Is raising VAT to 20% fair?
The chancellor George Osborne is claiming that his budget is ‘tough but fair’. The centrepiece of the budget is the raising of VAT. It will rise from its current rate of 17.5% to 20% in January. This, or some other equally severe tax rise, obviously needs to be done in order to help plug the hole in HM Government’s finances. But is a rise in VAT the fair way of doing it?
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Counterproduction to nuturing the economy engine of the nation
When taxes rise, business spends less on people.
When taxes rise, mobile (typically well-off) people will simply move to a cheaper tax zone, resulting in even much lower revenue.
When taxes rise, the economic multiplier gets reduced and available investment to infrastructure improvement shrinks.
This depends on the level of tax; the reasoning behind imposing taxes(in this case strengthening the economy: thus innovation:therefore a rise in G.D.P and so in conclusion more transactions in economy and the exact opposite of what is predicted on the left).
There are no hard and fast rules in Economics. Using different models one acquires different predictions. The question is really of whether a 20% tax increment is good or bad.
For that I'd have read a bunch of finance/economist articles; go through boring statistics and once I do I'll get back to you on this.
People can plan their budget
With VAT, the cost of all goods will go up. VAT is like a hidden tax in the fact that when we see an item for sale, this price already includes the VAT. Therefore all we will notice is the 5% increase in the cost of goods. This tax is fair because people can calculate easily and budget accordingly. This is as opposed to income tax whereby people often do not understand what they should pay and how much money will be taken off of them for the work that they have done that week. This is especially true for those of poorer backgrounds. VAT is easier to budget on than income tax. Therefore this tax is fairer for everyone.
But the budget for those on poorer income will spend more on VAT than those on higher incomes. It is estimated that low income families on average will spend 12% of their disposable income on VAT. This is compared with 7.6% for average households and only 5.9% for the highest earners of the country [[http://www.guardian.co.uk/uk/2010/jun/21/budget-raising-vat-george-osborne]]. How can this be justified on the basis that it allows people to plan? If we had a fully comprehensible income tax system this too would be viable to budget on!
The wealthy will not be able to obviate this tax
The thing about any other form of tax is that it can be obviated by those in the higher income families. They will either know themselves how to abuse the system, or they will be able to hire someone who does know how to obviate the tax. VAT however, is close to unavoidable. This tax is added immediately to the goods and so anything purchased in the UK already has the tax attached to it. With the wealthy being unable to avoid this tax in a disproportionate rate to the poor, this tax is fair.
They would be able to avoid this tax in a disproportionate rate to the lower classes, and quite easily (and enjoyably so). The easiest way to avoid tax? To go on holiday and take advantage of duty free. Who goes abroad the most often? The wealthy. Therefore, they would be able to avoid VAT on products quite easily and at a larger rate than poorer families.
Poor families will suffer the most
It may appear on the face of it that a VAT increase is necessary but the Government is failing to take into account the dramatic affect this increase will have on the poorest members of society. Deputy Leader of the Labour Party, Harriet Harman voiced her criticisms of the increase yesterday stating raising VAT "punished the poorest most" meaning that pensioners, for example, "had less money in their purses". [[http://news.bbc.co.uk/1/hi/business/10373992.stm]] The increase in VAT could end up costing UK households an extra £425 per year [[https://www.talktalk.co.uk/money/guardian/news/2010/06/21/2010-budget-raising-vat-to-20-would-cost-households-163425-a-year.html]] and with unemployment at record levels this is going to force many families into poverty.
It will not have escaped anyone’s attention that we are currently in the middle of a recession. We need to increase our budget deficit and raising VAT is a necessary weapon to fight this economic crisis. In May of this year the European Commission forecast that the UK deficit for this calendar year would rise to 12% of GDP, the highest of all 27 EU nations and worse than the Treasury's own initial forecasts [[http://www.guardian.co.uk/business/2010/may/05/uk-budget-deficit-worse-than-greece]]. £4 billion will be raised for every 1p rise in the main rate of VAT and this can be used to reduce the deficit and re-establish the economy.
It is a fair increase, especially when one considers that the UK's 17.5% VAT rate was the lowest standard rate of ANY major EU member. In fact, the European average is higher than the proposed increase at 21.3%. It is also useful to compare the dire situation in Greece and the steps taken to ensure economic recovery i.e. raising its VAT rate from 19% to 23%. Everyone in England will bear the burden of the increased rate equally and this is a necessary burden in the current climate.
VAT applies indiscriminately.
It is unfair that out of all the taxes, VAT is the one which is raised. This tax does not take into account people’s wealth or earnings. Everyone will pay this flat rate of 20% on all of the goods they buy. The rich will pay the same percentage and the poor will pay the same percentage. This tax is not means tested like other taxes. Therefore this is an unfair way for the Government to attain extra money for the public purse.
Surely this indiscriminate tax is the fairest, for the very reason that it applies indiscriminately! Is that not the mark of fairness? Rather than charging differing amounts, we charge people based on the price of the product they buy. Let us not forget that the wealthier of people will buy more expensive items and will therefore end up paying more tax anyway!
We should instead raise income tax.
This is a typically Conservative idea that the Liberal Democrats have moseyed along with. Yes, we need money for the public purse. This is due to rich bankers gambling. What should we do? Raise the VAT so even the poor suffer? Of course his is not fair. Instead the income tax should be increased. That way the more you earn the more you pay, rather than a flat rate that will equally affect everyone. Raising the tax brackets will mean that the bankers are punished more than the poor, and are made to pay more to recuperate their loses.
Those who earn over around £40,000 already pay double the amount of tax than those who earn less than that sum. How could it possibly be fair to increase the rate of this tax so that the people who have earned more money in a year pay an even more extortionate amount of tax? This would result in a greater amount of unfairness than the raising of the rate of VAT inline with most other EU countries.
Retailers will be hit
Retailers are just getting over one of the worst retail periods in living memory. During the recession, people had low confidence in the economy and so they spent less money. This meant that retailers received less money. This lead to them reducing the number of retail staff, this lead to people having even less money to spend and so the spiral continued. Now, just as we are seeing an increase in spending, just as we can see retailers making good profits again. Just as the economy is picking up what are the Conservative Government going to do? They are going to give retailers a choice. Retailers can either absorb the rise in VAT or make fewer profits, or they can pass on the rise in prices and see fewer customers through their doors. This is certainly not fair on retailers who are just achieving recovery.
This point highlights that there is a choice that retailers have. The can either absorb the cost themselves, or they can pass the extra tax on. This is fair; business is all about anticipating the market and making risky decisions. This is one of those occasions. This is in comparison to income tax where such choice is not availed; to anyone.
Could result in job losses for already low income families
When the retailers profit decrease, what will their instant reaction be? Cut expenses. Hat is the easiest expense to cut? Part time or low paid members of staff. These are often single parents. These workers take on day time shop roles while their children are at school. Being part time, they would be the easiest members of staff to make redundant as they would receive less redundancy pay and it would be their workload which would be decreased. This is another way in which raising VAT instead of income tax directly adversely affects the lower classes more so than those who are better off.
Raising income tax would have had much the same affect. People would still spend less money. Retailers would therefore still have to make redundancies. The redundancies would still be more likely to be the shop floor staff; the lower classes. This is not the tax being unfair but the way the system works being unfair.
What do you think?