Cutting VAT won’t work

Just about the worst tax cut they could design is a VAT cut. It’s costly on the revenue, but will have little impact on the problem. People do not feel well off. Offering them 2.5% off dearer items at a time when the shop and showroom prices are already 10-20% down is not going to do much.

It’s not fair on the poor. Essentials that make up most of the budgets of the lower paid are already VAT free. The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol. If markets do not like the borrowing figures we will lose more from the higher long term rates of interest the markets will demand of the government.

An income tax cut on low incomes would do a lot more good, giving people more cash in hand to pay off the credit card and Hire Purchase money they owe and handle the bills for the basics that are overwhelming them. Far from showing the government is in touch or in charge, a VAT cut shows just how far they have lost the plot. Whilst any tax cut is better than none, too big a cut in the wrong tax is not going to solve anything.

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60 Comments

  1. Bazman
    Posted November 23, 2008 at 1:46 pm | Permalink

    VAT is on almost everything and people on lower incomes tend to pay more as a percentage of their income in VAT. A regressive tax. Massive savings for rich people on luxury goods too. Necessary goods and services are bumped up by a huge amount due to this tax. Don't forget who last put 2.5% on VAT John! This will be massively popular.

    • Stewart Knight
      Posted November 23, 2008 at 11:06 pm | Permalink

      The poor do not pay VAT for food or children's clothing, and that makes up the vast majority of the poor income spend, so quite how you arrive at 'almost everything' is beyond me..oh hold on, now I see the big red rose next to the big red rose tinted glasses. BTW: The rise in VAT to 17.5% was an EU directive, you know, one of those things gold plated and laid in stone by Labour (people -ed)? It will have little or no effect on anything and certainly will not be popular as it will not show up as a tax cut that people can spend or save.

      You should go back to Mandelson or Campbell for advice on spin because this is a woeful effort.

      • Bazman
        Posted November 24, 2008 at 8:08 pm | Permalink

        Vat is a regressive tax and a greater burden on those poplw on lesser incomes. To say the poor only spend money on food and childrens clothes is at best naive. Like saying the rich only spend money on champagne and caviar. Thatcher changed vat from 8 to 15% in 1979 and when Norman Lamont wanted to find a way to bring the spiraling cost of the poll tax under control in 1991, he opted to raise VAT. In 1994 the Tories tried, and failed, to introduce a massive rise in VAT on fuel bills, mostly reversed by Gordon Brown in 2001.

        • Andrew
          Posted November 24, 2008 at 11:53 pm | Permalink

          VAT is an expenditure tax, based entirely on how much one spends – the percentage is equal for everyone. A regressive tax is one which makes the poorest worse off. If a poor person earns £10k a year and a rich person earns £100k a year, if they spend all their money, they both pay the same proportion of their incomes in tax, no-one is getting richer or poorer relatively, so it cannot be classed as regressive. It is only 'regressive' when their is a disparity in expenditure, which is entirely up to the individual.

          If you really want to make the poor better off, lower tax on alcohol and cigarettes (an unfortunately high proportion of their expenditure).

          An even better idea would be to raise the tax threshold of the poor.

  2. CIW
    Posted November 23, 2008 at 1:51 pm | Permalink

    What's your view on tax cuts for businesses as at least part of the solution to economic situation? Businesses provide jobs for citizens. Would a tax cut for businesses help them to continue to employ people?

    Reply: Yes

  3. Posted November 23, 2008 at 2:32 pm | Permalink

    Who said ?

    "Some of the jam we thought was for tomorrow, we've already eaten."

  4. jean baker
    Posted November 23, 2008 at 2:35 pm | Permalink

    Nulabor appears to be 'hitching a ride' on David Cameron's proposal weeks ago to cut tax 1 p and freeze VAT to assist ailing small business. Darling's since used the media to blame the banks for failure to assist ailing small firms.

    Brown's view is the equivalent of a Captain's abdication of responsibility after the 'unsinkable' ship hits the iceberg and becomes doomed ….. 'fear not fellow passengers, it's not serious, icebergs are a global problem, you know'.

  5. Kit
    Posted November 23, 2008 at 2:51 pm | Permalink

    "An income tax cut on low incomes would do a lot more good"

    Oh No! Those low income folk would payoff debts or even save money! For the greater good we need them to spend, spend, spend! But isn't that how we got into this mess in the first place…

    • jean baker
      Posted November 23, 2008 at 7:18 pm | Permalink

      Unregulated credit, not cash purchases, caused the three generational 'black hole' debts (to taxpayers).

      Many believe that had the same principles been applied to shareholders in the private sector, the person responsible would have been imprisoned for fraud and embezzlement.

  6. David Menashy
    Posted November 23, 2008 at 3:17 pm | Permalink

    2.5% off VAT is a price cut of 2.127%, not 2.5%.

