Liberals and the VAT Question 33


I remember having a passionate argument with John Pardoe about VAT in a pub during the Cambridge City by-election. Pardoe enjoyed Vince Cable levels of popularity as a liberal economic spokesman in those days – his flagship policy proposal was reducing income tax and increasing sales tax (sorry, too lazy to check if it was already called VAT then). He characterised it as switching from tax on income to tax on consumption. I was 17. I took myself very seriously in those days; it was with retrospect kind of him to do so.

I argued VAT was regressive – the rich and the poor pay at the same rate. As the poor save less, it means a higher proportion of their income will go on tax. Pardoe said the rich buy more expensive luxury goods, so will pay more tax.

I haven’t changed my mind in the intervening 35 years. I would much rather the extra 13 billion pounds had been raised by increasing income tax on incomes over the higher rate threshold.

I very much welcome the curtailment of housing allowances, which have boosted both private sector rents and property prices and contributed to Britain’s still overheated housing market.


33 thoughts on “Liberals and the VAT Question

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  • mrjohn

    Do you really think the rich pay tax on their income ?

    I would prefer a flat rate for all, the rich pay more in cash terms on the same percentage. Simplify the rules and enforce them thoroughly. Tax deduction for lower income people is just a subsidy to the employers who employ them on minimal wages.

  • Anonymous

    The tories, lib dems, nulab are on the tv blaming each other for the mess. The standard of debate does not even reach the heights of childish behavior. Jack Straw and Nigel Lawson being the leading protagonists.

    Give up all hope.

  • Laurence

    Remember that a large proportion of rich people’s luxurious consumption ?” restaurants, cars and travel being two biggies ?”

  • James Cranch

    What disturbs me about debate on question such as these is that it’s normal to talk about them without reference to any detailed evidence on the topic.

    What should be done is for some nice chap to produce a graph of spending on items eligible for VAT as a function of income.

    Then there’s no guesswork required.

  • Euripides

    I can’t see how housing allowances could possibly drive up private sector rents and property prices, as they cannot be higher than the median rate for a certain area.

    The price of property has gone up because of a gap between supply and demand with the more wealthy having an increased monopoly on property, (one of the few areas that the banks will lend in) surely?

    Because many of the lowest paid and/or disadvantaged people rely on housing allowance to enable them to remain anywhere reasonably close to areas of employment and services, these policies will result in the gentrification of whole areas with the poorest pushed out.

    Real wages are predicted in the most optimistic estimates to decrease over this parliament, which makes this a double whammy.

    The poorest will have to spend a higher percentage of their disposable income and time on commuting to places of employment.

    Imagine you are a poorly paid cleaner who can’t afford to live near a city centre. More time and money spent commuting means less money on supporting the local economy, less time and money for the family and an increase in stress. The result? More chance of small businesses failing, leading to more unemployment, leading to greater cost to the state in benefits, probably increased cost to the NHS due to poorer health from the carer due to stress and the newly unemployed for poverty related illnesses, poorer health (especially mental health) for the cleaners children who have less quality time time with the parent, poorer health and more cost to the state with the cleaners increased stress and resulting immune system illnesses, possible relationship stress/breakdown due to lack of time and money to spare.

    The cleaner now lives in a poverty stricken ghetto because they have no choice, demonized by the press as a no-good scrounger.

    Big Society? A sharing of the debt burden? Fuck you loser, you’re not welcome in our new gated community.

    Sorry for the doom laden rant, but you only have to look at the North, Scotland and Wales in the 80’s to see where this is leading to.

  • craig

    laurence

    not just rich people. Being a self-employed writer my major tax-deductible expenses are travel and entertaining.

  • frog2

    Craig

    Afraid you haven’t done your homework on this one.

    Items with Zero and reduced rates count more the poorer you are .

    The important thing is how much each economic group pays in VAT .

    No time, so a repost from a Guardian discussion —

    ————————————-

    Koolio’s comment 17 Jun 10, 3:30pm

    VAT isn’t that hard in the poor. Remember, most food is zero-rated, same for public transport and children’s clothes. Plus home energy is low-rated. So the burden of VAT doesn’t hit the poor as hard as you might think.

    Ed Balls might have dug up some old notes at home but more recent analysis (Economic and Labour Market Review, Volume 4-3, March 2010) shows that the bottom 20% of households see 4% of their spending go on VAT, compared to 8% for the wealthiest 20% and 7% on average in the UK. Put another way, the worst off pay less VAT.

    So the lowest 20% will pay 56p more for each £100 of spending, while the vast mass of people will pay a quid . That will bring in billions of revenue.

    ———————————–

    (That’s if the 4% is a good stat of course !)

    Many people are playing fast and loose with the figures here. Save the Children is apparently saying the poorest pay 14% of expenditure in VAT, which just has to be garbage.

  • Paul

    This is interesting. It’s an article suggesting the UK should learn from Canada’s experience in reducing their ‘budget deficit’

    http://news.bbc.co.uk/1/hi/business/10254055.stm

    The interesting part is that there are claims – for example, in Naomi Klein’s ‘The Shock Doctrine’, Chapter 12 – that Canada’s so-called ‘debt wall’ was an illusion. She claims that fears that Canada was heading into a debt crisis were deliberately stoked in order to push neo-liberal policy – spending cuts and privatization – even though there was nothing wrong with Canada’s economy.

