VAT vs Income Tax

Many people think that taxes on what we buy are fairer than those on what we earn. Focus groups have suggested that because we choose what we buy it’s fairer that we are taxed on it rather than our income, which we have no choice about.  The latest person to advocate for a more consumption based tax system is Paul Kirby of KPMG, formerly head of No10’s policy unit. He suggests that the UK should get rid of its income tax and raise the revenue instead through raising VAT to 33% and removing all VAT exemptions. According to him this would give people more choice, make the economy more sustainable and reduce the amount of debt people take on. The problem with this is that evidence suggests that more unequal societies have higher levels of debt and more financial crises and this tax change would make the country more unequal.

Increasing the rate of VAT would dramatically increase the cost of living for the bottom half of society.  As the price of goods and services increase those on the lowest income would feel the hit hardest. The bottom half of society already pay a greater proportion of their income in VAT than the top and this would only increase if essentials were taxed as well. This would mean the price of a pint of milk would go up from 46p to 60p and a loaf of bread from £1.27 to £1.65. Meanwhile those at the top would see massive gains from no longer paying income tax while the poorest would see no gain at all.

This would actually result in less choice for most of the population. If a person can only afford to buy the bare essentials than they lose the choice of how to spend their spare income. If a person can only afford the cheapest brand then they lose the choice of weighing quality against value. Any extra choice for them is an illusion. Only those at the top would have more choice as they have the choice of what proportion of their extra income they save. However for most people it would decrease the amount they save and increase their level of debt. Greater levels of inequality lead to higher levels of debt as people borrow to artificially raise their living standards to meet the expectations of society.  This and other factors lead to more financial crises and a less stable economy.

Paul Kirby does suggest that the regressive effects of this policy change could be countered by other tax changes and income transfers but doesn’t addresses the large level of revenue which would need to be raised. This sort of change could only make a country more equal with VAT levels of up to 50% and much higher levels of redistribution. Interestingly some countries do make themselves more equal with high levels of regressive consumption taxes and large levels of redistribution but this is done in conjunction with high levels of income tax.

Although shifting around how we tax people may be appealing, focusing on equality is a far more efficient way to make the economy more stable and to reduce levels of personal debt.

Tim Stacey, Policy and Campaigns Officer