Tories refuse to rule out VAT increase

As well as hitting the poorest through a freeze on working-age benefits, the Tories may also be planning to hit them again with a hike in VAT.

As well as hitting the poorest through a freeze on working-age benefits, the Tories may be planning to hit them again with a VAT hike

Just 24 hours after making a conference speech in which he promised tax cuts for ’30m people’, David Cameron has refused to rule out an increase in the rate of VAT to pay for it.

The promises made by Cameron yesterday, which included raising the threshold for those paying the 40 per cent rate of income tax and increasing the personal allowance, are set to cost over £7bn to fund.

Asked today about his party’s £7bn spending committment, Conservative Party chairman Grant Shapps refused to rule out increasing the rate of VAT in government:

Jo Coburn: Are you ruling out a rise in VAT?

Grant Shapps: Well I have absolutely no intention of writing future Budgets on your programme…

BBC Two: Daily Politics, 2 October, 2014

The government has already put up VAT once, from 17.5 per cent to 20 per cent in January 2011, and is now refusing to rule out doing so again. VAT is considered a regressive form of taxation as the proportion of an individual’s taken by the tax falls as they move up the income scale – as this (albeit dated) graph from Tax Research UK demonstrates:

VATj

And as the report states:

“On this basis an unambiguous conclusion can be drawn: VAT is regressive.”

So as well as hitting the poorest third of the population through a freeze on working-age benefits, the Tories may also be planning to hit them again through a hike in VAT.

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19 Responses to “Tories refuse to rule out VAT increase”

  1. Peem Birrell

    >>The government has already put up VAT once, from 17.5 per cent to 20 per cent in January 2011, and is now refusing to do so again.

    Well that’s Ok then…

  2. 137point036

    VAT is a tax on consumption (and therefore an encouragement savings). That makes it a good tax for anyone who believes in progress and growth. BUT BUT BUT it is only good overall if the taxes on wealth and income are fair. Fat chance with this government.

  3. JoeDM

    And will Labour increase Income Tax and National Insurance tax ?

  4. Brian Bonto

    Refusing TO RULE OUT doing so again.

  5. Peter Martin

    There’s no need for either party to raise taxation levels. Government creates money when it spends. When it taxes it destroys it. A surplus means it destroys more than it creates which is logically impossible except over a short time-scale.

    All money created by government must eventually come back to be destroyed after it is trapped in the government’s very efficient tax net. Where else can it go? It can be temporarily reprieved from its eventual fate if it is saved, either by ‘prudent’ individuals or companies, or in the central banks of the big exporting countries.

    The budget deficit is what it is because both savers in the UK, companies and individuals, and savers overseas , the big exporters, wish to hang on to ££ issued by the British government. Just quite why they do might be a mystery to many but that is what we see happen!

    For example, if savers in the UK went out and converted their savings into bottles of whisky, and the money that Germany and China hold due to their trade imbalance was spent on Rolls Royce jet engines, or whatever, in Britain, then the government’s tax take would soar.

    The deficit would simply disappear. If people want to save their money and be paid just about enough in interest to cover the effects of inflation, is that really such a problem? Why not just let them?

    Any politician wanting to “balance the books” needs to stop us saving or buying imports. To do that they need to make us all very poor. If that’s their plan they should tell us before the election , not afterwards.

  6. DaveL

    Labour go on about a cost of living crisis, but have made no mention of dropping taxes. The biggest expense I have to budget for is government.

  7. Peter Martin

    VAT is a tax on consumption (and therefore an encouragement savings). That makes it a good tax for anyone who believes in progress and growth

    Why?

    How is it possible for anyone to invest in increased production, ie growth, if the aggregate demand of for that production is insufficient due to the over-taxing of that consumption?

  8. 137point036

    Question 1: are you against all taxes (and all spending by government)?
    Question 2: If there is to be tax, and taxes on consumption are out, what do you want to tax? The choices seem to be income or wealth. Do taxes on those not influence savings and investment in production and growth?

  9. Peter Martin

    Q1) No. Taxes are necessary
    a) to make the currency desirable. That’s what makes $$ and ££ worth something even though they are no longer backed by anything tangibly valuable like gold.
    b) to control aggregate demand. Taxes are needed to prevent inflation. Its only when inflation looks like being a problem that they need to be raised. Taxes aren’t needed to raise revenue.
    Yes spending by government is desirable. Just on what, and to what extent, is largely a matter of political opinion.