    "Offering them 2.5% off dearer items at a time when the shop and showroom prices are already 10-20% down is not going to do much."

    BTW Great blog John – you're a voice of sanity.

    David M.

  7. Posted November 23, 2008 at 3:20 pm | Permalink

    But electorally it may be smarter. Everybody like lowerv taxes, the middle classes are the ones more likely to notice the details & that VAT cuts have a bias towards their expenditure & unless Labour can be nailed down to giving a rough date for ending it Mr Cameron will be in the cleft stick of either going along with it, which means he has to publicly say it is a good idea, or go into the election with a promise of higher prices round his neck.

    What he should do is denounce it in terms familiar to Old Restament Prophets forecasting disaster, gnashing of teeth & having to pay back both principle & interest & correctly pointing out that if the £200 billion a year in real terms, Labour have increased public spending we would, quite obviously, not have that problem. The history of the Old Testasment & indeed WW2 shows that people will follow leaders who do not promise goodies if they believe they are sincere.

  8. Posted November 23, 2008 at 3:32 pm | Permalink

    It won't even work for flashy wine, I've been buying my semi-flashy claret in France for years now, 2.5% of VAT won't change that. Not good for the economy of course, but people, like business when offered the choice between trading in a high or low tax area, choose the low tax location. It amazes me they choose not to see this (or in some cases accuse you of being somehow disloyal?)

    You proposal for an income tax cut (or perhaps raising the personal allowance) is clearly more sensible.

  9. Amanda
    Posted November 23, 2008 at 3:47 pm | Permalink

    Agreed, this will have very little long term positive effects. This Government either knows nothing of economics, or it cares nothing for this country and is looking for the tax breaks that will give them the biggest political advantage.

    On the first charge of knowing nothing of economics, a fiscal boost is surely only useful if it primes business investment. It also needs an atmosphere of trust, optimism and goodwill. We have none of the latter, and businesses are in cost custting mode – although there are a few measure to help them. So result of this will be lower tax receipts , devalued pound, and yet more loss of economic confidence.

    On the second charge, someone on the Coffeehouse blog pointed out that few know how much of a 'price' is VAT in real terms. So Brown can claim that falling prices (like the M&S 20% price cut, are due to him.) His main weapon now is spin and the support of major media outlets eg BBC. He only has to look like he's acting the part and the media will buid it up into the fairy story.

    The media are the second biggest threat to our county.

  10. Paul Williams
    Posted November 23, 2008 at 5:09 pm | Permalink

    As you rightly point out, reducing VAT will help those that are rich more than the poor. This is another 10 tax fiasco in the making

    • Bazman
      Posted November 23, 2008 at 6:55 pm | Permalink

      Wrong way round Paul VAT is a regressive tax helping the rich. Think about it.

      • Andrew
        Posted November 24, 2008 at 2:05 am | Permalink

        It isn't regressive, it's flat. It acts as a reduction in price and does not impact anyones incomes. It can't alter income equality therefore it can't be classed as 'regressive'*.

        *"Regressive and Progressive Taxation"- Dangerous use of language designed to alter our perspective.

        • Bazman
          Posted November 24, 2008 at 8:24 pm | Permalink

          Taxing the poor is regressive. You are expecting the poor to pay for services just because they use them.

      • Paul Williams
        Posted November 24, 2008 at 1:57 pm | Permalink

        I might have misunderstood your post, but isn't your point exactly what I said.

        • Bazman
          Posted November 24, 2008 at 8:20 pm | Permalink

          Yes it was paul. Hassled by daughter at the moment of reading.

  11. Susan
    Posted November 23, 2008 at 5:10 pm | Permalink

    I believe that VAT is an EU competence and that a British government may increase the VAT rate but not reduce it, by any amount, without EU agreement (the lowest rate, in any event, being 15%).

    If I'm correct then I can only infer that there have been late-night, back room deals done and that VAT will be increased to 20%+ at a specified future date – or, perhaps, VAT introduced on items which have hitherto remained VAT-free.

    Balancing raising the tax-threshold to a decent level (permanently) while simultaneously withdrawing tax credits and administrative costs should be an achievable Conservative target. I realise that no one policy can be seen in isolation but I think something like this deserves consideration.

    As for the PBR itself: neither politicians nor the public will have the final say; the markets will have the final verdict tomorrow.

  12. adam
    Posted November 23, 2008 at 5:48 pm | Permalink

    Osborne was suggesting a VAT cut on the Daily Politics last week.
    Havent they stolen it.

    What a mess the two parties are in.

  13. not an economist
    Posted November 23, 2008 at 6:28 pm | Permalink

    I agree entirely with what you say, but I also take the view that Brown and Darling would be aware of these criticism. For this reason I do wonder if this is a red herring designed to wrong foot the tories in some way: perhaps to encourage the Tories to prepare and concetrate their attack on such a policy proposal and then the govt expands at length on a completely different set of proposals in the prebudget speach itself, leaving the tories unprepared for the ensuing debate.