    “Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada, particularly the C. D. Howe institute and the Frazer institute (which Milton Friedman has always actively and strongly supported).”

    The result seems to have been that the false warnings of a imminent crisis actually created the crisis where none had previously existed.

    This chapter also reports Vincent Truglia of Moodys saying that he was pressurized to downgrade Canada’s credit rating, something he refused to do.

    He said, “Several recently published reports have grossly exaggerated Canada’s fiscal debt position. Some of them have double counted numbers, whilst others have made inappropriate international comparisons.”

    Klein states “Truglia got so fed up with the politicized statistics coming out of Canada … that he took the extraordinary step of issuing a ‘special commentary’ clarifying that Canada’s spending was “not out of control”.

    Also from this chapter:

    “In September 1995, a video was leaked to the Canadian press of John Snobelen, Ontario’s minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he ‘would be inclined to talk about.’ He called it ‘creating a useful crisis'”

    Klein is not, I think, pushing an economic conspiracy theory, just pointing out the extent to which most of the the world’s economies are dominated by adherents of one ideology: Friedmanite/Chicago Boys economics.

    I’m not suggesting that our own budget issues are not real. But it may be interesting to ponder which of the measures taken are really aimed at cutting the deficit and which are aimed at converting public wealth into private property, a basic tenet of the seemingly dominant Friedman/Chicago Boys economic philosophy.

    Recognizing the difference may be difficult, at least until after it is too late to do anything about it (as appears to have been the case in Canada). We should be very sceptical of each and every measure introduced and its ongoing consequences. At the very least we should be asking which measures are temporary and which will remain after the deficit is dealt with.

  • Craig

    Paul

    Our debtis very real. All the state money pumped into the banks accounts for a lot of it.

    I am not opposed to Keynsian demand management, but remember that when he was proposing it the state accounted for under 2)% of the economy. Now it accounts for fifty per cent. Increasing that during a recession is a very different approach.

  • Sick as a chip.

    “The tories, lib dems, nulab are on the tv blaming each other for the mess. The standard of debate does not even reach the heights of childish behavior. Jack Straw and Nigel Lawson being the leading protagonists.”

    I watched it happen.

    Jack Straw- “The tories supported our economic policy 100% for the first eleven years of labour government”.

    Nigel Lawson- “Yes, but then we saw the light”

    I don’t know whether to laugh or cry.

  • kathz

    One problem with VAT is that it is charged and paid by organisations which consequently become more expensive.

    For instance, anyone needing a lawyer has to pay VAT on legal fees – that’s a 20% tax on justice. The lawyers can, I believe, claim back the VAT they spend – that’s certainly how it used to work. People need recourse to justice for all kinds of reasons and it’s already disproportionately tilted to favour the rich in many circumstances. (I know that some cases – not all – entitle the very poor to legal aid, but it’s not universally available – look at rules on eligibility.)

    Meanwhile, universities do not charge VAT so cannot reclaim it (see Times Higher http://www.timeshighereducation.co.uk/story.asp?sectioncode=26&storycode=412182&c=1 ). This means universities, which are probably already facing cuts of 25%, will have to pay an additional 2.5% on a number of goods and services.

    So people needing justice and wanting education suffer from VAT increases. It doesn’t seem right to me.

  • technicolour

    At the beginning of all this I remember Evan Davis saying on Newsnight that this was ‘psychological’. He was not asked to expand on this.

    If one considers that only 4 percent of the money in the world is real (ie cash) is the rest made up against promises?

    And public debt aside, if private debt were to be abolished, what would be the consequences?

    Very interesting posts, thanks.

  • Ian M

    What I don’t get in this sorry mess is what on earth the Liberals have got out of this ‘coalition’ except a few token ‘aspirations’ and some nice jobs. People who voted for them have got a Tory government which is no different to one in which the Liberals weren’t there. Where is Vince Cable when you need him? Relegated to some backroom job where he can’t do any harm, ie actually influence Tory policies, which are largely weighted towards big business and the wealthy (didn’t notice them losing too many of their precious perks today).

  • Very confused

    Craig Murray

    Does this mean the bankers, etc, keep their enormous bonuses?. The lib dems said they would do something about that, did they tell us another lie.

  • Mark Golding - Children of Iraq

    I agree Ian – sadly – Lib Dems have been routed, seduced by ideologues. We witness Nick on the benches nodding continuously like the proverbial toy dog in the back window. Shame, I saw a spark of something good in this man. Vince Cable had some influence on the budget (see “Back to Black”) but he has been strained thru a fine filter alas.

  • Ian M

    Clegg always struck me as a neoliberal in liberal’s clothing. Him and Cameroon look like public schoolboy clones, which they are. I am not surprised he leapt at the chance to merge his party, when he could have easily exerted more influence by staying independent and only voting with the Government at bills and votes of their choosing – the Tories would have had to negotiate and take account of the combined Opposition far more than they do now. They have handed the Tories power on a plate, by binding themselves so closely to them they have annulled themselves.But Clegg seems ideologically and temperamentally at one with Cameron, which has prevented the Liberals acting as a genuine brake on Tory policies for the rich.

