So the Tories will raise VAT, eh?

Ed Balls is shouting it from the rooftops:

Labour retaliated in the escalating row over tax and spendingon Saturday by all but ruling out a rise in VAT after the general election – while insisting that a Tory government would impose one \”within weeks\”.

In an interview with the Observer on the eve of a four-week general election campaign, the schools secretary, Ed Balls, said his party had always opposed VAT rises because they were unfair, hitting the poor and pensioners hardest.

Now the problem we\’ve got here is that Balls is supposed to be the one who actually understands economics. You know, as opposed the the howling loons further to the left.

And even a casual perusal of the economics of taxation will show that reducing taxes upon labour and increasing them upon consumption (for those who want to have the same total tax income of course) is a good idea.

For we can list taxation in the order by which the various types reduce growth. Giles has a nice chart from the OECD here. The most destructive taxes in their effect on future growth are capital and corporation taxes. Then come personal income taxes (of which national insurance is of course a type), then consumption taxes like VAT and then, yes you lovely little LVTers out there, the form of tax which has the least effect upon future growth is the taxation of property.

Now it is true that economic growth isn\’t everything but I think we\’re all pretty much agreed that in our current situation it\’s almost everything. We\’re not going to be running a fiscal surplus anytime soon and we\’ve certainly no hope of reducing the national debt in anything less than geological timescales. We therefore need growth to reduce it as a portion of the economy. I\’m not sure that there\’s anyone at all arguing against that chain of logic.

Thus, changing the tax mix so that we reduce the taxation which reduces growth and increase the taxation which does not reduce growth would seem to be a very good idea. Moving, for example, from taxation upon incomes to taxation upon consumption.

And this says nothing at all about the actual level of taxation. Whether you want a high tax, large State, solution or a low tax small State one, you would still want to be making this move. Essentially, move closer to what the Nordic social democracies do in their tax mix. For this is one of the reasons that they\’re able to have a high tax, large State solution and still have economic growth. Precisely and exactly because they apply the standard principles of taxation. Low taxes upon capital and corporate income, higher on personal incomes and higher again on consumption.

BTW, no, having a 50% income tax rate and a 25% VAT rate doesn\’t mean that the consumption tax rate is lower than the income tax rate. We\’re talking relative to others here….capital taxation is lower there than here, consumption taxation higher there than here.

So, even if the Tories were to be thinking of lowering NI and increasing VAT, this would be a good thing. As it reduces a tax which reduces growth and replaces it with a tax which reduces growth less.

1 thought on “So the Tories will raise VAT, eh?”

  1. Mr. Balls is speaking as a politician. He is therefor not in the least concerned as to the true merits of his proposals, or of the opposition’s. He is focused on how they appear to those in the electorate who are considering voting for him. I can’t argue with his judgment that that portion of the electorate considering voting for Mr. Balls and his colleagues believe that they lose nothing if their employer has to pay a tax- so politically he’s correct. Economically of course- you’re right.

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