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