    Another reason for me thinking this is that things have been hyped up for us to expect sthg big in the pre-budget speach. A 2.5% percentage point reduction in VAT isn't what I would call big. Pathitic and innefective yes, but not big.

    Just a thought.

    • Lola
      Posted November 23, 2008 at 6:56 pm | Permalink

      Agreed!

  14. mikestallard
    Posted November 23, 2008 at 7:07 pm | Permalink

    From Westminster, a huge tax cut of 2% on VAT looks like a really big deal.
    Out here in the styx, I regret, it just floats over our heads.
    Prices seem to be falling at the moment, except that the type of wine I drink is made abroad where the pound seems to be falling even faster than the VAT.
    I wonder where the story of the 2% came from anyway. Aren't prebudget announcements meant to end in the perpetrator being sent to the Tower or something?
    Meanwhile the ship of State races toward the rocks at full steam ahead, wasting, spending and deaf. And, yer know, it is all because we reeely reely care about the poor.
    Especially at Winterval.

  15. Brian Tomkinson
    Posted November 23, 2008 at 7:21 pm | Permalink

    Whatever is announced tomorrow will be more concerned with political considerations than economic and financial ones. Some of us have argued for years that Brown was destroying our economy. How long before we get final confirmation that he has directed the printing of more money? We have our own Mugabe running this country.

  16. Acorn
    Posted November 23, 2008 at 7:30 pm | Permalink

    Have to agree with you 100% JR, VAT reductions tend to favour the higher income groups. As far as I remember, around 55% of household spending is VATed at the standard rate of 17.5%; about 5% at the reduced rate (fuel and energy mainly); about 30% are exempt rated (effectively a disguised 6% VAT rate) The rest is zero rated (food and transport).

    (Darling Bud could get rid of exempt rated and make them zero rated – you get the input VAT back – don't think he has done this since I retired.)

    All the metrics tell you that increasing the tax free allowance on Income Tax is the best way to go. AND, FOR CHRISTS SAKE, GET RID OF THE CURRENT TAX CREDIT SYSTEM.

    The HMRC has been designed to work on a YEARLY accounting basis. The DWP (pensions and benefits), has been designed to work on a WEEKLY accounting basis. Let the DWP handle ALL benefit payments regardless of which statute introduced the bloody benefit in the first place!

    [DB; read the following link from the Treasury, it explains how the government manages its debt. When Gordo arrived, he made the DMO the governments cash manager, instead of the BoE "Ways and Means" system. I think this is the bit that Mr Redwood objects too.]
    http://www.hm-treasury.gov.uk/d/bud08_debtreserve

  17. Alfred T Mahan
    Posted November 23, 2008 at 8:01 pm | Permalink

    If a 2.5% reduction is VAT is indeed the Chancellor’s chosen weapon to fight the coming recession, it’s an extremely blunt one.

    Another reason, in addition to all those listed above, why it should be avoided at the moment is this. Businesses pay VAT in arrears, so they normally hold a balance due to the taxman. This can be a sizeable sum – and I know when I have been registered for VAT myself in various lives that VAT-induced cash flow was a major element in my financial planning. Cutting the rate of VAT cuts this source of working capital (a reduction from 17.5% to 15% cuts it by about 11.5%), just at the time when one of the country’s biggest problems is an acute lack of business finance.

    I’m not against a reduction in any tax per se – on the contrary. But surely the government can do better than this?

    My suggestion (leaving spending cuts aside) would be to spend the money on reducing National Insurance. Since the biggest problem in a recession is increasing unemployment, it makes sense to reduce the tax on jobs to preserve as many of them as possible. It’s a tax that businesses pay regardless of whether or not they’re in profit, so it would particularly help companies teetering on the brink of viability. It must surely be better to prevent unemployment if at all possible rather than deal with it afterwards.

    This would also have the benefit of increasing British commercial competitiveness. In current conditions, margins are under pressure across the board and businesses would have to pass the cost saving on – thus benefiting the consumer, although I expect that Labour would only say it’s a bung to employers.

  18. Posted November 23, 2008 at 8:28 pm | Permalink

    I agree, John. It's not worth the hassle for a shopkeeper to reduce the cost of items by just over 2% in real terms. It will add to the costs of businesses who have printed leaflets and flyers with the current 17.5% rate on them. Computer software will need to be updated and any posters with the current rate printed on them will also have to be pulped and new ones put in their place.

    Of course, if it wasn't for our friends in the EU, the reduction could have been larger. Yet another reason why we need to renegotiate our membership the biggest QUANGO of the lot.

