Saturday, Dec 05, 2009
Consume, dammit!
Guardian: VAT could rise to 20%
"Consumption is 70% of the UK economy and confidence is crucial."
|Says it all, really. Problem is, the country have been spending their equity and credit card balances, overdrafts and loans for the last 15 years and now the taps are off - as they should be!
Posted by brickormortis @ 07:42 AM (1378 views) Add Comment
14 Comments
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1. mark wadsworth said...
Link doesn't work for me, did you mean this?
By the way, everybody parrots the Big Fat Lie that VAT is a tax on "consumption" (which is somehow rather grubby and demeaning) and therefore that it does not harm "production" (which requires investment and sacrifice as is rather noble). The Lie goes on to say that therefore VAT steers people away from doing Bad Things and towards doing Good Things.
This is just another lie to get people to pay more tax, VAT is in fact the worst and most distortionary tax of all. Worse that corporation tax or income tax, even worse than Employer's National Insurance.
However, the good news is, a VAT hike to 20% will kill off the recovery stone dead and I'll be able to snap up a cheap house.
2. str 2007 said...
I hate to be contrary to your views Mark, but did anyone really notice the 2.5% drop to 15%.
I guess you'd notice a sudden rise of 5%.
But if they bring it up to 17.5% in the New Year and then 0.5% increase every other month through 2010 I doubt anyone would notice the increase.
The 30% devaluation of sterling might show up next year though and that will have an effect.
3. str 2007 said...
On the subject of Sterling
Spooks was very apt last night, repeated again on Wednesday evening.
4. stillthinking said...
Supposedly there is no tax on food, ie not a VAT item. But where do farmers get the money to pay income tax, how can they pay fuel duty on their private driving, how do they pay their council tax? The only answer is that they embed their needed tax money into food prices. Therefore food is a taxed item.
I have this theory that there is only one tax rate which applies equally to everybody based broadly on the above. (aggregate average taxation theory, which hopefully will catapult me into economics fame! I dreamed a dream)
But as far as VAT goes generally, this is consumption switched from private to state. So I don't necessarily see that a VAT increase would necessarily change -overall- consumption. The shape of that consumption yes, but overall amount, no. Surely what will be the underlying cause of consumption falling is that the government, currently borrowing to consume, stops borrowing. Because you can imagine a deficit-less government, in a stable financial position, raising vat and also increasing state provision(.....), which wouldn't alter net consumption, but just change the composition to less private and more state services consumption.
So if we currently borrow to maintain demand then sooner or later we can't borrow anymore, and then the system has to go back into balance, and this is going to happen irrelevant of rates of income tax, vat, fuel and cigs duty.
5. holding out said...
str - Have you considered the hassle it is for retailers (and even other businesses) to change their VAT rate. The VAT is charged when the goods are despatched rather than sold so if you buy something with a lead time and you charge a set price and the VAT rate changes you then have to either go back to the customer and up the price which they may not accept or absorb the loss yourself. To say nothing for having to reticket all prices.
6. letthemfall said...
stillthinking - "Therefore food is a taxed item"
That's a perverse argument. You might say the same about anything we buy.
Everyone who works pays income tax (if they earn above the paltry allowance), and this tax pays for health care, roads, etc. We are the consumers, not the Govt.; the Govt just manages (or mismanages, depending on your point of view) the overall provision of these services.
7. mark wadsworth said...
STR2007 "did anyone really notice the 2.5% drop to 15%?" Yes - all those businesses who managed to maintain or improve gross selling margins (like for example the supermarkets) despite the recession, and hence remain able to employ people, buy goods, keep the factories going etc etc. And all those businesses who would have gone into losses but managed to stay afloat rather than go under.
You fall for the old lie that "The consumer bears the tax". VAT makes itself noticed by slightly higher prices, slightly lower output, slightly lower profit and a shift in investment/consumption from VAT-able items to non-VAT-items, i.e. it is the most distortionary tax.
