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Morning Line: Stop whingeing - tax rises are inevitable

Despite all the objections of vested interests, a rise in VAT to 20% makes a lot of sense.

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by Lorna Bourke on Jun 16, 2010 at 10:30

There is much fluttering in the dovecotes ahead of next week’s emergency Budget. It’s a racing certainty that there will be an increase in VAT when the Chancellor, George Osborne, stands up to deliver his first budget on 22nd June. Given that the rate of VAT is 20% or thereabouts in most of Europe, there is considerable rationale for bringing the UK into line.

It is also the least painful way of raising extra tax revenue since to a large extent paying it is voluntary. Low income families don’t pay much VAT as most of their expenditure is on VAT exempt items such as food, housing, travel and children’s clothes. VAT at 20% raises a very useful £1 billion a month in extra revenue.

But the scaremongers are putting it about that the government is thinking of imposing VAT on food. And the anti VAT on food lobby, headed up by supermarket giant Tesco, does itself no favours in the way it is lobbying for food to remain exempt. Instead of making the sound moral point that poor families are forced to spend most of their disposable income on essentials such as food and it should therefore remain exempt, it chooses to talk its own book.

Tesco’s finance director Laurie McIlwee said, ‘I fear the plan is VAT on food.’ And he urged the government not to increase the tax take on VAT. ‘The economy is recovering, but it is pretty fragile, and so a VAT increase in the future would be more appropriate than one that is immediate.’

True – but he would be more convincing if he didn’t sound so concerned about Tesco’s profits. McIlwee was speaking as Tesco reported slowing UK sales growth in the first quarter of 2010. Tesco posted a 1.1% year-on-year rise in U.K. sales from stores for the 13 weeks to May 30th. Adjusted for value-added tax, the figure was just 0.1%. This compares with a 4.3% rise last year.

It is clear that VAT at 20% is the only way to raise substantial extra revenue without disadvantaging those who can least afford to pay. CGT raises around £3 to £4 billion a year – peanuts compared with the £12 billion that a 2.5% increase in VAT raises. But the government must raise extra revenue where it can – and from those who can afford to pay.

For those who maintain that widows and orphans will suffer if CGT is increased, the facts are that only one in 131 taxpayers or 247,000 out of 32.5 million, paid CGT in 2009. According to Fidelity International, its clients’ average holding outside an ISA is £18,000. With an assumed growth rate of 5% there would be no CGT or need to complete a tax return until the money had been invested for almost 10 years.

Increases in CGT are not aimed at those who have prudently saved for their retirement but at the hedge fund and private equity managers who make profits running into billions yet pay themselves in capital gains rather than income – thereby reducing their tax rate to 18% instead of the top rate of income tax of 50%. And it is these ‘tax skivers’ whom the Chancellor is targeting. He has indicated that there will be concessions for small investors who are long term holders of assets as well as entrepreneurs.

Raising the rate of CGT is not a problem for most as they don’t have enough capital to generate sufficient gains to make them liable to CGT – so the widows and orphans are safe even if the rate of CGT is increased to income tax rates of up to 50%. It is the annual exemption, currently £10,100 per individual, which is so valuable. And the government will drag small investors into the CGT net at its peril. The cost of collection will almost certainly cancel out most of the gains from having to process hundreds of thousands, if not millions more tax returns.

‘We support the case for raising CGT to the marginal rate for individuals who are seeking short-term speculative gains,’ commented Gary Shaughnessy, UK managing director at Fidelity International. ‘However, we believe that all individuals who are saving prudently for the long term should be rewarded and this can be achieved by applying CGT at the basic rate of tax. We believe this is a simple and fair system which will be easily understood and straightforward to operate. We think the current allowance of £10,100 should be maintained.’

The trouble is that people are not being rational - but are talking their own book. The government has to raise more revenue. But according to the Royal Institution of Chartered Surveyors, the recent recovery in house prices could be reversed if rates of capital gains tax are increased. Well, they would say that, wouldn’t they. CGT at income tax rates didn’t deter buyers before 2008 – so why should it in future? And in any case, with house price increases back into double digits, first time buyers are, once again, priced out of the market. So are rising house prices a good thing anyway?

As Martin Gahbauer, Nationwide’s chief economist put it, ‘unless the rise is implemented immediately, then some second home owners and buy-to-let landlords may decide to sell in advance of the higher rate being introduced. Such a development could lead the supply-demand balance to shift more in favour of buyers and relieve the current upward pressure on house prices.’ Is that such a bad thing? Certainly not if you are a first time buyer.

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24 comments so far. Why not have your say?