  19. THE ESSEX BOYS
    Posted November 23, 2008 at 8:31 pm | Permalink

    Bazman on 23 Nov 2008 at 12:46 pm

    John! This will be massively popular.

    WRONG..WRONG…WRONG BAZMAN!

    Listen to Uncle John. Most vatable goods are subject to regular deep-cut promotions of 15-25% so a 2.5% VAT cut will be insignificant. Yet another example of Labour being out of touch with real people.

    The day-to-day bills that impact most are council tax and energy bills and those should be more accurately targeted rather than the scattergun offensive of a VAT reduction.

    What we should really do – but may have to chuff off the EU first – is to put 17.5% VAT onto Aviation fuel to raise £10m pa, limit any tax cuts to that sum and then adopt some prudent housekeeping.

    The Conservatives should not be thwarted by talk of a 'Services Cut' but refer to their own policy as a 'Waste Cut' which is, or should be, a truer definition.

    As for John McFall – the supposedly independent chairman of the Finance Select Committee – being wheeled out again today as Labour's spokeman on the VAT issue – this is entirely inappropriate and a complaint should be made to Parliament. How can this man then sit in judgement on government policy if he is its advocate? Utter nonsense!

  20. Ronnie Stooge
    Posted November 23, 2008 at 8:41 pm | Permalink

    I agree. If say, you're going to spend £200 on a new blu-ray player, a £5 discount will make no difference.

    Raising the starting tax threshold will effect every tax payer but the lowest paid the most.

    Shhh…don't tell him though….let him get him wrong…

  21. Malcolm Dodd
    Posted November 23, 2008 at 8:42 pm | Permalink

    Re Cutting VAT won’t work.
    Agreed. John is correct.
    Note that food is zero rated – i.e. There is no VAT on food.
    Where are the 3 million homes that Mr Gordon Brown promised would be built?
    The construction industry is on its knees. Those workers need to get back to work and the way to kick-start construction is not to tax the end result.
    Simply abolish Stamp Duty on house purchase.

    HM Revenue and Customs annual receipts http://www.hmrc.gov.uk/stats/tax_receipts/table1-
    shows £13.5 billion as the anticipated stamp duty receipts for 2008-9.
    Given, Lies, Damn Lies and Statistics or today Spin, More Spin and Even More Spin it is to be wondered with the lack of sales of houses (due to the lack of mortgage finance) in 2008-9 how this £13.5 billion will be achieved.
    Note that the 2007-8 receipts were £14.1 billion.

    • Bazman
      Posted November 24, 2008 at 8:42 pm | Permalink

      VAT on Takeaway food. Luxury foods ie Jaffa cakes, and restaurant food.

  22. simon
    Posted November 23, 2008 at 8:44 pm | Permalink

    Whilst it would bring howls of anguish from many parliamentarians, what would the effect of introducing a flat tax rate of 20% be? One could either keep the 10% band or just raise the lower band to take the lower rate tax payers out of the frame completely.

  23. Matthew Reynolds
    Posted November 23, 2008 at 8:51 pm | Permalink

    Rather than a 2.5% VAT reduction I would raise the basic personal allowance by £1,500 over & above prices to say £7,900 p/a . That tax cut really would favor people the lower their incomes and they are the very people most likely to spend any extra cash which if we are seeking to beat deflation is a wise idea. To stop the PSBR being increased by this tax cut I would tell QUANGO's to cut their budgets by 12% in FY 2009-10 or face having public money taken away ( they would survive on the back of charging service users directly via fees).

    This tax cut like the VAT reduction would cost £12 billion – but my idea would not add to the PSBR as QUANGO's would cost 12% less ( bringing their cost to the taxpayer down from £100 billion to £88 billion). Rather than just give the rich cheaper luxury goods I want to help the coping classes & the poor.

    Everyone would get their taxes cut by up to £300 p/a and by moving money from the Brown client state to the wealth creating private sector you could pave the way for economic recovery.

    On top of that as a one off stimulus you could give all basic rate taxpayers a £1,000 check as funded by extra public borrowing at a cost of £22 billion from April 2009.

    From 2010-11 onwards public spending growth could be cut to zero in real terms with:-
    No more aid for places like China & India who do not need it
    An End to the New Deal and IB & JSA being replaced with one payment – that would slash economic inactivity,
    More usage of market forces to slash procurement costs,
    Civil service recruitment costs,
    Many QUNAGO's merged , axed or hived off,
    No more ID Cards or costly IT schemes
    No more farm subsidies that hurt the Third World,
    More private investment for transport and so less public spending
    EU funds with-held until their accounts can be signed off
    LEA's being curtailed with less money for them and more freedom from schools from the discredited targets system of excess testing.