The people who really would notice the gradual increases are the people who lose their jobs and the businesses who go bust. Hiking VAT to 20% won't increase prices that much, but it will ruin the economy even more.
Stillthinking - yes, I also dream of a bit of honesty in the system, where all income/profits are taxed at the same flat rate (whatever that is), so businesses currently VAT exempt or zero-rated (primarily residential construction, housing and banks) would pay more and all productive currently VAT-able businesses would pay less.
LTF, ST is right - food is taxed as well, as the price you pay has to include the income tax the farmer pays. However, as land rents are a function of food prices, and as food prices are set 'by the market', the income tax they pay just depresses land rents, so the income tax on farmers is just a crude substitute for Land Value Tax on agricultural land, which would of course be a far better way of doing things.
8. letthemfall said...
MW:
In which case every single thing in the shops is "taxed" before any VAT is applied. You can look at this way if you like but I don't see any good reason for doing so. Agricultural land tax would presumably increase food prices so I doubt that will ever go before Parliament.
Flat rate income tax would benefit the high paid at the expense of the low paid, which I suspect is the main motivation for those who propose such a system.
9. mark wadsworth said...
LTF:
"Agricultural land tax would presumably increase food prices"
No it wouldn't! That's the beauty of the system. There are two fairly fixed figures - food prices and actual production costs/income tax, the balance goes as rents. So as long as the LVT were less than or equal to the rents, the tax makes absolutely no difference to anything apart from agricultural land values! It's basic maths.
"Flat rate income tax would benefit the high paid at the expense of the low paid..."
Again, not necessarily. The starting point for a flat income tax is a higher personal allowance, then you get rid of all the tax breaks that only benefit high income people, then you get rid of the supertaxes on employment (National Insurance) and economic activity (VAT) and then you average it out a bit. There'd be winners and losers all the way up the income spectrum, but there'd also be more winners among productive businesses and workers and more losers among people who live on rental income or interest.
And even if there were more winners among high income people, so what? If somebody on a million quid a year pays twenty times as much as someone on £50,000 and so on, how is particularly generous to high income people? It's still highly redistributive.
Further, what's wrong with having two 'flat taxes' - one on property or land values and one on income? As high income people tend to live in big and nice houses, what they might gain on the flat income tax swing they would lose on the flat property tax roundabout.
10. stillthinking said...
That is a key bit. In my view you can say the same for anything you buy. My view is that taxes are embedded in prices, for example, when I pay tax, the only way I can get the money, being incapable of directly producing money, is by adding on to the price of whatever I produce.
So from that, the distinction between income tax rates becomes a bit meaningless because whether you are rich or poor ultimately taxes are within prices. So for the UK, for an overall tax burden of 40%, on average 40% of purchase prices must be tax.
I want to flesh this idea out more (and will do so eventually) because one of the implications is that jobs that are lowly taxed, i.e. cleaning for example, being very low paid typically, yet existing within a higher overall average taxation system, are effectively cross subsidised. The cleaner doesn't benefit as on average everything the cleaner buys has an embedded 40% tax, but cleaning itself is artificially cheaper relative to other things. The lower tax embedded in paying for the production of a cleaner must be offset by a higher embedded tax in some other form of production. I also think that this distorts the market rate/wages.
I need to flesh this out properly and I haven't done so yet.
11. letthemfall said...
mark w
I don't see how either food prices or production costs are fixed. Anyway, according to stillthinking's argument that costs rise to "pay" for the tax, then agri LVT would necessarily push up food prices.
