Saturday, September 19, 2009

Taxation policies

UK Govt Cool On Extending Car Scrapping Incentives

Apparently so far the government has no inclination to extend the tax break for the UK car market. I think tax break is a better description than "car scrappage scheme" because the government subsidy was equivalent to VAT, so the scheme operated as a tax free period. This makes me wonder during recessions and consumer entrenchment, whether taxation levels designed to maximise revenue during more normal trading conditions, actually reduce revenue and economic activity during downswings as become -relatively- more oppressive. Which leads on to, given the government cannot reduce the real interest rate, are there any options left at all to encourage consumption and stem unemployment?

Posted by stillthinking @ 10:03 AM (799 views)
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2 thoughts on “Taxation policies

  • mark wadsworth says:

    ST “This makes me wonder during recessions and consumer entrenchment, whether taxation levels designed to maximise revenue during more normal trading conditions, actually reduce revenue and economic activity during downswings as become -relatively- more oppressive.”

    Well of course. But this doesn’t really apply to corporation tax, if your profits go down, the tax goes down automatically and if you make losses you pay nothing (or even get a refund for the previous year).

    The taxes that do have this hugely damaging effect are:

    1. VAT – which is basically 15/115 of gross turnover (either paid to taxman or adding to cost of your inputs and your supplier pays it to the taxman). If you have high fixed costs say £90,000 (net of VAT) and normally sell 1,000 units for £115 each (gross turnover £115,000), you pay £15,000 VAT and keep £10,000 profit (before corporation tax). But if your sales decline by ten per cent and you sell 900 units for £115 each, your gross turnover is £103,500 and once you have paid £13,500 in VAT you are at break even. if your sales fall any further, you go out of business or reduce the scale by sacking people.

    2. Employer’s NIC which adds 12.8% to the cost of employing people (same logic as item 1).

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  • If I were in charge of government, I would consider a VAT increase above 17.5% maybe to 20 or 22 to be an incredibly useful tool against inflation. I wouldn’t be surprised if this happens in the next few years.

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