Why politicians love value added tax

From April 2008:

1) It’s a tax on “consumption”; and consumption is A Bad Thing, as opposed to taxes on “production” which is A Good Thing. This completely ignores the fact that in a largely service based economy, one man’s consumption is another man’s production. Funnily enough, the right-wingers are more guilty of perpetrating this lie than the lefties. As it happens, VAT is mildly regressive – people on low incomes pay a higher fraction of their income on VAT than those on higher incomes.

2) It’s an EU requirement, so we can’t do anything about it. Apart from reducing our standard rate from 17.5% to 15%, the minimum standard rate required by the EU. Funny how nobody mentions that.

3) VAT receipts are relatively stable; in times of economic downturn, people spend more than their incomes – even if people’s incomes and business profits are falling, the government can still rake in the tax. The flipside is, VAT sends more businesses to the wall during a recession than would otherwise be the case (they have to pay it, even if they are making losses). And VAT receipts are about three times as high as receipts from Council Tax, without the protests or the hassle.

4) Voters and businessmen don’t understand it! People don’t inspect their sales receipts closely and think ‘Shit! I just paid £200 for a new hi-fi for £200 – £30 of that went straight to the taxman’. Similarly, VAT-registered businesses that make VAT-able supplies to the general public are conned into thinking ‘We don’t pay VAT – we just add it to our selling price and the customer pays it.” These chaps need a lesson in the difference between the legal and economic incidence of a tax. See page 95 of this for explanation.

5) Of course, some businesses are zero-rated or exempt, so they don’t care. Some VAT-registered businesses make supplies to other VAT-registered businesses and think that it doesn’t affect them. Which mathematically it doesn’t, but just you wait until your customer (who makes VAT-able supplies to the end consumer) goes bankrupt … Or they’re beneath the registration threshold and make damn’ sure they stay there (see STB in the comments for details).

6) “VAT is a simple tax”. Yeah, right.

7) VAT raises about twice as much as corporation tax, once you strip out the additional 20% corporation tax paid by North Sea oil & gas companies. The LibLabConsensus are happy to wrangle over whether the large companies corporation tax rate should be 28% (down from 30% last year) or 25% (proposal 18 on page 142, this whole report was far too radical for George ‘Twat’ Osborne, of course).

8) If the government f***s things up and we have inflation, or even if they just print money and we have inflation, then prices go up, so VAT receipts go up as well.

9) Banking is exempt from VAT; new housing is zero-rated and sales of second-hand homes are exempt from VAT, so if politicians fancy blowing a credit/asset price bubble, the tax system makes this all the easier.

10) If the government f***s up and our currency plummets, then great. Fewer people go abroad on holiday, but the UK is cheaper as a tourist destination, so overall VAT receipts (on hotels, restaurants, musicals etc) go up. This also feeds through into inflation, see point 8).

See also “Ten reasons why VAT is the worst tax”.

BTW, this rant does not just apply to Value Added Tax, it applies to all Sales Taxes or Turnover Taxes, local, general or otherwise, unless the proceeds are clearly earmarked for and matched with spending on external costs, e.g. if petrol duty revenues are spent on roads and public transport, then fine. If tobacco duties are spent on cancer research, then great. And so on.

5 comments for “Why politicians love value added tax

  1. April 22, 2011 at 7:16 pm

    I have often said that if there is a Hell the hottest spot should be reserved for Maurice Laure, the inventor of VAT.

    Much like Income Tax was supposedly only a tempory tax to fund the Napoleonic Wars.

    VAT was introduced in France purely becuse the French weren’t paying their taxes like good little drones should. Nowadays in France it is the most important source of state finance, accounting for nearly 50% of state revenues.

    And yet it has been introduced all round the world even when compliance with income tax is high e.g in the UK via PAYE

    Why? because it is another way to pick our pockets on the sly. Yeah lower Tax, but raise VAT and most don’t notice.

    My top 3 BAD taxes

    1. VAT
    2. Death Duty now fluffily renamed Inheritence Tax
    3. Capital Gains Tax

  2. April 23, 2011 at 3:38 pm

    At least, unlike income tax, it’s possible to avoid it (for the consumer, anyway). Altogether now:

    “No income tax, no VAT, no money back, no guarantee…”


    • April 23, 2011 at 10:07 pm

      JM, the consumer doesn’t pay the VAT anyway, the supplier pays it. The legal obligation is on the supplier to pay it, he merely passes on about a third to the consumer (depending on price elasticity of supply and demand).

  3. April 23, 2011 at 4:04 pm

    Ooops! I didn’t know about John Sullivan’s death when I posted that comment!

    How spooky…

  4. David
    April 27, 2011 at 7:07 pm

    Don’t buy anything that has VAT on it. Starve the beast as much as you can.

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