From the TUC

The Conservatives and VAT – the tax they love to raise

07 Apr 2009, by in Economics, Society & Welfare

I see that the Conservatives have decided that the cut in VAT is a ‘con’ because rich people gain more from it than poor people. Well, in a sense, that is obvious: rich people have more money to spend than poor people, so they pay more in VAT.

But if you care about whether a tax is pro-poor or not, the important question is: what proportion of people’s income does it take?

People in poverty have no alternative but to spend nearly all their income, so the proportion of their income that VAT accounts for is quite high. The Office for National Statistics produces a useful table showing the effect on the distribution of income of benefits, direct taxes and indirect taxes. If you divide the population into quintiles (fifths) by their income, the original income of the richest quintile is 15 times as high as that of the poorest quintile.

If you then take benefits into account (gross income) that ratio falls to 7:1.

If you take direct taxes (such as income tax and National Insurance Contributions) into account the ratio falls to 6:1.

And then if you take indirect taxes into account (VAT, but also taxes on tobacco and alcohol etc) the ratio rises to 7:1.

(After taking benefits in kind (like schools and social services) into account the final income ratio is 4:1.)

Another way of showing this is to look at what proportion of their disposable income indirect taxes take for each group:

1st (poorest) quintile 31.2%

2nd quintile                22.5%

3rd quintile                 20.0%

4th quintile                 18.6%

5th (richest) quintile   13.4%

A natural conclusion from this is that a progressive tax reform would shift the emphasis of taxation from indirect taxes to direct.

So it isn’t surprising that the old nasty Tory party favoured moves in the opposite direction.

Back in those days, VAT was the tax the Tories loved to raise and hated to cut – before the 1979 general election the main rate of VAT was 8%.

During that election, Labour campaigned on a Tory threat to double the rate of VAT. (It was prominent on the Daily Mail’s ‘Labour’s Dirty Dozen’ splash – a dozen lies the Labour Party were supposedly telling during the election, most of which proved to be true quite soon after the election was over).

Straight after the election, the 1979 Budget raised VAT to 15% so they could cut top rate IT from 83% to 60%. Then the 1991 Budget raised it to the 17.5% rate we have now.

(NI Contributions are the other tax the Tories loved, with an increase from 6.5% [main rate] in 1979 to 10% in 1994).

If the Conservatives were now a progressive force they would have reconsidered their love of VAT, so the latest attack on the VAT cut speaks volumes.