Thursday, 15 March 2012

Progressives, Obsessives and VAT

Christie Malry's blog doesn't seems to allow long comments, so this post (and replies thereon), made me write a blogthing....

He talks about the cult of the progressives.. those who shout down any tax/benefit changes they consider aren't wholly designed to bear down disproportionally upon the rich. I (like Christie) believe that a tax system should be progressive, and I don't think I've ever met anyone who doesn't. Deciding what is and isn't progressive because, as Christie alludes, whilst it might seem like science, it's not.

Alas, a complex problem and a complex system is increasingly becoming victim to gross over-simplification for political ends, and the obsession with progressiveness (or, to be more accurate, progressiveness as deemed by the noisier inhabitants of the moderate not-quite-left) is not helping to formulate better and fairer tax policy.  Along with this comes the eternal mantra that the tax burden should fall on those with a 'better ability to pay', and by 'better ability to pay' people invariably seem to mean 'with a higher individual gross income'.

Imagine two taxpayers.. Mr £50k and Ms £30k. 'Progressive wisdom' dictates that Mr £50k should pay a higher rate of tax than Ms £30k. If we needed to raise more tax then it would favour increasing income tax, as that would affect Mr £50k more than Ms £30k. 'Progressive wisdom' would not favour an increase in VAT because, it says, that would impact Ms £30k more than Mr £50k, because the increase would account for a greater percentage of her income.

Now let's imagine that Mr £50k is 45 years old, and is a single parent of three, and he has a mortgage on his modest but criminally overpriced 4-bed house. He gets by just fine (£50k is still a good wage) but he's not exactly flash. He spends most of his remaining money on food and clothing for the children, perhaps having some left over to put aside for a rainy day.

Ms £30k is 25, single, living in a flat that her parents paid for. She spend some money on food (lots of meals out and takeaways, mind), drink, entertainment and gadgets.

Now... who's got the better ability to pay a bit more tax? And is an income tax rise or a VAT increase the best option?

This is a deliberately manufactured example, of course... but it's not a stretch to suggest that a lot of people have disposable incomes, which they can spend on the sorts of consumption that VAT taxes, that are much higher than people who have higher earnings.

Income does not always equate to wealth. Income does not always flow through to disposable income. The tax system needs to take account of this. To be 'progressive' it needs to measure 'ability to pay' by reference to more than just earnings. With VAT it does this.. which is why it irks me greatly when VAT is dismissed as 'regressive' all the time, when even in isolation it is not.. and when taken as part of a comprehensive tax system it definitely isn't.

The point of VAT is that it should only apply to non-essential spending. Of course, it doesn't get it right all the time.. but it's not too bad. It's not on most food, books, children's clothes, public transport and other such things. Whether VAT is applied to the right things is a matter for another day, but it's irrelevant to the question of whether it is a fair tax.

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