A VAT increase should reduce our imports of clothing, white goods and so on, so should help the balance of payments.

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I am not a fan of increased taxation - why not reduce the nanny state, government expenditure and live within our means.

And while we are at it, let's get out of un-economic Europe and save ourselves billions or is it trillions.

if we have to increase taxes let's put it on imported goods.

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It is quite possible that increasing prices will lead to yet more borrowing, particularly on credit and store cards.

This may be why we are where we are.

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Lorna - you are echoing the policies of ex labour (communist) politicans TAX and SPEND - you should know better. CUT the vaste amounts of money and waste in the annual Welfare spend circa £156bn and you can easily achive £10bn a year.

Please make it clear that economic growth is NOT the same as government expenditure which some would have us believe. We need the private sector to grow to get us out of this mess and you can only achieve this through lower taxes NOT Higher.

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Thanks for some sanity Lorna. Wouldn't it be nice if the Chancellor announced an independent Royal Commission on taxation at the LMB. Then we could let experts, academics, companies, unions and third sector reps review in a more considered and objective way what reforms are needed, on some kind of evidence base. At the moment all politicians are running scared of the TPA zealots, motivated by political objectives no-one voted for.

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Anon 1 and Anon 2 why do you not have the courage of your convictions and put your names to your comments. Even better strop wasting your time whinig and get on with the real job of looking after your clients. And as a lifeling Labour supporter I am sick and tired of Tory contributors likening Labour to communists, blaming the last administration for the current ills of the economy when thaey made the best of a bad job caused in USA.

CAN WE STOP THE GRATUITOUS POLITICS PLEASE

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The simple fact is raising VAT will affect the poorest the most. If you put VAT up the cost of fuel goes up the cost of all goods goes including food, affecting the poorest the most. VAT is the most unfair tax as everyone is affected by it and forced to pay it.

It's about time the Government stopped panicking about the deficit and came up with a strategic long term plan to reduce rather this headlong rush to reduce it, whatever the cost. The Government the needs to focus on the needs of the whole country, and stop trying to appease their paymasters in the city

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CGT. Have you taken into account all the people who have to live in Care homes and rent out their houses to help pay for their care, if the house is sold it will be classed as a 2nd home and therefore subject to extra taxes. ???

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VAT is very similar to Poll Tax - surely the Conservatives don't want to go there (again)?

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The problem with a VAT rise is that it will never come down again.

We do NOT need tax rises what we DO NEED are substantial cuts in public spending and waste. Starting with Local Authorities and there 35 hr week

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I agree with Ian A. The Labour Government left the economy in splendid shape and it has only gone down the tubes in the last week or two since the Coalition Government took over. Everyone knows this but it takes perceptive people like Ian and myself to put the truth out into the public domain.

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I never understand people who say the government should raise taxes to deal with problems. Gov't IS the problem. They have no control on their own spending, so they use the power of the purse to extract more money from hardworking people. When does gov't get off its duff and severely reduce bloated expenditures? why force financial pain upon the populace when the gov't doesn't force pain upon its own books?

Before accepting a higher VAT, fight to force gov't to cut at least 50% of the costs it needs to raise.

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Ian A

I am Anon that you refer to. I am not a winnger, socialite or any other politically coloured type that you refer not least a supporter of a Labour party that has destroyed through regulation and tax any incentive to; save, run a business or provide for yourself outside of the state. I am equally sick of hipocrtics like yourself who think the sun shines out of the labour party. Having traveled the world in business this country has become more akin to communist Russia and so antibusiness through regulation and taxation that it will be another generation before we return to anything like a self sustaining balanced economy. Don't try and blame the USA for this mess, they caused the banking crisis but the labour party generated the indebtedness we are in and no one should forget it.

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Let's have a tax on credit cards and all forms of borrowing!

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I am impressed/amused that Ian A complains that Anon 1 and 2 don't leave their name.

Less impressed by his grasp of economics and his support of a previous regime that broke our pension system, bust our country and then blamed the USA for it's incredible spending spree.

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Wow, I really miss Gordon. I really did have something to complain about in the "Good Old Days" and it made many a happy evening for me shouting at the television. Now I have the additional worry 5 years down the line in case the country is stupid enough to vote Gordon cronies back in. However, Dianne Abbot looks like a racing certainty for a good moan if she is fortunate enough to win the leaders contest. Seriously, get real Ian A. When labour took over we had a balance of payments surplus for goodness sake and a lot less civil servants to worry about with their retirement at 60 on 2/3rds final salary pensions! VAT at 20% is fair, especially if you unify this with 20% CGT and 20% Income Tax, albeit starting at £10K as has been recently mooted. And while the Coalition are about it, no more aid to India and China who can start to learn to live without us and no more payments of family allowances etc. to EU. nationals who work here but whose families remain in their own country.

