consumer transactions, because of its regressive nature. I’d also agree that it would stimulate the consumer market and thus the economy. Make the revenue shortfall from wealth tax and income tax.

moto748 - 28 May 2019 19:01:04 (#15 of 33)

I don't see that that follows, ming. From the POV of small businesses, it's all about how much you spend that you can claw the VAT back on, compared to how much you charge.

mingmong - 28 May 2019 19:04:08 (#16 of 33)

#14 #15 thanks both. I'm trying to understand this from a small business perspective, as I feel this is a group Labour needs to win back. Sounds as though this policy would be fairly neutral in that respect.

moto748 - 28 May 2019 19:05:41 (#17 of 33)

And if you're, say, a builder or an electrician, it's also about whether most of your customers are other VAT-registered companies, or Joe Blow. If most of your business is with Joe Blow, you have a problem, and will likely be uncompetitive with non-registered rivals.

moto748 - 28 May 2019 19:07:16 (#18 of 33)

I think it's fair to say neither Tiny nor myself are 'typical' VAT-registered small businesses, though. My situation is similar to his.

TinyMcSmith - 28 May 2019 19:13:46 (#19 of 33)

We are probably typical for ‘non-trade’ perhaps? In that we deal with other businesses (generally larger than ourselves) and can’t offer ‘cash in hand’ prices.

TinyMcSmith - 28 May 2019 19:17:17 (#20 of 33)

On that topic, I wonder how the unofficial economy would change if VAT were abolished or lowered?

Would small roofers, plumbers and so on, lose a competitive advantage?

Or would it all work itself out?

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