Cameron has made some striking pledges on how he will cut the deficit. The trouble is that most of them are at odds with his promise to protect the vulnerable.
As this excellent Social Market Foundation report contends, it is hard to see how any of his pledges on ring-fencing middle class benefits, limiting tax rises and increasing health spending will survive, at least if Cameron really isn’t going to balance the books on the backs of the poor.
But his blog repeats the received wisdom that VAT is a regressive tax that punishes the poor.
No doubt the SMF’s proposals to means-test child benefit and raise VAT will concern many on the left. But if not these we have to pick something else instead or say how taxes would go up further. In which spirit, instead of the VAT rise, which would be deeply regressive, I would instead pick a wealth tax.
The SMF report actually includes this fascinating chart highlighting the progressive merits of a limited rise in VAT.
It makes the case that looking at the proportion of income lost by households is misleading, because lots of people on low incomes (such as students) borrow to spend expecting their future earnings to rise. “While they may appear poor on a snapshot basis, they may well be spending and therefore paying VAT in fair proportion to their future expected earnings,” the report finds. If you examine the impact on expenditure rather than income, VAT is a progressive tax.
That said, a VAT rise will not be more progressive than some other tax options. But the SMF argument certainly complicates what Labour politicians make out to be a clear cut case against VAT.
Jim Pickard
Kiran Stacey