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Once VAT has been increased, there is no doubt whatsoever that food prices will go up and the poor will suffer. Our great supermarkets will put food prices up.

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Well, Ian A, so all our financial problems are the fault of the nasty USA. Gordon doubling public sector expenditure and borrowing too much, even in the good times, has had nothing to do with it. And, I assume that it is the USA rather than incompetent management and regulation that is to bame for the failures of Norther Rock, B&B, RBS and HBOS.

With your grasp of economics, politics and reality it would be in your clients best interests if you didn't look after them.

I am sick og gratuitous politics here too. In particular, I am sick of the labour party trolls that post here. In view of the damage to our freedom, finances and constitution wreaked by your governernment a period of quiet humility would be welcomed.

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Increase tax where it makes sense - VAT is a good (and the main) option. It is to a largely a voluntary tax so it is ‘easy’ to increase it and as essentials like food are exempt, the poorer are better off (the fuel component in food pricing is minor).

Reduce the size of the state. Cut jobs where they will not claim benefits until we can afford them (e.g. managers) and cut projects that are not necessary. If the project vendor exercises penalty clauses, then drop them off the government preferred supplier list. We need to share the pain.

Simplify the tax system, increase the threshold at which tax starts, invest in the HMRC – it is the only department that earns money, the rest just spend it. For every 2 jobs cut in other departments, create 1 in the HMRC and target the tax skivers.

A company can cut costs in hard times to balance reducing income, a country cannot. People made redundant by the state (and by private organizations) end up claiming benefits, so the costs cannot be cut to nearly the same extent. The real (read ‘strategic’) answer is to reduce the deficit in good times to cover the bad times – something Labour got massively wrong (and something the Germans did far better than we did). You can only spend you way out of a recession if you have the money in the first place. The previous government just followed a tax and spend policy by subtlety. Increase taxes slowly and keep spending. Prudence? Rubbish.

Collective noun for bankers? “Wunch”.

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Ian A may be interested in the following : Gordon Brown : Mansion House : 2006-- London is " the world's leading international finance centre with a regulatory regime widely regarded as the best in the world" Gordon Brown : April 2010 " maybe I should have kept the banks on a tighter leash"

No doubt the USA played a significant role in the financial crash but our late and unlamented Chancellor / Prime Minister is by no means innocent.

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Hear hear P. Williams.

As a small business owner I am not in favour of a VAT rise. All of my best brands are German. (Nothing comes from the UK anymore). My prices have already risen by shocking amounts and my profit margins have fallen because of the hopeless exchange rate. Another price rise would be disastrous.

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It's true that the deficit is horrific, and also true that the last government has wasted a lot of money, but though Labour inherited a 'balance of payments' surplus, they also inherited hospitals and schools that had, literally, been run into the ground. Vast swathes of the country (i.e. north of Watford) had been left desolate with enormous unemployment levels and very little hope.

Labour may have made mistakes but I, personally, feel the country is a better one now, with new hospitals, new schools and regenerated cities. The way people on this forum talk, you would think that Labour wasted ALL the money, that they had done absolutely nothing of worth .

All I remember from the Conservative years is one recession after another, high inflation, high interest rates and higher crime levels than now. We may well have had better economic figures under the Conservatives, but life was pretty grim for millions of people.

Nobody's perfect - least of all governments, whatever their colour, but what will happen when all the planned cuts are implemented? Unemployment will rise, and the majority of those who lose their jobs won't be able to find another, so instead of paying taxes, they will claim benefit. The savings won't be as great as planned, and surely the economy will contract sharply and we'll be in a vicious downward spiral, with everything beginning to decay again, crime rising, etc., just like the good old 1980s.

Don't get me wrong, I'm a 40% tax payer and I DO get annoyed that so much of my income goes to government (and not just via income tax), but I remember the 1980s quite clearly and life under the Tories - unless, perhaps, you worked in the City of London - was pretty grim. Like 'Anonymous 3', I think the new government should take a longer term view about reducing the deficit, rather than panicking and risking a real depression.

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Lorna Bourke, stop whinching, it is the idle rich like you who should pay to cure the mess they created, not their poor victims..

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bwanakuba

Jun 19, 2010 at 20:26

Lorna !!!

YOU are very right.

Put the country first.

we are bankrupt.

we got to do something.

Abolish welfare state completely.

Increase direct and indirect taxes.