I was only warming up with the parliamentary reform thing… this is the really wacky one, the political equivalent of my pogo stick/zimmer frame hybrid invention.
One thing which the Tories always seem to be saying is that there are too many taxes, an over-complicated tax system, unfair levels of taxation and an overall level of taxation which is too high. I can agree with the first three, although maybe not for the same reasons that they state them. They think the tax system is unfair because those who are better off pay too much tax, while I think it is unfiar because those who are worse off pay too much tax. I think they are looking at amounts while I am looking at percentages, or somethng like that.
Anyway, VAT is so much a part of our life that the instinctive reaction is to find the idea of doing away with it unthinkable. However, it is possibly the unfairest part of the tax system, especially now that it applies to fuel costs. Somebody on an average wage, and many on an above-average wage spend every penny they earn. In effect they pay income tax on everything they earn, and then pay 17.5% on what is left. Most of what they spend the money on is non-discretionary (food, fuel, transport) so they have no choice.
So do away with VAT and just set income tax rates so that those on an average wage with typical spending habits would still have the same purchasing power, those below average rates have slightly more purchasing power, and those on the lowest incomes are lifted out of poverty. Adjust higher tax rates as necessary to balance it out.
That sounds like the higher-earners would get taxed more, but that is not necessarily so. Mind you, even if it is, it is not such a bad thing in terms of redistribution and could be a smaller hit than you would suppose. For a start, the total revenue requirements would go down as there would be a lot less spending required on administering tax law if tax law was a lot simpler.
Here are a few specific thoughts:
- An immediate end to 'carousel fraud'. Thats billions of pounds saved at a stroke.
- All those VAT inspectors would not be needed. But don't let them go and incur huge redundancy costs – re-deploy them to work on auditing other taxes to reduce tax avoidance and evasion. That should increase revenues, and there would be a gradual reduction in numbers as they retire and are not all replaced.
- Everything would be cheaper. This could increase business as there is less temptation for us to go on booze cruise-type trips across the channel but more incentive for continental Europeans to visit and buy stuff here. It could even encourage more of us to stay in Britain for our holidays.
- The better-off might be more encouraged to spend more of what they take home, which could also help stimulate the economy.
I can't understand why the Tories like the idea of simplified tax so much. My oversimplified view of life holds that the Tories mostly represent the better-off, and that they benefit most from complicated tax systems which can be manipulated by clever accountants. I like the idea of having as few taxes as possible but recognise that it implies that either the remaining tax rates have to rise to compensate or total spending has to reduce to reflect the lower overall revenue.
The way I see it, a simpler tax system offers fewer places to hide and so less avoidance and a greater collection, added to a slightly more efficient administration, which means you still have as much to spend and maybe even a little extra.
Taxation only exists for two reasons: to collect revenue required for state spending, and for social engineering reasons – like sin taxes to discourage smoking or environmental taxes. Why not look at the whole system and decide which taxes are necessary for the sake of fairness and just set the levels of those taxes so that the required revenue is raised? Income tax, capital gains tax, land tax and corporation tax seem to be essential, but what else is?
If you really want to get controversial you could even consider whether duties on alcohol and tobacco really work. Most people in the South-East will be able to cross the channel for cheaper booze and fags or know someone they can get them from – especially in an airport town like this. If our duty was lower than certain other places, but especially France, Belgium and Holland would the benefits outweigh the costs? Actually thats not something I want to get into really. For the time being scrapping VAT is probably provocative enough!
One last thing about VAT which may help sway opinion – it was invented by a Frenchman 
There is a caveat to all this though. Its not so much a serious suggestion as something intended to provoke some reaction, which will probably educate me or cause me to think more about the topic, as the earlier idea did. I will happily confess to not being an economist, so I would genuinely like to hear from anyone who is about why/whether VAT or some form of sales tax is necessary.
The Tories like simple tax systems – even a flat tax becuase they dont like inefficiency and waste – when you have incredibly complex tax systems and ‘Tax credits’ you have massive opportunity for fraud and mistakes.
But back to VAT – I do share some of your concerns about VAT but sorry to say that this is all a bit irrelevant as we couldnt get rid of VAT even if we wanted to – the EU wouldnt let us.