    We could keep public spending growth at zero in real terms for a couple of years between FY 2010-11 and 2011-12 just to get the PSBR down. That is possible – even New Labor managed that in 1997-1999 after all ! The budget deficit could be a drag on economic recovery as could Big Government so cutting both down to size will help economic stability once a tax cut induced recovery has happened. We need to get cash into peoples pockets in 2009 as the New Year will be even worse than 2008.

    A big borrowing funded one off rebate for basic rate taxpayers & a permanent rise in the personal allowance as funded by cutting the QUANGO state down to size could make many people up to £1,300 better off . That would help the High Street via higher disposable incomes , higher sales , greater job security for people who work in retail , higher levels of confidence while by giving people more hard cash the number going bust or losing their homes would be lower possibly.

    Public borrowing & spending have got out of hand – but real cuts in state expenditure to ensure a lower budget deficit can only really happen once a recovery is underway to avoid fueling deflation. Lower VAT funded by extra national debt is insane as it gives more to the rich and by forcing shops to pass on the 2.5% price cut ( for fear of being named & shamed ) you could make deflation worse. Fiscal action must cushion the economy – not force inflation into negative territory as the dole queue tops three million.

    So George Osborne needs to offer lower taxes & spending plus a one off deficit hike now to rescue the economy in 2009 and draconian public spending restraint to balance the books in the longer term. Such a policy reflects the need for a short term boost and long term prudence and is logical & workable. It might even silence the critics…

  24. Mr Ecks
    Posted November 23, 2008 at 10:25 pm | Permalink

    I also believe this is a smokescreen. 2.5 off VAT will not be "massively popular"–it will hardly be noticed at a time when thne January sales have already started in mid November and many purchases are down 20-25% already. The only chance of any "popular" measure ZaNuLab have is to increase whats in peoples paypackets. If you are preparing for tomorrow Mr Redwood, I suggest you have a word with Cameron to ensure he is ready if Bottler shoukd reduce the rates of income tax or some other ploy.Don't let these bastards wrongfoot you. New Labour must be destroyed.

  25. Bazman
    Posted November 23, 2008 at 11:18 pm | Permalink

    No indirect Taxes. Just VAT? Any supporters?

  26. Stewart Knight
    Posted November 24, 2008 at 1:24 am | Permalink

    Just as a thought for you John, but wasn't the big issue last week also an impending problem with deflation?

    Surely a cut in VAT will stoke that problem probably worse than any other? I know VAT of itself may not affect deflation as such, but at what point is the inflation/deflation figure arrived at from year to year?

  27. Steve
    Posted November 24, 2008 at 2:35 am | Permalink

    Well done John; it's something that the BBC obviously hasn't tumbled to yet (or will ever report), and I think you're entirely correct in your thinking/logic.

    Putting it into context, if you were pondering buying a £1200 plasma tv and it ends up costing £1175, will that make you buy it?

    It's an insanely small reduction for individuals (unless you're buying a yacht or a mercedes), costs the tax payer billions, and has no effect. The retailers will simply boost their pre-vat prices to compensate (to save them having to reissue pricelists/catalogues etc), so even that 2.5% won't be passed on to final prices.

    So, it is, as you say, the worst possible thing that they could do, being massively expensive and yet having no effect whatsoever.

    And, as other people have commented, vat isn't relevant to things like food, children's clothes, or mortgages, so the help for the poor will end up being literally a few pennies per month.

    Upping the starting-threshold massively is the only fair/realistic thing to do and should be done as a permanent policy; it's simple, helps the poor, puts money into people's pockets, and would save a fortune in admin taking millions of people out of the system altogether.

    Get rid of tax credits too; just allow people to keep more of their money in the first place, and give benefits to those who need it.

    If a government took a simplifying approach, they'd end up with a fairer system which costs less to administer and makes everybody's lives easier. But labour doesn't do "simple". It just does "stupid."

    • Posted November 24, 2008 at 11:30 am | Permalink

      Hear Hear Steve!

      I have long thought that a flat rate of income tax is the fairest way of taxing all people. Yes, have the income tax threshold but at a higher level of say £10k. Thereafter all income is taxed at a rate of 15% – no tax breaks no allowances. Oh, and income tax is levied on the whole salary package to avoid company directors deferring income into share options and the like.

  28. Posted November 24, 2008 at 3:57 am | Permalink

    One effect of sales taxes which is often overlooked is that they are not always an addition to the price which would otherwise be charged. The pricing of goods and services is not always calculated solely on a "cost plus" basis, there is also a question of how much the customer can afford to pay.

    A business which finds its sales dropping will cut its prices until people start buying again. This sets the benchmark price for the goods or services in question. If that benchmark is below cost, the business will no longer offer those particular goods and services; if it is above cost, the business can continue.

    Cutting your prices to make sure you can still sell means you reduce your profit but a cut in the VAT element of that price does not necessarily lead to a further fall in price. You know you can sell at the new benchmark price so you maintain that price and use the reduction in VAT to bolster profit and bring it back closer to what it was before.

