The rise in VAT to 20% took effect at midnight this morning, and of course the Labour Party have come out swinging, with Labour leader Ed Milliband calling on the Chancellor to apologise for what he called a misleading claim that VAT was the fairest tax to increase.
The Chancellor has argued that the VAT increase was the most progressive policy option because income increasing the level of income tax or employer-side National Insurance contributions would cost jobs, while this policy, combined with other deficit reduction measures, would increase employment.
In response Ed Milliband claimed that: “Everybody knows that it’s poor and middle-income families that will be hit hardest”; implying that the Chancellor was fibbing when he included the VAT increase in the class of progressive policy options.
The Chancellor points to the Institute for Fiscal Studies (IFS), which has argued the policy is “mildly” progressive because the poor spend a higher proportion of their lifetime income on necessities like food and domestic fuel, which have reduced or zero VAT.
I’m leaning towards Milliband’s side on this one, as there are a few things that make me give the IFS’ argument the side eye:
- Many reasonable purchases are not of zero-rate or reduced rate items. Wouldn’t an increase in VAT reduce the range of items that people on lower incomes can purchase?
- Plus, wouldn’t the cost of necessities rise anyway? My understanding is that a sales tax like VAT increases the cost of doing business. Any extra costs would be passed onto customers, methinks. This would impact the ability of the poorest to make savings.
- The IFS might be making unreasonable assumptions regarding similarities between the poor and the rich.
Politically this may be somewhat embarrassing for the government, because a 2009 statement from David Cameron contradicts the Chancellor’s assertion. Here’s what he said:
You could try, as you say, to put it on VAT, sales tax, but again if you look at the effect of sales tax, it’s very regressive, it hits the poorest the hardest. It does, I absolutely promise you. Any sales tax, anything that goes on purchases that you make in shops tends to . . . if you look at it, where VAT goes now it doesn’t go on food obviously but it goes very, very widely and VAT is a more regressive tax than income tax or council tax.
Also, spare a thought for Nick Clegg, human shield, once again facing the prospect of taking a thumping, since it was quite clear from the Lib Dem election campaign that they were all for attacking the Conservatives on this policy.