  • Mark Golding - Children of Iraq

    frog2

    May I suggest you do some homework. What I call children’s ‘happy foods’ are standard rated in a complex RMHC mixing bowl.

    Snacks, crisps, ice-cream, confectionery, milk-shake powders; even ginger-bread men with chocolate faces, Cereal or muesli bars, juice concentrates and of course Ronald (unless the poor are not allowed take-aways) and…

    Any item of clothing larger than certain complex measurements including school clothing and footwear larger than 3 girls or 6 1/2 boys.

    Oh and retailers regard an increase in the rate of the tax on food as inevitable.

    http://www.guardian.co.uk/business/2010/jun/15/tesco-plea-on-vat

  • frog2

    Mark Golding

    Childrens’ “Happy Foods” are not food ! People who buy junk like that are stupid.

    The statistics I mentioned are worth looking into, non ?

  • technicolour

    Clegg looks rather frozen and unhappy, I thought. Like a man who did a deal with the devil but still found himself out in the cold. I’d walk now. They can, can’t they?

  • Anonymous

    The problem for the uk is that it no longer has a meaningful manufacturing base. The tories destroyed it by shipping it to where it made more profits for the rich. That is going to prove the death knell for the uk. A lot of the skill needed to pass on to the younger generation is dying out fast, the older people, the last of the real trademans are now retiring. We are a financial centre and a service industry based country.

    What we have done does not make any sense.

  • Duncan McFarlane

    On VAT i completely agree with you Craig.

    On housing benefit caps, i don’t. Yes, there’s a lot of money wasted on paying excessive rents to private landlords. The solution is to build or buy up council housing and re-introduce greater regulation of rent levels, not cut housing benefit and make more people homeless as a result.

  • Anonymous

    Mark you obviously did not read the first post carefully 😉

    It’s my opinion that people who buy sweets and junk food for their kids aren’t doing them any favours, so we disagree !

    The VAT part of peoples’ spending varies with how much of it is Vattable.

    That’s all.

  • jungle

    I agree housing benefits need reform, but arbitrarily capping the rates per property size (at the levels talked about, £400/wk for a 5 bed, presumably proportionately less for smaller households) is going to have a terrible effect on Inner London. We’re not talking about just Kensington or Westminster here.

    It will effectively mean that all the many thousands of people currently depending on housing benefit within Inner London – except the tiny handful that get social housing – will suddenly be unable to afford their existing housing. To find housing below the cap, they will be forced to live in much smaller housing than they need. The overcrowding generated would be horrendous.

    The other effect will be a rapid exodus of the poor from Inner London in search of cheaper housing, to form Paris banlieue-style ghettos on the outskirts. The effect on suburban fringe places like Slough, Croydon, Barking, Luton, Basildon could be explosive. It may be true that it is economically unsustainable to subsidise any unemployed household to live any closer to the centre than Zone 5 – but trying to make that change overnight is just insane.

    It could even result in sudden mass homelessness, as a very large proportion of those on housing benefit in Inner London suddenly – in the same month – become unable to afford their existing housing, saturating the market for alternatives.

  • Anonymous

    jungle: Good post. But I think the idea is to get landlords to lower rents, it could misfire?. There are many landlords who would be in a big mess if they can’t find tenants, as they have buy to let mortgages that still need paying. We could be looking at a lot of repossessed houses for sale?.

  • frog2

    Same housing benefit in france–APL

    Landloreds know that most not-rich here get it so can up the rents even 30%.

    Reversing a system like that not easy…

    a haircut for landlords, or putting caps and then letting inflation do it .

  • Parky

    There has been a sense of hysteria created in the media during the past few months and calling the budget on Tuesday an “Emergency” did not help. What was to happen if these cuts do not happen, the deficit is large but not by relation to GDP, excessive. Cutting current account spending is prudent and paying down the debt, in good time, also.

    During the time of NuLabour, they certainly had a good attempt at creating a client state of civil servants, local government, quangos and benefit claimants. This largesse has come at great cost to the ecconomy and the heavily taxed middle class and could not be sustained in the long term as few of their number create wealth and many hinder it.

    This should be seen more as pruning and weeding the garden rather than digging it up completely and applying round-up.

  • ingo

    After listenimng to Nick Clegg this morning on radio 4, studiously avoiding the question of his VAT conversion and strenuously denying that his steered course is taking the Lib Dems from the centre left to the right I am slowly coming to the conclusion that this episode will either split the liberal democrats, or obliterate their future prospects.

    Now would be a good time to start a progressive new liberal party with sustainable values, a desire for limited protectionism and a self sufficient economy, a party that values the defence of these isles, not the defence of world domination and a futile war on terror, which should really be called the ‘Leviathan war’.

  • Richard Robinson

    “I am slowly coming to the conclusion that this episode will either split the liberal democrats”

    That’s my thought, that this alliance has the possibility of splitting up the old groupings along some new lines. Which might be constructive.

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