Raising Vat would squeeze savers at both ends
A Vat increase is criticised as taxing the poor, but it is also a tax on the old – whether they are rich or poor. And you don’t have to be elderly to get caught by this shift to spending taxes.
To a theoretical economist is does not matter much whether a country taxes earnings or expenditure – the government either catches pay on the way into people’s bank accounts or on the way out. So high income taxes and low Vat or low taxes on pay and high spending taxes are both viable options.
But switching from one system to another causes pain.
Britain used to have low Vat rates and high income tax. There is a generation whose pay was taxed at a standard rate of 35 per cent while higher earners could be taxed at 98 per cent. Vat was as low as 8 per cent then, but rather than spend all the earnings the state did not confiscate these people saved for retirement or rainy days. Yet now they come to spend those savings, they find their purchases could be taxed at 20 or 22 per cent if Vat is raised.
So this generation has had its savings clobbered on the way in and now faces seeing them clobbered as they take out their savings.
It is just feasible that a future government will one day cut Vat to low levels again – the initial 1970s rate of 10 per cent was soon cut to 8 per cent and chancellor Alistair Darling made a temporary reduction to 15 percent during the recession – but the trend is upward. Today’s workers, while enjoying low income-tax rates, could thus be hit by even higher spending taxes in future therefore.
Chancellor George Osborne is unlikely to worry about the generation that has been caught by both high income taxes and high Vat, but he should remember that these people have votes, even if they may have to wait five years before they can use them. If his coalition is really dedicated to fairness it would remember the people who will be heavily taxed twice.