    There is absolutely no reason to believe that a reduction in the VAT rate from 17.5% to 15% will lead to widespread price reductions. It is much more likely to lead to prices staying pretty much the same but profit margins being increased slightly.

    In this way a cut in VAT would be good for business but to a far lesser extent and in a different way than the Chancellor will try to portray. It will not lead to an increased volume of sales but it will provide a small cushion against the squeezing of margins.

    To describe such an effect as giving a boost to the economy is to stretch the English language beyond reasonable bounds. It is a small damage limitation measure. Let's give it one, two or even two-and-a-half percent of a cheer. But let's not pretend that it is something it is not.

  29. Bernard Johns
    Posted November 24, 2008 at 9:50 am | Permalink

    No help for us pensioners then.
    The same old dilema. To heat or eat?
    Council Tax, fuel bills and food take, by far, the largest cut of my
    pension. To save on this VAT reduction, you have to spend in the
    first place. Pensioners don't have money to spend on red wine!

  30. APL
    Posted November 24, 2008 at 10:11 am | Permalink

    JR: "The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol."

    This is tedious. If you have lots of money, then you are entitled to spend it in any manner you choose.

    But you are right in one respect, 2 or 2.5 percent cut in VAT is a waste of time.

    JR: "It’s costly on the revenue, but will have little impact on the problem."

    We need to zero rate the UK for VAT. Then abolish the tax. This would have next to no impact on the UK revenue, since the next thing we should do is stop paying the EU £10 – 15 bn per year. Withholding the Danegeld and cutting VAT would net off nicely against each other

    • Bazman
      Posted November 24, 2008 at 8:46 pm | Permalink

      How about VAT on car tax? A tax on taxes no less. Car tax? Anyone for a fridge or cooker tax? Definitely justifies a vacuum cleaner tax!

  31. Posted November 24, 2008 at 11:00 am | Permalink

    Very much in agreement, John. IMHO, and that of the Libertarian Party, UK, is that Income Tax should be abolished and a dramatic cut in government spending, just as any household would do in a crisis, should balance it out. Let individuals decide when to spend their money. The government cannot get away from the idea that they believe they have "first call" on our earnings.

    p.s. Heard some wibble on the BBC saying that if they cut income tax people would save, but you can only get the savings from VAT if you go out and spend more. Imbeciles.

  32. Therese
    Posted November 24, 2008 at 11:46 am | Permalink

    I agree with FatBigot.
    Everyone is assuming that prices will automatically fall. I think that is far from the mark, especially where today most prices are inclusive of VAT.
    If something is selling at 99p today – you simply won't get the full VAT reduction – at best, our supermarkets may take 1 or 2p off but everywhere else?
    Just shows how out of touch Labour is with the realities of making money. As ever, they only know how to make cash by taxation.

  33. Posted November 24, 2008 at 2:02 pm | Permalink

    I fear with this critique you may be leading the Conservative party towards the wrong approach.

    Arguments over the exact design of the fiscal stimulus are unwinnable. At best it will be 'he said, she said, he said'…and no-one really knows how to judge – including the experts. In fact you are wrong about the proportion of low-income spending that is zero-rated – it's less than you might think, and it is more likely to be spent in the domestic economy. You should also bear in mind that VAT changes can come in straight away, but income tax changes have to wait until April. What will the Conservatives do when Brown produces figures that show that VAT cuts are not regressive? Arguing about which type of tax cut or spending pledge will best refloat demand will always at best end in a 'score-draw' – and that isn't good enough for the Conservatives at this time, because it leaves Labour unscathed and they have the initiative.

    Likewise, an attack on the 45% top-rate tax will be equally misguided – a toff trap laid for the Tories by the calculating spin doctors of new Labour. It is an irrelevant gimmick and should be dismissed with contempt and not discussed at any length.

    The real challenge from the Conservatives should be on the following:

    1. The complete absence of any plan to get the economy back into balance and to eliminate a vast structural deficit – they need to be saying now where the public spending cuts or tax increases will come from. Arguing about the fiscal stimulus is like handing the keys of the pub to a bunch of drunks and arguing about what drinks will intoxicate us the quickest. Yes, it will be great fun for a few weeks – or even up to an election – but then a lot of misery, pain and failure will follow. The plan is to bribe us with our own money before the election – normally you can't get away with that, but in this crisis they feel they can do anything.

    2. The risk that the deficit simply will not attract enough lenders, the pound will fall further and interest rates will have to rise.

    3. The state of the real economy – massive losses in savings and pensions as our stock market has fallen by 50% in dollar terms in under a year, unemployment, repossessions – and Brown's responsibility for our position being weaker than other countries. the fiscal stimulus is rearranging deckchairs, fiddling while Rome burns etc.

