Still not quite got this tax incidence argument, eh Ritchie?

And note the involvement of Sir James Mirrless – the man who is heading the Institute of Fiscal Studies current pl;ans to reform the UK tax  system by shifting all corporation tax liabilities onto VAT so that the burden of tax moves from the wealthiest in society to the poorest.

Sigh. We\’ve had both Vince Cable and Larry Elliott pointing out that of course companies don\’t actually bear the economic burden of corporation tax. It\’s some combination of workers, consumers and investors.

We\’ve also had people like the Congressional Budget Office pointing out that in an open economy like the US (and the UK) that burden is carried some 70% by the workers in the form of lower wages.

So the current situation is that, in large part, it is not the wealthiest in society that pay the corporation tax. It is the workers.

Moving that tax burden to VAT might be more regressive…it might also not be. That rather depends upon what portion of goods and services consumed by the poor is subject to VAT and what is not (housing, children\’s clothes, food etc are not, heating and energy is a special low rate and so on) and comparing that to the  VAT impact upon the expenditures of those with rather higher incomes.

That\’s an empirical question which I\’m sure someone would be delighted to dig up the answer to….an answer which I look forward to someone telling me.

But if you start out by insisting that corporation tax is paid by the wealthiest when it most clearly is not then anything else you have to say on the subject is clearly going to be wrong: if not just politically motivated blowharding in fact.

3 thoughts on “Still not quite got this tax incidence argument, eh Ritchie?”

  1. I would assume, like you, that VAT is slighty ‘progressive’ because food, rent and children’s clothes are exempt. However, the various studies that I have found seem to suggest that VAT is actually regressive.

    The problem is, VAT on fags and booze, which probably make up the bulk of VAT that very low income people pay is also included in those figures.

    So all things being equal, I’d guess VAT is roughly flat as a percentage of people’s incomes. But even that assumption is flawed – VAT in turn is also borne by a combination of consumer, producer, employee and investor.

    If you are going to look at economic incidence, you might as well consider VAT as being a tax on the turnover of about half the economy (part of which is passed on to consumer) rather than being a sales tax (part of which is borne by the producer in lower receipts or lower output).

    This is yet another reason why VAT is The Worst Tax. The non-VATanble half of the economy pays £20 billion in corporation tax; the VAT-able half pays/collects £20 billion in corporation tax and £80 billion in VAT. So the tax burden on profits/turnover of most productive businesses is £100 billion, and the tax burden on profits turnover of banks and homebuilders is £20 billion.

    And we wonder why there are imbalances in the economy …

    Tim adds: not all that sure about the regressivity of those fags and booze and VAT. That usually gets lumped in with excise taxes….which are indeed highly regressive. That is, when people talk about the regressivity of the indirect tax system they include the effects of duty, not just VAT. or at least, they often do….

  2. VAT is harder to ‘plan’ away. You’d think Dickie would be all for it.

    Not least because, as you say, there is an element of choice involved for both consumers buying things with VAT on them and for Government for what they slap VAT on. It gives a great scope for the Government to shape consumption (for whatever righteous, petty or mendacious reasons).

    Workers pay business taxes through lower wages and consumers pay them through higher prices. The aim should be to not impact prices or wages. It never is. It’s just short sighted, greedy kneejerking.

    Do we really need anything more than Income Tax and VAT? All business earnings become personal income eventually don’t they? VAT could be used to encourage the healthier, safer, grey lives the politicians want us to have.

  3. And government WANTS taxes to be regressive on fags, booze and luxuries otherwise the workers would buy them and you can’t have that!

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