As for a general support of sales taxes – I thought it was a particulary socialist ideal, use variable sales taxes to encourage/penalise behavour that the state agreed or disagreed with. In France, books deemed pornographic by the authorities were taxed at the “luxury goods” rate of 33.3 per cent, but classical novels are taxed at 23 per cent, and school text books at a reduced 7.5 per cent.
I can remember when VAT was introduced and we had ‘Luxury rates’ of 25 per cent on items such as TVs and of course we had the famous ‘Jaffa Cake’ court case over whether it was a biscuit or a cake!
I’ve always been surprised by the Left’s support for VAT – its a very regressive tax that hits the lowest paid hardest.
I too, from a very limited understanding (Wikipedia!) believe that we are required within the EU to have a VAT system. One can see why – can you imagine the immediate surge in sales and tourism in the UK if everything became zero rated? Just too tempting surely? That said, I think you make some very good points and it might be something that could be tackled at an EU level to attempt to reduce poverty and spending, the mind just boggles at the amount of money that the taxation system must cost to administer.
As a slight aside, the North American system of adding taxation at the till is something that is extremely irritating!!! So nice to come back at Christmas and know that the price you see is the price you’re paying and not have to have some shot in the dark as to what one’s final bill will be.
I thought that our EU contributions were funded from VAT, as well as being an agreed minimum rate.
Nice idea, but to be honest I’d rather we just were more open about having a higher Income Tax rate for better services
Ash: Thatcher and Major more than doubled VAT from 8% to 17.5%. They also put it on utility bills (and if Labour had not have intervened) it would also be 17.5% on these.
Nobody calls Thatcher tax and spend but total tax take is now around 1987 levels (8 years into a Thatcher govt) at around 40% of GDP.
What the Tories did do is cut taxes for the better off and shift this tax burden on to the poor, and one of the ways they did this was increasing VAT, alcohol and fuel duties and inventing the regressive poll tax and council tax.
The Left may tolerate VAT but they certainly do not love it like the Tories do.
Skuds: As the others have pointed out, scrapping VAT would need EU wide agreement.
In an ideal world, it would be nice if we could decide on the fairest simplest to collect tax and scrap the rest. But unfortunately a level of complication is probably always going to be needed. Different taxes affect different people in different ways, it is not just about raising revenue but changing behaviour. Also having one tax is like having your eggs in one basket. If someone finds a way around a tax, you still have all the others. The complication of the tax system is partly an arms race against tax evaders. Your idea on attracting sales from low taxes is called social dumping and is one of the reasons why international agreement is needed on tax issues to protect spending on public services.
A couple of points from someone with probably even less of an understanding of economics thanmy esteemed bruv.
As far as I was aware no-one actually pays income tax on everything they earn. I am not aware who introduced tax allowances but, last time I looked, we all still get them.
I always remember VAT as the reason why I am sure that Thatcher isn’t really a woman. When the luxury rate of VAT existed my Aunty Carol got, understandably, upset about the fact that sanitary towels and tampons were charged, you guessed it, at the luxury rate. I’m just sorry we never got to put her plan of sitting on the doorstep on Number 10 bleeding until she realised that they may not actually be a luxury into practice…..
Personally I think we should scrap income tax and keep VAT, even put it at a higher rate. Give those on lower income concession swipe cards to use at shops. People would only ever pay tax on that which they buy. If they buy more they pay more tax. If they choose not to buy, they have more money to save, which encourages saving. Plus VAT is not as complicated for the self emploed as income tax is. They charge VAT they pay VAT. Thats it, simple.
So have you done the sums which show what rate of VAT would be needed to make up for the revenue lost through income tax? 50%? 60%? More?
And then sit back and watch as the economy grinds to a halt when the ridiculously high prices make tourism a dead industry and shops in the South-East fall victim to everyone taking the ferry to France for the weekly shopping as booze cruises give way to grocery cruises.
VAT is horribly complicated for small businesses, especially those which are buying and selling at the same time. It may be simple for the self-employed, but these are a small proportion of the workforce (and Income Tax would be simpler for them if they didn’t spend their entire accounting period trying to avoid paying any of it).