What?

VAT accounts for 35% of the income of those in the bottom fifth of society but it accounts for 15% of the income of those in the top fifth of society.

Eh?

Eoin, this simply cannot be true.

Imagine that everything, but everything, carried VAT at 20%.

Income of one of those bottom fifth is £100 (it\’s just an example, I\’m not recommending that this be what the poor actually have as their income). They spend all their income on those goods and services which are carrying VAT at 20%.

The maximum they can pay in VAT is £20: 20% of their £100. It just isn\’t possible that they can spend 35% of their £100 on a VAT which is charged at 20%.

You\’re simply asserting here something which is mind-garglingly wrong.

There are a few ways we can get to your figure: we could count consumption taxes on disposable income for example. So we\’ll strip housing costs out (which are non vatable), we\’ll include fags and booze taxes as being consumption taxes (which they are), note that the poor do spend a larger portion of their incomes than the rich on such things and I\’m sure we could credibly claim that consumptions taxes take 35% of the poors\’ disposable incomes while they only take 15% of the richs\’.

But your statement that VAT does is simply flat out wrong.

17 comments on “What?

  1. Is he perhaps trying to say that VAT is levied on 35% of the poor’s consumption but only on 15% of that of the rich???

  2. John,

    But if that’s his tack, he’s mad.

    VAT exempt, zero-rated and reduced rate goods are, with the possible exception of books, are concentrated in the necessities items – food, utilities, health, rent – generally considered to be a greater percentage of spend at the poorer ends of the income scale.

    Whereas luxuries – restaurants, fast cars, yachts – are standard rated (I can’t see that chartering airplanes and helicopters, zero-rated, would make enough of a difference.)

  3. Interesting that he is now saying that we should not compare average expenditure with decile income but decile expenditure with decile income.

    In the past I’ve tried suggesting to him that averages should be compared with averages and deciles with deciles. The first time I did he told me that I was naive and the second time my comment was blocked.

    I guess whatever gets him to his preferred conclusion that the poor are getting squeezed works

  4. What Matthew2 says. The bottom qunintile of 2010 incomes included a some poor people, and some not-poor people who happened to have a low income in 2010 (because they were retired, or students, or on maternity leave, or self-employed and having a bad year, or such like).

    The poor can’t spend more than their 2010 income in 2010 because they don’t have savings or access to credit. The not-poor with temporarily low incomes can, should, and usually do.

  5. In New Zealand, farmers are notorious for that kind of income shifting because they work over multi year cycles. I went to uni with a stinking rich girl whose parents owned a large agricultural empire. She was on full means tested student allowance for three out of four years she was there.

  6. Mind you, even including other indirect taxes I still can’t make it reach 35%.

    Try for yourselves. Download the latest excel spreadsheet from here:

    http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-231970

    Go to Table 14A

    Total indirect taxes, bottom quintile (Box B86) = £2,965 (and even that includes the allocated burden of business rates, employer’s NI, business fuel duties, etc. – so it seems he does believe in tax incidence after all).

    Gross income of the bottom quintile (Box B48) = £11,730.

    Divide one by t’other and you get 25% – somewhat short of Dr Clarke’s 35%.

    OK, figures are 2009/10, when the average VAT rate was 15.625% (15% for 9 months, 17.5% for the remaining 3 months). It’s now 20%, so let’s increase the VAT figure. That gives an extra £286 of tax, taking the indirect tax burden up to 27.7% – still a long way off 35%.

    Yes, we’ve also had an above-inflation increase in tobacco duty, but we’ve also had a much bigger decrease in fuel duty, which will more than cancel out the increase even for the poorest quintile.

    So where does his 35% figure come from?

  7. It’s all down to the definition of “income”!
    They exclude student loans, because a loan is not income, they exclude redundancy benefits, which are deemed to be one-off, they exclude about one-third of working tax credits and child tax credits because they are not reported, they exclude unreported income from unreported work by those claiming JSA and from “moonlighting”.
    If you look at the data you will find that there are a lot of rich people included in said “bottom decile” as expenditure includes employers NI on their servants, stamp duty on house purchases (which is only charged on very expensive houses), air passenger tax, customs duty on items brought back in excess of the personal allowance …
    @ Richard – he’s presumably including “intermediate taxes”

  8. He is indeed including excise duties. He also has a cunning plan to maintain these taxes without hurting the poor: tax the producers, not the consumers. Pretty smart, huh? Plenty of tax from alcohol and fags, but they’ll be cheaper!

  9. Aha, I think I’ve found Dr Clarke’s source – and if it is, he’s got it wrong.

    See the first graph in this post from Murphy:
    http://www.taxresearch.org.uk/Blog/2011/01/04/why-vat-is-regressive/

    Bottom quintile, indirect taxes north of 25%, VAT around 10%, total 35%+. Top quintile, indirect taxes 10%, VAT 5%, total 15%. Matches Dr Clarke’s figures.

    Except that Murphy’s indirect tax figures include VAT (I checked against the source data), so if he’s adding together Murphy’s indirect tax and VAT figures, Dr Clarke is double counting VAT.

  10. @ Richard
    i) Thanks for that link – I’ve been stuck with 2007/8 data because I could not find anything newer
    ii) Aha! Look at table 3 – he is using the figure for *all* taxes as a % of “income”. Note also that this is less than 20% of expenditure – so expenditure is 143% of disposable income for this group. They are spending (excluding indirect taxes) more than their pre-tax gross income

  11. John 77 (#16) – that would explain his 35% for the bottom fifth, but not his 15% for the top fifth.

    See my #15, which is the closest I can find to explaining both (although #11 may turn out to be the most accurate).

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