Friday, 26 November 2010

The IFS answers… Is increasing VAT progressive?

Apparently yes... though my personal opinion is that this is a perfect candidate for John Rentoul's series.

I believe the main argument for it being a progressive tax is that those worse off spend proportionally less of their money on products with VAT attached to them and as such an increase in VAT will cost them proportionately less.

I can see this argument however I don't think this takes into account the actual effect on those lowest earners.

Low earners spend proportionately less on VAT related products because they have less money.  As a result they are on strict budgets, with many spending exactly what they earn each week/month/year and others spending more than that by utilising credit.

Higher earners however have a lot of discretionary spending and as a result are able to save money.  

I would argue that as a proportion of disposable capital available to spend (including income and capital reserves once essential expenditure is taken into account) a poorer person will be spending proportionally more on products with VAT than a more well off person.

Those living on a shoestring as a result are likely to have to forgo purchasing particular products as the rise bites and prices increase out of their range.  Those better off will easily be able to absorb the rise, hence it cannot be progressive.

I still think the Coalition (capitalised according to grammar Nazi John Rentoul as it has been around for more than 6 months) is doing some very positive things for the country but portraying an increase in VAT as progressive in my opinion is completely wrong, no matter what statistical data is thrown at it, the substance of the rise is the material effect that it will have on the real people who will be effected.

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