    Q2) Consumption taxes aren’t out. But consumption shouldn’t be over-taxed. Taxes on income and wealth are again a matter of political choice. As is the balance between indirect and direct taxation.

    The overall level of taxation should be set such that aggregate demand in the economy doesn’t lead to higher than acceptable levels of inflation.

    Savings aren’t needed for investment in production and growth. Banks create money when they lend. They don’t use lend out savings! So investment, via the creation of bank credits, both creates extra taxation and savings. That’s the opposite way around from the conventional wisdom.

  10. 137point036

    If savings are not needed, why don’t the banks (voluntarily or at the point of a gun) just create the credits which will get the economy buzzing?Have the last 6 years been a waste?

    You seem to move a lot of tax decisions to politicians. Do politicians have secret knowledge? I wish they would share it with the people they represent. We should be told. For starters, how do they explain the poor harvest from their choices in last 6 years?

  11. Peter Martin

    Well the banks have to some extent. Lending has picked up in the last few years in the USA, the UK leading to some concerns that another credit bubble may be developing in the housing markets. Banks lend when it makes sense for them to do so. This means they need to be confident that their loans will repaid. When that confidence wanes, when property or share markets start to look overvalued, they become increasing reluctant to lend. The words credit and crunch start to be used. It doesn’t mean the banks have run out of money though.

    ALL tax levying decisons are in the hands of politicians in democratic countries. UK politicians haven’t done that well so obviously there’s no secret knowledge. US politicians have done better but could have done better still. European politicians have done spectacularly badly. To a large extent that’s because, in the EZ, the’ve lost control of their economies by handing control to unelected bodies ie the ECB, the IMF , the European commission and so can no longer be considered to be democracies in the normal sense of the word.

  12. 137point036

    So the banks have their hands on the throttle; not companies, not the government. That seems a bit unfair on the rest of us.

    I do not contest that politicians make decisions. My question is what knowledge base are they tapping in to makes them the right people to make the decisions? Where did George Osborne learn the trade?

  13. Peter Martin

    Banks do what is in their own interest. When they over-lend they cause a boom and create asset bubbles. When they under-lend it all comes to a crashing stop and boom turns to bust.

    This can be counteracted by sensible government intervention of course – so it is being over-simplistic to blame the banks for everything. Interest rates can be increased to slow down lending and fiscal policy can be slackened to prevent the economy going into recession. The problem is that the mainstream of the economics profession is wedded to the idea that fiscal policy should always be keep as tight as possible and that monetary policy should be kept as loose as possible.

    Consequently we have interest rates which are too low and cannot fall any further. The sensible approach would be too gradually increase interest rates but allow the deficit to rise to stimulate the economy. Unfortunately George Osborne has learned his trade from those who reject that kind of Keynesian thinking, but there are signs that he’s saying one thing but doing another on the deficit, so knows that a bit of Keynesian stimulus doesn’t do any harm from time to time.

    The cynics would say that was because an election is due next year. I’d have to say they are probably right and it will be back to full austerity shortly afterwards.

  14. 137point036

    OK, so the key decisions are made by the banks and George Osborne. We could not be in better hands. And George has learned his trade somewhere. Just like Fred Goodwin and Bob Diamond.

  15. Guest

    And you get the NHS, etc.

    Or would you rather people pay for private healthcare, massively increasing their bills, as America shows?

  16. Guest

    Increase progressive taxes vs increasing a regressive tax. Hmm!

  17. Guest

    No, you don’t get progress and growth by increasing regressive taxes.

  18. 137point036

    OK, so in place of regressive taxes, which neutral or progressive tax finds favour with you … and delivers progress and growth? We should be told.

  19. DaveL

    How amazing! A fully funded NHS (including things like the Mid Staffs scandal) but people have to buy food scraps with the pennies left over!

    What pressure is there on government at all levels to keep spending limited? In 2013 (1) £25b was wasted on inefficient public sector procurement and poor use of outsourcing (2) £5b was paid in benefits to people earning over £100k a year.

    Tell you what, we’ll split that £30b – half a million new nurses and a few percentage points off the National Insurance rate. Brilliant for employment, brilliant for businesses, brilliant for the employed, and no additional tax increases.

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