On income tax, higher allowances would certainly go some way to a fairer tax system, as would perhaps LVT on big houses, but I think a progressive tax system is fundamental to a more equitable society. I don't think anyone is really worth a million a year. People get paid for their labour, and an amount to recognise initiative (starting an enterprise) and financial risk - none of which justifies great riches in my view. A flat income tax would do nothing to address current income inequalites which have been so damaging to our society.
stillthinking
Not sure I follow your argument. If you sell your product at a higher figure to make up for the tax you'd pay on the lower figure, then you will have a larger income and therefore pay more tax. Following that logic one would have to increase prices ad infinitum, which obviously can't be done. I think you are also treating tax as though it were a cost. But this is not the case: as I've said, tax is what you pay for public sector services, according to the principle that higher earners pay more because they can afford it. Thus everyone has access to vital services, rich or poor.
Are you saying that low-paid cleaners are subsidised???
12. stillthinking said...
No, I am saying that the cost of cleaning is subsidised.
Ignore for a minute the minimum wage, then there are a few categories of jobs available which the market sets the rate to be borderline worth doing i.e. if they paid any less nobody would do them. If on that type of job you were to increase increase taxes to 40% from 20%, then I would see that pushing up the price (of cleaning), and not pushing down the disposable income of cleaners. If that were the case then the low tax rate paid to cleaners is a subsidy for people who want to buy cleaning, not the wages paid to cleaners.
When wage levels are created by market forces I suggest these are dictated by the supply of labour available at a certain -disposable- income. And absolutely, I do think that tax can be considered a cost.
Further, if the overall taxation burden is 40% then reasonably, the state sector consumes 40% of private production. And given the variety of production it is also reasonable to assume that for each category, whether cleaning, or shoes, or food, 40% is consumed by the state. But, cleaners only pay 20% of their production.
State consumes 40%, cleaners only provide 20% ?!?
This is a mismatch. Something must be wrong here.
We know that the state takes 40% of each category but the cleaners only provide 20%. Rejecting the idea that the state doesn't consume as much from low taxed categories seems reasonable, where can the additional 20% of cleaning come from?
My suggestion is that the additional 20% of cleaning required by the state must come from taxes embedded in the purchases made by cleaners. Which means, there is ultimately no different level of taxation levied against different categories of workers because taxes are embedded in prices.
13. Mark Wadsworth said...
Stillthinking, keep going, I like this line of thought. Ultimately you are probably right, but I'd like to see how you arrive at this conclusion.
LTF: "I don't see how either food prices or production costs are fixed."
Well take it from me, they are. There is competition to grow and sell food, and consumers pick and choose between different suppliers. If you grow and sell potatoes, and they sell for £x per ton, do you seriously think you can sell them for £2x per ton? Nope. And if it cost £1.5x per ton to grow them, would anybody sell them for less than that? Nope. And so on.
"Anyway, according to stillthinking's argument that costs rise to "pay" for the tax, then agri LVT would necessarily push up food prices."
Nope. The selling price of food is fixed - the production costs are fixed - so the balancing figure is rents. LVT is the same as rent.
Put it another way, imagine you grow potatoes. You sell for £1.0x per ton (fixed by the world market for potatoes) and they cost you £0.6x per ton to grow (including the value of your own labour). You are a tenant, so the landlord charges you as much as he can get away with, being £0.4x per ton. He'd be daft to charge you any less. if he charged you less, would you drop your price? Nope. And if he tried to charge you more, you'd go out of business, so he can't charge you more.
Now, imagine the LVT were £0.4x on the land you need to grow a ton of potatoes. How much rent can the landlord charge, assuming he charges as much as he can get away with? The answer is a big fat zero.
And, nuclear option, the LVT goes up to £0.5x. Rather than make a loss of £0.1x, all farmers would throw in the towel and abandon their farms and people would buy their potatoes at the price dictated by the markets (by importing them), which happens to be £1x.
14. Burt said...
"Further, if the overall taxation burden is 40% then reasonably, the state sector consumes 40% of private production. "
Absolute nonsense. I work in the private sector and 90% of our consumption is from the public sector. One-sided economics I'm afraid. LTF is absolutely right as well about including income taxes, etc, on agricultural production. You could apply the same reasoning to the accumlation of taxes on the circulation of money through the economy to fit your prejudice.