Sunday, 23 November 2008

A cut in VAT should be strongly supported - by Ken Livingstone

It would be astonishing if, after the briefing to the Sunday Times, Observer, Sunday Telegraph, The Independent and other newspapers, tomorrow's government economic statement did not centre on a reduction in VAT. If so this is measure which should be strongly supported - not only for immediate but for strategic economic reasons.

One of the most iniquitous features of Tory tax policy, particularly from Thatcher onwards, was the shifting of the tax burden from direct to indirect taxation.

Indirect taxation hits the lowest paid proportionately more than the high paid and is therefore deeply socially regressive - which is exactly why it was a policy pursued by the Tories and Thatcher. Cutting VAT will therefore hit two birds with one stone.

First, as part of the government's measures to combat the economic downturn, this is one of the most effective measures in keeping up consumer demand. A reduction in VAT will aid all sections of the population. But, precisely because indirect taxation is socially regressive, reducing VAT will aid the lowest paid most.

The lower an income the more certainly any available income is spent, as the low paid can least afford to save. A reduction in VAT has almost exactly the same effect as a boost in income because it allows a greater quantity of goods to be bought with the same money. Reduction in VAT is therefore one of the surest ways to ensure that the maximum amount of any economic package is translated into an increase in consumer demand - one of the key measures required to fight the economic downturn.

Reduction in VAT is also, politically, just the type of measure required to ensure Labour holds together the alliance of those on around average incomes and the low paid which it should be based on.

Second, strategically, this should be the beginning of a reshaping of the taxation system. It is being briefed that this reduction in VAT will be temporary, and it will then be restored to its previous level to reduce the budget deficit during an economic upturn. This is not what should occur - any increase in VAT would be deeply regressive for the reasons already outlined. Instead, when taxation increases again to reduce the budget deficit during an economic upturn, an increase in direct taxation on the highest incomes should take place. That is, any reduction in VAT should be used to begin a reshaping of the tax system in a more equitable direction.

Discussion on the future of taxation will continue, as will that on other measures such as the proposal for the government to purchase bank shares at above market prices. But tomorrow one thing is decisive. The left should give the strongest support to a reduction in VAT and applaud the government for it. Such a measure provides a striking contrast to the economically disastrous and socially regressive policies being openly advocated by the Tories.

3 comments:

Derek Wall said...

yes I would go with this, we need to move from indirect taxes that hit the poorest back to direct.

The Green Party argues that environmental taxes should be balanced by cuts in VAT.

still need to move beyond capitalism and reflationery solutions to recession because ultimately an economy that only works if we go shopping more is unsustainable

Alun Griffiths said...

Exactly

Please listen :

http://www.electricpolitics.com/podcast/2007/03/ecological_economics.html

Robert said...

The VAT cut wont' be passed on by retailers and even if they are they will not be significant enough to have much of an effect on spending either on small items or large purchases.

What we need to do is to take radical action to force the banks to make credit available again on reasonable terms and above all safeguard employment.

http://www.taxresearch.org.uk/Blog/2008/11/27/why-the-vat-cut-wont-work/