Not A Tax on Business But A Tax on Everyone

The British Chamber of Commerce is I am sure a worthwhile organisation, looking after the interests of its members first and foremost, but this weeks pronouncement regarding ways of cutting the budget deficit show that like a lot of self-interest groups it doesn't see the wider social implications of its recommendations.

It has argued that the plans to raise national insurance should be dropped, or at least curbed and the income from a 'tax on jobs' be replaced the increasing the rate of VAT to 18.5%. The idea of switching horses from business to consumer came as a result of the latest survey of its members. "Almost half of respondents (41 per cent) said that the top priority of the government must be to cut the budget deficit. Some 22 per cent cited a reduction in red tape as the most important aim, while 13 per cent put a more competitive tax system at the head of their wish list."

Using the Treasury's Tax Ready Reckoner, the BCC calculated that a 1 per cent increase in VAT, to 18.5 per cent, would yield the government an extra £4.5 billion in revenue. On the other hand, freezing the proposed 1 per cent rise in NICs would save businesses £5.1 billion.

The point with VAT is that it is, and I don't apologise for repeating myself here, in my opinion a regressive tax. If you are an individual, rather than a business, you cannot reclaim any VAT on any of the purchases you make. The amount of VAT you pay on a gallon of petrol is the same whether you drive an Aston Martin or a Toyota Prius. Of course economists will argue that if you express VAT as a percentage of consumption rather than income then it is not a regressive tax at all, well you pays your economist you takes your choice.

Being an indirect tax however means that VAT is not more regressive than all other indirect taxes. It can be made less regressive by giving exemptions and zero-rates for items mainly consumed by those on lower incomes and indeed to the extent that children's clothing and most items of food are exempt it already achieves this to some degree. Unfortunately even those of low incomes do sometimes like to try and breakout of the so-called poverty trap and the advantages of those items exempt from VAT can be negated by the imposition of tax on adult clothing or fuel for example.

There is something else to be considered as well and that's the fact that having announced these increases back in 2008 I bet most people have forgotten about them, this is something that Labour have become adept at doing during their period in office and the opposition have been completely impotent when it comes to reacting to them.

Apologies to anybody who has glazed over by the end of this.