    I completely agree about the EU spending, but running that argument now will lead you and your followers off in to the darkened room marked 'bonkers and irrelevant'.

    Best of luck from a life-long Labour supporter that has turned to the Conservatives in utter disgust and exasperation at Gordon Brown, but fears the leadership is not making the impact it should in the midst of such terrible failure. Your diary is almost always an inspiration.

    MD

  34. THE ESSEX BOYS
    Posted November 24, 2008 at 4:18 pm | Permalink

    Oops – sorry re our blog last night about putting VAT on aviation fuel – we meant £10 BILLLION extra revenue and not £10m of course – at least that's the figure we have seen quoted.
    A fiver or so on an air ticket seems reasonable to us because it completely excludes the least well-off. Not sure OF the EU implication – another reason for ploughing our own furrow?

    This Redwood blog is about the most thoughtful and mature one we've come across – excellent contributions and sound common sense!

    As we are an hour or so from Brown's attempt to dig himself out of the hole it's taken him so long to dig we remind us all of 2 of his quotes to a City audience in recent years…

    26th SEPTEMBER 2005
    "Britain uniquely has continued to grow. In any other decade a house price bubble would have pushed Britain from boom to bust."

    21st JUNE 2006
    Your dynamism has led Britain to innovate in the most modern instruments of finance".

    AND WE SHOULD THINK HE'S GOT IT RIGHT TODAY!!

    • Bazman
      Posted November 24, 2008 at 11:18 pm | Permalink

      I'll Just fly to Africa in my private jet to avoid your 'unjust' European tax on aviation fuel. Just like driving the Rangeee (Range Rover) or tow-rag (Touareg/Cheyenne ) to the cheapest petrol station. Nice one anyway. It's the thought that counts boys.

  35. Iain Ross
    Posted November 24, 2008 at 7:19 pm | Permalink

    Thanks Darling,
    As a small business I'm now over 1000 pounds worse off a year as I'm on the Flat Rate Tax scheme. Nothing mentioned on the news about that I see.

  36. Bazman
    Posted November 24, 2008 at 8:15 pm | Permalink

    Sorry. No direct taxes just VAT. Any supporters? Justify it rich boy!
    If you have bought anything necessary like car or boiler parts you get the price and are then shocked by the 17.5% VAT charge. These type of goods and services are never sold in a SALE! So the Tesco argument is false.
    So indirect or direct? All you flat raters need to wake up. This usually works in countries like Russia where tax collection is a real problem and ludicrous lengths are made to avoid any tax.

    • Andrew
      Posted November 24, 2008 at 11:18 pm | Permalink

      Flat rate on income is perfectly acceptable as long as the tax paying fresh-hold is high enough. If poor people are exempt of the tax they are capable of buying their necessary goods.

  37. Jason
    Posted November 25, 2008 at 3:49 am | Permalink

    I agree, you should make more of deriding the cut in VAT proposed by the govt. Cutting income taxes for low earners would help much more – allowing those you say to reduce debt burden at the margin and allow them to buy more essentials. Someone should also tackle Crash Gordon on the removal of the 10% income tax band – the resultant further tinkering and complicated claw backs designed to mitigate the adverse public reaction etc. It can all be linked quite nicely to portray a picture of a government acting totally at odds to public perception and wishes whilst inviting economic disaster for the population.

  38. Steve
    Posted November 25, 2008 at 5:01 pm | Permalink

    I think I've worked out the governments master plan!

    The recovery will be led by web designers changing the VAT on every web site selling to the UK, and printers reprinting stationary with the new VAT rate.

    Just as soon as every business has updated everything, they'll change the VAT rate back to 17.5% and all those web designers and printers will have another glut of work to do.

    Seriously though, in effect if businesses dont pass this cut on, then they effectively increase their margin, and therefore profit, which would work the same as cutting any other tax effecting businesses.

    But for those who cant pay the mortgage and the bank wants the overdraft paid off by Wednesday it will be no help at all.

    Basically a pathetic attempt and a no loose situation for labour, if it works they get all the glory and another term, if it goes wrong they get to blame the conservativs for huge tax rises in the next parliament

  39. Posted November 25, 2008 at 6:13 pm | Permalink

    Frankly, this pathetically small reduction will do NOTHING to encourage more sales.

    Questions must surely be asked of the government's advisors role in this VAT change. Did they consider for one moment that almost every company in the country will have to instruct computer companies to change every single item to reflect the change in VAT . It will be a nightmare to all of the small mail order companies who are going to be wholly dependant on this coming week's orders in the run up to Christmas. Are they expected to re-print catalogues?? What about companies like Amazon and Argos !!! The list is endless.

    With small businesses already struggling financially, these additional costs (which have not been budgeted for), could lead to the companies collapsing.

    Our business runs a website called: http://www.bailiffadviceonline.co.uk which offers advice to the public if they are faced with a visit from a bailiff.

