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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33 Responses to “Top Tory’s VAT plan would leave poorest 30% worse off”

  1. Sarah H

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  2. Richard Johnson

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  3. Max p

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  4. Elaine Bagshaw

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  5. Vic Mo

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  6. Michael Hanley

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  7. Small Green Bear

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  8. Vicky Stonebridge

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  9. charlie whelan

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  10. Andrew Lomas

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  11. Chris Smith

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  12. uberVU - social comments

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  13. Ben Folley

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  14. Adam Bienkov

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  15. topsy_top20k

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  16. paul crichton

    RT @leftfootfwd: Top Tory's VAT plan would leave poorest 30% worse off http://bit.ly/aH2gHS

  17. Stuart Madewell

    Why haven’t you rebutted the Toreis NICS claim? Why haven’t you debunked their claim that its a ‘Tax on Jobs that is killing the recovery’? Who is Gershon and are his proposals that Cameron and Osborne base their claims on credible.

    Just dismissing the buisness leaders who wrote in support of the Tories as privaledged or deluded won’t cut it. Increasing NICS increases the costs of buisnesses.

    You have to show that it is necessary and it is trhe right thing to sdo whilst at the same time reecognising the difficulties it will create.

    You also have to explain why increasin NICS instead of VAT is both fairer and sensible from an economic point of view.

    Attacking Kit Malthouse may be fun but is beside the point.

    Its time to raise your game Will

  18. Anon E Mouse

    Will – Don’t stoop to telling lies – you’re not Shamik Das. There is no Tory plan to increase VAT and you know it.

    It’s over Will and you should be acting in a truthful manner and considering the left in the future in Britain.

    Stop supporting the unsupportable…

  19. Henry

    Anon: in 1979, the Tories said they had ‘absolutely no intention of doubling VAT’ (which Callaghan said they’d have to do to pay for their plans), saying it was a ‘Labour Lie’. In a amazing bit of devious political footwork, they then increased VAT from 8% to 15% as soon as they were elected. Why should we believe them now?

    In his memoirs, Geoffrey Howe (the Tory Chancellor after 1979) described this as ‘part of the small change of election campaigning’. You’ve been warned.

  20. SteveTaff

    Top Tory's VAT plan would leave poorest 30% worse off | Left Foot … http://bit.ly/d5kpLk – Freedom

  21. Bill Kristol-Balls

    @ Henry,

    There’s a poster there somewhere –

    The Tories Say They Will Cut The Deficit, Spend More On The NHS And Reduce National Insurance….

    HOWE Will They Do It.

    Put in a big picture of Geoffrey Howe with a line about him doubling VAT and Robert’s yer fathers brother.

    Better than the Cameron as Hunt effort imo

  22. Will Straw

    Anon – good to have you back. I’ve missed you. I don’t think anything in this article is inaccurate. A top Tory made this daft proposal yesterday and that’s what the blog is about. The Tories are saying they have “no plans” to raise VAT but Henry’s points are very well made.

    Bill – Genius idea. I’m going to try and get that made up.

  23. Anon E Mouse

    Will – You banned me for telling you to bugger off as I remember but in any event if we are to believe what we are told then Labour will give us a referendum on Lisbon…

    You get the point…

    I’m also glad you’re no longer ignoring me dude! Thanks man.

  24. Shamik Das

    “Will – Don’t stoop to telling lies – you’re not Shamik Das”

    Anon, libel me again and you’re out.

  25. Will Straw

    Anon,

    We want you on here adding your strongly held thoughts and analysis of our pieces but please do treat our authors and other commenters with respect. It’s not too much to ask.

    All the best,

    Will

  26. John77

    Will Straw,
    If you didn’t think anything in that article is inaccurate then it can only be because you stopped thinking while you penned that reply. The ONS data that you cite quotes a figure of 7.9% for the percentage of spending by the bottom quintile absorbed by VAT. ONS THEMSELVES state that the income figures for the bottom quintile are seriously understated because their data on income omits two-thirds of the tax credits paid by HMRC, of which the large majority (I hope!) goes to poorer households, so the income of the lower deciles is understated and the %age absorbed by taxes is overstated. VAT is less than 30% of the tax paid by the each of the bottom two deciles. In fact, according to ONS, the direct taxes paid by the bottom quintile exceed the amount that they pay in VAT! Kit Malthouse is not a “Top Tory” – second division at best.
    The Conservative party in this country has since its creation in the Nineteenth Century always supported the concept that taxation should be based on the ability to pay. The flat tax philosophy is supported by the “Conservative Party” in the USA which is unconnected to the British Conservative & Unionist Party.
    Apart from the last couple of points, I have told you all this before. You are too young to be suffering memory loss due to Alzheimer’s disease, so why are repeating claims whose errors I have already explained to you?

