There have recently been some calls to cut VAT – including from two former Chancellors if the Exchequer. At a time of increasing calls on the public finances these calls seem unwise.
The purpose of taxation is to pay for public expenditure – it is not a good tool of social engineering. In developing fiscal policy you should not start by considering the mix of Direct versus Indirect taxation, you should start with expenditure.
The Virus has been profoundly damaging to virtually all sectors of the economy and will continue to be so for the foreseeable future. Government help for the most threatened sectors, for example The Arts, is unavoidable unless we want them permanently to close. In times when the calls on the public finances will be unprecedented to argue for a reduction in direct taxation seems perverse.
The Arts are comparatively non price sensitive. If you have to pay £50 for a theatre seat it’s unlikely that a price reduction of £1.50 will entice you much. But across the nation the revenues raised by VAT are a key component of the government tax take. If the government is going to bail out the theatres, as they may have to, then the funds to do this have to come from somewhere.
VAT like duties on fuel, alcohol and tobacco is a regressive tax. The poor pay tax at the same level as the rich. Over time to switch from these taxes to more progressive revenue raising (income tax or a wealth tax) is desirable but this is not the right time to consider tax reductions. Borrowing is already at record levels and the scope for further increases is surely limited.
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