• November 2008
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VAT’s Wrong!

I notice various media sources, amongst them The Times reporting on the call by The Centre for Economics and Business Research for a 5% reduction in the standard rate of VAT in the UK.

I heard various economic ‘experts’ blathering on about it on the broadcast media yesterday. They all seem blissfully unaware that Mr. Darling could not unilaterally reduce VAT by this amount. The minimum standard rate of VAT in the EU is 15%. The UK is bound by this minimum.

Even if the government had this power it would have a very limited impact. Hard pressed retailers would be unlikely to pass on the savings for example. They would justifiably see it as a cash injection during particularly hard times. I have a feeling that the service sector would view it in the same way and probably manufacturing would take the opportunity of a hike in prices of somewhere around, hold on let me think about this, 5%.

It would therefore be inflationary as these things are calculated on a net price basis.

VAT is an unfair non-progressive tax. By non-progressive I mean that everybody pays the same rate. Income tax is progressive i.e. the more you earn the more you pay. However this is not the time to reduce VAT even by the allowed 2.5%. The result of this would inevitably be a hike to 20% or even 25% in the future.

Humbly once again, I direct any passing economists or chancellors to my own suggestions for a boost to the economy via VAT.

Whatever they do I have the feeling it’s too little too late. I’ve lived through two recessions. A slump will however be a completely new experience.