A VAT lot of good

December 09, 2009 3:02 PM

Woefully inadequate, gravely concerning, toe-curlingly aggravating, these are just a few of the phrases I could use to describe today's PBR announcements. But I will stop indulging my creative writing bent and focus on something that wasn't a surprise in the PBR, but still requires a few chosen words.


Yes, it's VAT. In the last Budget, VAT was cut to 15%, to help the economy and stimulate the High Street. Retailers welcomed it, as did consumers. Hell, even we were pleased. I mean, we'd like to see it much lower but as long as we're hamstrung by our membership of the EU that decision remains above our politicians' pay grade.


But this was only ever going to be a brief and fleeting affair between Alistair Darling and a bona fide tax cut. It's going back up, to 17.5%, as scheduled. The Chancellor said that he had "no further rises to announce at this time", leaving the door open for future rises in the Budget next year. Speculation is in the air that the Tories are pondering raising it to 20%.


Why is this news, and why am I so hot under the collar about it? In short, because too many people forget what VAT is, what it does and who it hits the hardest. While a VAT hike might seem like low hanging fruit to raise some dough to help our dire public finances, I want to remind any politicians with twitchy fingers of a few facts about this hated tax. 


- The poorest fifth of households pay 38.7 per cent of their income in tax, whereas the richest fifth pay 34.9 per cent.

- The most regressive taxes are indirect taxes. The poorest fifth pay 27.9 per cent of their gross income in indirect taxes whereas the richest fifth pay 10.0 per cent. The biggest indirect tax is VAT.


Or, here's a graph from our paper launched earlier this week A taxpayers' guide to the political parties' responses to the fiscal crisis that illustrates it beautifully:

Vat graph

In short, VAT should stay down, for good.

Woefully inadequate, gravely concerning, toe-curlingly aggravating, these are just a few of the phrases I could use to describe today's PBR announcements. But I will stop indulging my creative writing bent and focus on something that wasn't a surprise in the PBR, but still requires a few chosen words.


Yes, it's VAT. In the last Budget, VAT was cut to 15%, to help the economy and stimulate the High Street. Retailers welcomed it, as did consumers. Hell, even we were pleased. I mean, we'd like to see it much lower but as long as we're hamstrung by our membership of the EU that decision remains above our politicians' pay grade.


But this was only ever going to be a brief and fleeting affair between Alistair Darling and a bona fide tax cut. It's going back up, to 17.5%, as scheduled. The Chancellor said that he had "no further rises to announce at this time", leaving the door open for future rises in the Budget next year. Speculation is in the air that the Tories are pondering raising it to 20%.


Why is this news, and why am I so hot under the collar about it? In short, because too many people forget what VAT is, what it does and who it hits the hardest. While a VAT hike might seem like low hanging fruit to raise some dough to help our dire public finances, I want to remind any politicians with twitchy fingers of a few facts about this hated tax. 


- The poorest fifth of households pay 38.7 per cent of their income in tax, whereas the richest fifth pay 34.9 per cent.

- The most regressive taxes are indirect taxes. The poorest fifth pay 27.9 per cent of their gross income in indirect taxes whereas the richest fifth pay 10.0 per cent. The biggest indirect tax is VAT.


Or, here's a graph from our paper launched earlier this week A taxpayers' guide to the political parties' responses to the fiscal crisis that illustrates it beautifully:

Vat graph

In short, VAT should stay down, for good.

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