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.

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.

Just Shut Up

It's always nice to find out whether people who talk rubbish are doing it deliberately. Or whether people who spin and twist things to their own agendas are genuinely seeking to mislead and misrepresent.

I was critical of a hopelessly misleading chart presnted by Eoin Clarke. Whilst he still deleted my comment about it on his blog, he commented here and asked for a bit of help with Excel so he could set the scale on his charts sensibly. Fair play, I say.

So today I am directed by FCA Blog to this post by Grande Dame - which is spreading (warning: bad swearing ahead) horseshit:


"98 of the top 100 grossing businesses in the UK DO NOT PAY ANY CORPORATE TAX"


Yes. She said that. She thinks it's true. It's so patently untrue I will not provide the links that prove it. Life is too short.

So, has Grande Dame just got the wrong end of the stick? There is, of course, a lot of misleading stuff about tax being put out there. Mr FCA, indeed, highlights a shoddy headline from Sky News. Is Grande Dame a victim of misinformation, or is she a cause of it?

Well when challenged by FCA, she responded with (I paraphrase) "blah blah blah read this piece in the Guardian". I read the piece in the Guardian. It did not back up her claim. So I thought I'd leave a comment:

It does not say anywhere in that Guardian piece that these companies pay no tax. It says that they have a presence in tax havens, some of which have 0% tax rates. That is not the same.

If you look at the accounts of any of those companies (and they will all publish them on their websites, look for 'Investor Relations') then you will see that they do pay tax. Lots and lots of tax.

Most of these companies do, indeed, use various fancy structures and wheezes to *reduce* their tax bill. That is not in dispute. Not all of the subsidiaries in tax havens are set up with that in mind (it's hardly beyond belief to imagine that a huge UK company might want to have a genuine presence in Ireland) but many are. Great... let's talk about whether these companies are pushing the law too far and decide what should be done about it.

However, let's NOT say they pay no tax. It's not true. It's absolutely objectively and proveably nonsense. It is not supported by your sources, and even the most rudimentary fact-check would tell you that. You're spreading complete misinformation.. how, precisely, do you think that helps further your objective?

I thought that was polite and constructive enough. Grande Dame deleted it. Grande Dame doesn't care about the truth. She's written something that is wrong. She's had it clearly explained to her that she is wrong. She's been told why she's wrong and how she can confirm that she is wrong. She knows that she's not an expert in the field (at least, I hope she does) yet she will not listen to anyone suggesting she reconsiders what she's said. Whatever she thought when she wrote the piece, she now knows that it's wrong and she has no interest in correcting it. At this point, the youth would say EPIC FAIL.

Now... I'm not going to stick up for companies who set up tax-dodge schemes. I think that they should pay tax wherever they do business, under the rules set out by whoever is in charge. I'd like the law to limit some of the tax avoidance opportunities that are out there. (Of course, I don't much like lots of our tax rules, nor what the money raised is then spent on... but, that's a side issue, theoretically this is a democracy and companies that trade here should subject to whatever rubbish setup the rest of us are stuck with.)

HOW AND EVER... the case for corporate tax reform (if one believes there is one) is NOT helped by people talking rubbish. No debate can be effectively won when one side is armed only with spin and lies. If you don't think that the truth can stand up for itself, then you're part of the problem.


EDIT: Whilst she's still being wilfully ignorant of the basic and irrefutable facts, it does appear that Grande Dame didn't delete any comments. My bad, n'all that.

Doing it right

http://thethoughtgang.wordpress.com/2011/10/25/doing-it-right/

If Alanis Morissette were a tax blogger....

...she, too, would plug her forthcoming book in a blog post about how nasty advertising is.

Damn Statistics

I like graphs and charts. It's part of my job to use them to communicate data effectively. I try to do so clearly and fairly.. because there's usually nothing to be gained from hiding from the truth.

Eoin Clarke has done a chart here to show why Independent schools are much worse than comprehensive schools. As we can see, their GSCE results are much worse.

Oh.. but wait.. they're not. They're very slightly worse.. but he's used a deeply selective and misleading scale to make a difference of 0.4% look huge.

I did a chart using the same source data. But I added a second set, which shows the comparable GCSE results for the schools, but for pupils who got 5+ GCSE passes including maths and English. I'm not saying that this is a more telling indicator of quality.. that's for the reader to decide.

I've also used a selective and misleading scale.

Aren't comprehensive schools RUBBISH!

Here's another chart.. with a proper scale.. that shows the relative performance differences according to whether one thinks that Eoin has chosen the best measure, or whether ones thinks that we should take into account whether or not pupils can read, write and do sums.

Bun deal

Today I spent £1.39 on four burger buns that I knew, before I handed over my money, that I would have to throw away. I knew this because as I handed them to the lady in the shop she looked a little concerned, she checked the date, and she said 'they look ok, but if they're not suitable then bring them back and we'll give you a refund'.

I know what milk smells like when it's gone off, even despite being nowhere near it's expiry date. It smells like milk.. and as soon as I smell the milk, I have to throw it out because it's 'gone'. So I never smell the milk. I put it in my tea, and it's ok. If someone says 'I think the milk might be off' then I smell it, and it is off.

So the burger buns were, obviously, off. I smelt them and they smelt funny. I sliced them in half and the texture wasn't right. I threw them away. I was never going to take them back to the shop.. I wasn't even ever going to tell the lady that I'd rather not buy them in the first place. Sometimes, I'm so dreadfully British it really rather hurts, Henry.

So here is my question... did I help the economy at all?

Well, I think I added to GDP, which is good. It was a small local shop, not a supermarket, so that's good too. I'm fairly well off, and can afford to save money, so it's good that I spent some.

But, of course, nothing has been achieved here.. except a redistribution of my £1.39 between a variety of people... some probably poorer than me (the girl in the shop) and some probably richer (the managing director of the company that made the buns). There's no VAT on burger buns, but the taxman still grabs a cut of everyone's profits and wages - so some of my money will go to help ensure that very wealthy pensioners can continue to draw state benefits.

But, like I say.. have we really achieved anything?

Have we, in fact, caused harm? The bun maker made and/or the shop sold buns which were possibly not fit for consumption. After all, the lady didn't express concern or assure me I'd be OK for a refund with anything else I bought. There was clearly poison in them there buns... and I paid for them, and even if there had been rotting kitten feet inside I'd probably have decided that, for £1.39, it wasn't worth the bother of returning them. What kind of message does it send to all these people that I'm OK just to hand over £1.39 of the wage I should have been hard-earning at the time I'd ducked out to buy burger buns.. (or, 'working from home' as it's often known.) without getting anything like commensurate value? Have I been had? Or am I at fault for not helping them improve by pointing out that flogging me shonky buns just isn't on?

No value has been created, yet everyone has been rewarded.. except me, and I'm entirely ambivalent. Yet, to most the people who add things up and cast their opinions.. there was good here. There was production, distribution and retail of something. There was a free market exchange. There's been tax collected and wealth redistributed. Many boxes were ticked, and I had my burgers in a sandwich instead.