The Biggest Tax Subsidy Is Low VAT Rates – Let’s Charge Full Whack On Everything

HMRC has just released its estimate of what tax reliefs cost the Treasury each year. This is sparking, as it obviously will, demands that some to all of these be closed so that ever more of the economy can flow through government. The thing is, the targets being aimed at are peanuts as opposed to the Great Big Nuts of the system that should be targeted.

By far the largest of these reliefs is VAT rates. And there’s entirely good economic logic for removing those reductions in rates. For what is it that swallows all the money?

Tax relief ‘giveaways’ to wealthy cost Britain at least £4bn a year
Inheritance tax loopholes and entrepreneurs’ relief mostly benefit the rich, critics say

Nope, it’s not that, that’s a rounding error. It’s this:

Analysis of figures published by HM Revenue and Customs on Thursday revealed that the total cost of Britain’s system of tax relief had risen to a record £164bn annually – more than the entire NHS budget.

The biggest tax reliefs are zero or reduced VAT rates on purchases of food and energy, at a cost of about £53bn, followed by an exemption for capital gains tax on properties, worth £27bn, and pensions income tax relief worth £26bn.

Sweden charges VAT on food. And we really shouldn’t be subsidising the consumption of energy now, should we? Not in this world of climate change. In fact, that reduced rate of VAT on energy is part of that $5 trillion we’re said to, globally, use to subsidise fossil fuel consumption. Really, we should stop doing that.

Or maybe we shouldn’t? This being a useful litmus test for those who will try to use these figures. There will indeed be, as there is, shouting about that £4 billion. But that’s as near nothing compared to that £53 billion. So, people who are serious about reducing tax relief so as to reduce austerity – which should they be saying we should do away with? And which will they say we should do away with?

Quite, they’re not being serious, are they? Especially given that climate change part, the VAT subsidy being one of the things they already cry havoc about.

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Shadeburst
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Shadeburst

It’s good to have a transaction tax on consumption including food and energy. It’s bad to have a transaction tax on banking transactions. The only non-semantic difference between the two being that VAT is extremely regressive and hurts the poor most, but as is often said in these pages, squeeze them until the pips squeak.

Grope_of_Big_Horn
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Grope_of_Big_Horn

Citation please. VAT is a flat tax and is indifferent to the income or wealth of the person doing the buying. There are even nuances to suggest the 0 and 5% bands might favour the rich as being rich correlates with age. The elderly run their heating at a higher temp, the rich take more air travel ( no fuel duty there afaik ) and the young spend more on take-aways. The young buy clothes. The fat, which correlates slightly with being thick and poor, go to slimming world ( VAT payable ) while the rich take badminton classes (… Read more »

Shadeburst
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Shadeburst

From Investopedia: A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-income earners than from high-income earners. It is in opposition to a progressive tax, which takes a larger percentage from high-income earners.

timworstall
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timworstall

Vat isn’t a transactions tax, it’s a consumption tax. It’s not charged on each transaction, it’s on the final consumption and once only – even though it’s collected in stages.

Shadeburst
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Shadeburst

If you re-read my comment, I said “non-semantic” difference.

timworstall
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timworstall

But it’s very much more than a semantic difference. The effects are entirely different.