Top Tory’s VAT plan would leave poorest 30% worse off

Top Tory Kit Malthouse wants direct taxes replaced with VAT. The policy would mean the poorest paying 30% more in tax while the richest got a 9% tax cut.

Boris Johnson’s deputy mayor, Kit Malthouse, yesterday suggested that direct taxes should be replaced with VAT. The policy would result in an astonishingly regressive shift in the tax system.

In yesterday’s Times, Malthouse wrote:

“Whichever way you look at it, cash is on the way out, and this means an indirect, universal sales tax could be on the way in, as a replacement for all direct taxes. The amount of tax collected may well be the same, but the big benefit would be an end to the mindless game of cat and mouse among politicians, corporate Britain, the Inland Revenue and the long-suffering public.”

The wisdom of the policy has been questioned by Paul Waugh, Next Left and the Daily Mirror but the full horror of its regressive nature is only just becoming clear. Analysis carried out for Left Foot Forward by Howard Reed using ONS data shows the distributional impact of replacing direct taxes such as income tax and employee national insurance with VAT. The chart shows that the poorest families would be hit with a 30 per cent tax hike while the richest would face a 9 per cent tax cut. Reed estimates that VAT would have to rise to 55 per cent to cover the loss in income tax and NICs.

Malthouse has form on hair-brained tax schemes. In 2004, he promised that Westminster City Council could stop charging council tax by 2012. VAT is popular with conservatives since it fits with their flat tax philosophy. Earlier this parliament, George Osborne wrote:

“Flat tax scores highly on the age-old principles of good taxation, famously laid down by Adam Smith, who said that taxes should be efficient, transparent, simple and fair. They are easy to collect. The amounts charged are predictable. The burden on companies and individuals is low.”

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