. . . to paraphrase the entertaining forthright but not necessarily right Mark Wadsworth.

Across the Internet*, the argument rages about whether VAT is a good idea.  Mark’s view:

“Simple logic tells us that VAT is not a tax on ‘consumption’ (as if that were a bad thing), but either a tax on business turnover or a tax on gross margins (depending on how you argue it).”

My view:

if VAT was removed, prices would not stay where they were – they would fall, as competitive pressures would erode the (very short-lived) high margins that would pertain in the VAT-free world.  Hence the effect of there being VAT on objects is higher consumer prices.  Hence the consumer is paying it.

Now, we have the view of Greg Mankiw, an economist of slightly higher standing than me:

From a strictly economic standpoint, a VAT is great. It is essentially a flat consumption tax, like the so-called FairTax, but implemented in a way to reduce compliance problems. Because it is collected in stages along the chain of production, rather than all at the retail level, tax evasion is more difficult . . . My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.

He doesn’t mention how regressive it is (which doesn’t seem to bother Matthew Parris, who is all for stealthy regressive taxes).  But as a way of collecting money without distortion or hissing, it is hard to beat.  Sadly enough for the poor, who will probably end up paying more than the small number of mansion owners now organising on the pages of Country Life to defeat the idea with bad arguments.

*well, between Mark and I


4 thoughts on “VAT – a Truly Great Tax, but Regressive

  1. Re Mankiw:

    This would be a good example of why economists should not be allowed to set tax rates.

    It’s not all about efficiency of collection, for crying out loud.

    This is the result of a neo-classical dogma that postures as a “science” and is divorced from the ethical foundations which underpin society and politics, which economics is intimately bound up with.

    Ironic, really, given that the “original” economist also wrote one of the finest treatises on ethics produced by Western thought.

  2. Paul

    You’re overreacting. Yes, VAT is regressive, but it would be crazy to use that as the overwhelming criteria for judging taxes. Taxes on environmental bads would also suffer. You can use the tax system to adjust for this. In fact, we do, heavily. The bottom decile pay £3138 indirect (basically consumptino) taxes on a gross income of £9000, or 35%, the top decile pay £8400, or about 8% of their incomes. But

    – the bottom decile receive £5400 in benefits and pay only £1000 in direct taxes.
    – the top decile receive £1473 in benefits and pay £24k in direct taxes.

    So the indirect taxes the poorest pay are swamped by the benefits they receive back – and rightly too.

    I think the image of economics as totally value-blind is one of the more extraordinary straw men to emerge from this crisis. Smith, as you say, and Keynes, Marx, Hayek, Friedman, Krugman – all extremely good on ethics as well econ.

  3. Ah but giles, mankiw wants to get rid of the direct taxes!

    However, point taken. I should have said ‘some economists’ not ‘economists’. I’m happy for economists like you to be involved. Really, my problem is with rightwing economists telling only some sides of the story. Apologies for berating you by professional association.

  4. In return, I must acknowledge that I had forgotten the quite crazy affection for tax cuts of all kinds that Mankiw has. Bush’s advisor. But I was playing the ball .. . .

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