Thursday, 8 March 2012

Caroline Flint is an idiot

Caroline Flint thinks that instead of mucking about with tax for the rich, we should cut VAT by 2.5% in order to put £450 in the pockets of ordinary people.

She's an idiot.

A 2.5% VAT cut translates to a 2.1% reduction in the cost of something to which VAT is applied. So something which would have cost £120 (aka £100 plus 20% VAT) would now cost £117.50.nTherefore, to save £450 then someone would need to spend £21,600 (inclusive of 20% VAT).. with lower VAT they would pay £21,150. That's £1,800 per month.

To have £1,800 per month to spend, a household(1) needs a gross income in excess of £25k a year, or £480 per week. According to the IFS (see fig 2.1), median household income in the UK in 2009-10 was £413, and mean was £517. 

So someone with an average income can, should they be so minded, save £450 in VAT. Just.

But, not really.... because this requires a household to spend every penny of that income on stuff to which VAT is added. So, well, that means they can't spend any money on, er, housing.. food.. children's clothes.. insurance.. utilities and whatever else various governments have decided should not attract VAT (or, in the case of utilities, standard rate VAT)

So let us be a little more realistic.. let us assume that our household spends £550 on housing (that'll get you a £100k mortgage), and £75 a week on food (according to the Guardian, £50 a week for a family of four is possible, but bloody tough). Now we need £2,650 a month if we're to save £450 from our VAT cut.. so we need a gross income of more like £40,000(2) a year... or £770 a week.  Back to that IFS graph... we're now sitting pretty in the top 20%.

AND.. we're still expecting these people to live in modest homes (remember, we're only paying a £100k mortgage), have modest food bills, pay nothing in insurances, pay no utilities, pay no loans or finance costs, buy no children's clothes, put nothing into their pensions, and save nothing for a rainy day.

So, Caroline Flint, tell me again how cutting VAT by 2.5% will put £450 in the hands of ordinary families? Because I'm fortunate enough to sit pretty close to the sexy end of that graph, and I know damn well that I wouldn't save that much.

Curiously, do you know what WOULD put that sort of money into the hands of a lot of ordinary working people? Why, how about raising the personal allowance for income tax up to £10,000? Or even further.. up to the value of the minimum wage, where it should be anyway? Why doesn't Caroline Flint propose that instead? Perhaps because part of it is already coalition policy (and driven by those nasty LibDems, at that) and her party had many years in government during which they ratcheted up taxes on 'ordinary working people' whenever possible largely, a cynic might suggest, in order to fund a bureaucracy to find convoluted way to give some of it back.

(1) This assumes two earners who both pay basic rate tax. If income is biased towards one person then the gross amount needed increases because the tax paid will be higher. If there is only one earner then the figure is around £28,000 per year, or £540 per week.
(2) With a single earner the figures increases to £44,000 a year, or £846 a week. Now we're tickling the top 10% of households.

No comments:

Post a Comment