    To date we have probably dealt with around 6,000 queries and until the last couple of months, we only ever received enquiries from the public concerning unpaid council tax and unpaid parking tickets.

    However, it is STAGGERING that in the past 2 months EVERY OTHER query is from a small or medium sized business who are unable to pay their Business Rates and they now have a bailiff threatening to remove all of their assets and thereby their ability to trade out of this recession. Just today we have had enquiries from a hairdressers, 4 restaurants, a garden centre, garage, and 3 public houses !!

    A little unknown fact is that last year local councils obtained over 3 MILLION Magistrate Court Summonses against individuals and businesses for arrears of Council Tax and Business Rates !!

    With the severe effects of the recession this figure will certainly increase and frankly the amount of money that the government is paying for this VAT change would have been far better spent in freezing council tax and withholding enforcement against vulnerable non payers and small businesses.

    PS: Sorry for the long post….

  40. Alan Wheatley
    Posted November 26, 2008 at 2:49 pm | Permalink

    The more you look at the VAT reduction the less sense it makes: uncertain benefit and certain admin burden.

    Anyone know what happened when VAT went up from 15% to 17.5%? Did the reverse of what Darling is hoping for now happen then?

  41. Andy
    Posted November 28, 2008 at 6:48 pm | Permalink

    Terrible idea – the vat cut will in the majority of instances simply not be passed on by retailers, who will mnot go to the expense of repricing for a 13 month period.

    "Hornby" the model rail, Scalectrix and other Model line makers were about to increase their prices, this has now been cancelled to April '09 and the VAT reduction will cover it instead.

    The Government are going to get less receipts from business but by the sounds of it not being passed on. The likes of Debenhams, BHS etc say they are running 20% – 30% sales anyway so the VAT reduction would make no noticeable difference.

    Builders and Plumbers have also indicated on interviews on News programs that it will not be passed on, due to time and extra costs for them involved.

    Who on the 1st December will start the VAT cuts so that others follow?
    Not the small shops thats for sure.

  42. ratatosk
    Posted December 1, 2008 at 11:28 am | Permalink

    "The biggest gains will be for those who buy expensive wines, flashy cars and use lots of petrol."

    So are you suggesting we should raise VAT to 20% instead? If a 2.5% decrease has no impact, it must be the same for a 2.5$ increase?

    reply: No, I am not proposing that. A 2.5% decrease will have little impact for the reasons I have set out, but tax increases in this climate would be another reason to put off buying.

  43. ratatosk
    Posted December 1, 2008 at 12:00 pm | Permalink

    I think commentators are forgetting the cumulative benefits of paying less VAT. If a plumber does work for £100.000 over a year, he has received a £2.500 cashback. If the free competing market works, this will be passed on to consumers. The more VAT work done, the more cashback a trader will effectively get.

    I'm just surprised that a Tory will claim that lowering of VAT has no other effect than annoying retailers in relabeling price tags on goods…

  44. Steve
    Posted December 1, 2008 at 2:04 pm | Permalink

    ratatosk I think you miss-understand the concept

    Old:
    Pumber does £100k net work +vat (£17.5k)
    uses parts £10k net + vat (£1.75K paid through wholesaler)
    pays to VAT directly £15.75k
    total profit £90k total vat £17.5k

    New:
    Pumber does £100k net work +vat (£15k)
    uses parts £10k net + vat (£1.5K paid through wholesaler)
    pays to VAT directly £13.5k
    total profit £90k total vat £15k

    This has made no difference to the plumber UNLESS he does not pass on the VAT reduction, but the chancelor urges him pass the reduction on to customers

    like the idea of cashback from the tax man though 🙂

  45. Steve
    Posted December 1, 2008 at 2:50 pm | Permalink

    ratatosk

    Realistically cutting VAT by this amount makes only 2% reduction to the retail (or VAT inclusive) price of something.

    you seem to forget that VAT is a tax on buying, collected by the seller on behalf of the revenue and customs, NOT a tax on the seller.

    this means that something that retails for £10 effectively costs £8.50 and contains £1.50 VAT, the reduction means it still costs £8.50 but now contains £1.30 VAT

    No difference to the retailers, appart from huge costs of passing the reduction on. With retailers already offering reductions of 20% and sometimes 40% it is a neligible reduction.

    This is going to cost in excess of £12billion, it surely would have been better for the government to underwrite an insurance on B2B credit sales (as have the French government) and therefore keep the wheels of commerce turning.

    What I am seeing at the moment is business who supply on credit terms having credit control issues (not getting paid) and therefore they are unwilling to take on new business unless it is cash with order.

    Very few businesses can actually pay cash with order to all suppliers, and it itself contains risks, what if the supplier goes bust before they deliver the goods? You've paid your money and got nothing.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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