VAT is a regressive tax because the poorest end up paying more. And the Tories won't rule out an increase
Labour has launched a new poster campaign warning that a Conservative government could put up VAT. I’ve not actually heard the Tories say they will put up VAT but, as was recently reported by Left Foot Forward, back in October Tory Party chairman Grant Shapps refused on the Daily Politics to rule it out:
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
Nor did the Conservatives rule out putting up VAT prior to the 2010 election – and up in went as soon as they came to office. Thus Labour’s warnings are not without substance.
VAT is a regressive tax because the poorest sections of the population end up paying more as a percentage of their income than the well off – the proportion of an individual’s income taken by the tax falls as they move up the income scale. As the excellent Richard Murphy has written:
“VAT is intently regressive – meaning that the burden of the tax falls much more heavily on low earnings households than it does on those with higher income.”
Even the Office for National Statistics has pointed out that direct taxes are progressive whereas indirect taxes (such as VAT)…
“Have the opposite effect to direct taxes taking a higher proportion of income from those with lower incomes, that is, they are regressive.”
Which means that Labour’s campaign poster is not as scaremongery as it looks at first glance. Or at least it isn’t as scary as an increase in VAT, a very real (and very regressive) possibility under the Tories.
James Bloodworth is the editor of Left Foot Forward. Follow him on Twitter
13 Responses to “Why the Tories really could put up VAT – and why it matters”
Jack
Cameron ruled out rises to VAT in PMQs this week in response to a question from Miliband. When Cameron asked if the Labour Party would rule out increases to NI, Miliband didn’t answer.
Leon Wolfeson
They already did so, to be fair.
(Or rather, they’ve ruled out raising the base rate)
Gareth Hunt
“income tax is progressive, VAT is regressive”
The IFS argues that the lower income individual gets a proportion of their income from the state. This can be in a multitude of different ways – from JSA to Tax Credits. It is an overestimation to argue that the poor pay more indirect taxes. If you take out this subsidy, then the proportion is misleading and meaningless.
Leon Wolfeson
Except the basic cash for living can’t be taken out.
Gareth Hunt
Well “basic cash for living” is pushing it a bit. We have been overly generous in terms of what we hand out. The reality is that some of these people are living in luxury – including one family on a Channel 4 News snippet who had PlayStation 4s, iPads and iPhones. People with expensive luxury items like this who are “struggling” are spending their money on the wrong things. This is part of the problem. We need to use prepay cards and other methods to help people focus their spending needs on the important and crucial purchases.