  27. John77

    Sorry – typo “omits two-thirds” started off as “only includes two-thirds” and should read “omits one-third”

  28. Will Straw

    John – You seem to be arguing two things at once. First, Malthouse’s idea wouldn’t be so bad, after all. Second, Malthouse is a crank and the Tories have always been committed to fair taxation. On (1) are you seriously suggesting that moving towards more VAT wouldn’t be deeply regressive? On (2) Malthouse is one of the most senior Tories in office in the UK. And if flat taxes are an unBritish idea, why did Osborne flirt with them in 2005?

  29. Liberal Conspiracy » Tesco rejects Tory National Insurance campaign

    […] Many Conservatives have instead touted increasing VAT, which would disproportionately hit poorer households. […]

  30. John77

    Will,
    Diversionary tactics do not explain your apparent memory loss.
    I have no idea whether or not Malthouse is a crank because I have never met him.
    Malthouse is not in an elected office. There are roughly 200 Conservative MPs (yes, they are still in office) more than a score of County Council leaders and a hundred or so (unlike Labour ones there are too many to count in the middle of posting) district or metropolitan council leaders. So he is closer to Hartlepool United than Blackburn Rovers.
    My previous comment is not, as you try to suggest, self-contradictory. The UK Conservative and Unionist Party (not being totally insane) has always included ability to pay as an essential parameter in taxation policy and, while switching totally to direct taxes has worked rather well for Bermuda, it is quite happy with taxing the rich at a higher rate than the poor – in general you might notice that, unlike New Labour, it tends to avoid direct taxes on the poor. On the other hand, while not endorsing the idea that we might copy Bermuda, I was pointing out that you had GOT YOUR SUMS WRONG AGAIN.
    You seem to ignore the zero-rate tax on most “necessities”; VAT is, in reality, mildly progressive (in poor countries UK VAT rules would be significantly progressive); the progressive nature of VAT is concealed in the ONS figures by (i) the reference to a year where mortgage payments were an unusually high percentage of income and expenditure for the higher-income groups (ii) inclusion in the lower decile groups a significant number of people excluded from means-tested benefits because they had savings: the bottom decile paid over 70% of gross council tax assessment and the next decile paid over 65% – as exemptions include student households as well as those on means-tested benefits that implies that significantly more than 705 of the bottom decile and more than two-thirds of the next decile had low incomes because the Labour government made a policy decision that they should live off their savings. Those who paid stamp duty on house purchase were not living on the breadline, nor were those who paid EMPLOYER’S national insurance contributions.
    I do not know why Osborne flirted with flat taxes as I have never met him – maybe you should ask him, you are much more likely than I to meet him: it’s more than ten years since I last discussed fiscal policy with a Finance Minister – but Tony Barber’s idea of a guaranteed minimum income to cover basic needs and a flat tax rate of, say 30%, on all other income does have its intellectual attractions (provided that we do not get a million Sarah Palins as a side-effect) and it would be far better than the 71% or 81% effective marginal tax rate on low-paid adults – no total destitution, no disincentive to work because the non-tax-deductible traveling costs exceeded the net after-tax salary, etc etc.
    I do not advocate a move just to indirect taxes but VAT is NOT, nor would a move to it be, deeply regressive as anyone who looks at the figures and can do the sums I learned to tackle when I was 7 can tell you. The most regressive tax is tobacco duty (as a lifelong non-smoker, I feel disqualified from commenting further).

  31. The progressive case for a rise in VAT | Westminster Blog | FT.com

    […] or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth […]

  32. To defend the cuts, Labour must be clear about the size of government | Left Foot Forward

    […] or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax. As the Political Climate blog points out, “recent data […]

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