The Staggers

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How VAT has risen as income tax has fallen

For the first time, the rate of VAT is the same as the basic rate of income tax.

By George Eaton Published 04 January 2011 11:15

Today's VAT increase means that, for the first time in Britain, the rate of VAT is the same as the basic rate of income tax. As the graph below shows, while the basic rate has fallen from 30 per cent to 20 per cent, VAT has risen from 10 per cent to 20 per cent.

VAT was introduced in April 1973 as a result of Britain joining the European Union (as Evan Davies noted on the Today programme this morning, it's a rare example of an EU policy that the Tories like) and has been raised three times since, each time by a Conservative chancellor.

In the 1979 Budget, Geoffrey Howe, who, like David Cameron, had insisted that he had "no plans" to raise VAT, increased the tax from 8 per cent to 15 per cent. Eleven years later, Norman Lamont raised VAT to 17.5 per cent in order to pay for a poll tax cut of £140 a head. VAT then remained at this rate for 18 years, until Alistair Darling reduced it to 15 per cent as part of the Brown government's fiscal stimulus. The 17.5 per cent rate returned at the start of 2010.

With George Osborne confirming again today that the rise to 20 per cent is "permanent" (unlike the 50p tax rate), Britain's tax system has been tilted in an unprecedented direction. Opinion remains divided on whether VAT is "regressive". As Osborne pointed out this morning on the Today programme, the Institute for Fiscal Studies has suggested that the tax is "mildly progressive" on the basis that the poor spend more of their income on VAT-exempt goods than the rich. To my mind, this analysis falsely assumes that the poor have the same powers of saving and borrowing as the rich. Richard Murphy of Tax Research UK has a detailed rebuttal here.

With the coalition pinning its hopes on a robust recovery before the next election, however, it's likely to be the economics of the VAT rise that dominate the debate.

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Tags: VAT rise VAT George Osborne

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14 comments

Tue, 2011-01-04 14:16 — JCollins (not verified)

Richer people are 10% better off as they can afford to not spend the 10% extra that has now not been taken in income tax as compared to the 70s - and thus avoid the extra 10% VAT that we now have. Great if you can afford it but irrelevant to the vast majority of people who have no money at the end of the month anyway...surely this isnt another handout to the rich?...

Tue, 2011-01-04 15:02 — EnragedBrit (not verified)

Is it just a coincidence that the VAT increase is aiming to raise £13 billion - the exact sum we are giving away on overseas aid?
What a pointless exercise. Let the Indians pay for their space program and nukes out of their own pockets, not ours!

Tue, 2011-01-04 15:28 — Bill Fraser (not verified)

Yes, richer people like millionaire Ed Milliband and other millionaires in the shadow cabinet are better off...

But, if he wants to be Labour leader he should at least ensure he and his shadow chancellor sing from from the same blank song sheet... when commenting on the rise in VAT.

Tue, 2011-01-04 16:49 — mcquade

"This is happening all over the world"

Would you like to provide evidence of that, Richard?

Tue, 2011-01-04 17:26 — James McAdams (not verified)

Shouldn't it be "Norman Lamont RAISED VAT to 17.5 per cent in order to pay for a poll tax cut of £140 a head."?

Tue, 2011-01-04 21:25 — Eddy S (not verified)

income tax is history.

the less well-off should pay no income tax. it is a tax on productive resources. if a more progressive solution is required then a land wealth tax should be used.

there will be major changes in the labour market which will mean we will all view ourselves as "suppliers" in a global market - this will happen with the assistance of the internet and outsoucing of white collar work which will further reduce the amount raised through income taxes. there isn't much any government can do unless it wanted to curb globalisation and the internet.

Tue, 2011-01-04 22:24 — Gerry Tierney (not verified)

Bull said: So you're not counting the re raise to to 17,5% because it wasn't done by a Tory?

Me say: Read the article/do your research?

Wed, 2011-01-05 11:30 — Tony Dean (not verified)

Because big business in this country have been using tax avoidance schemes to channel money out of the country and not pay a penny in income tax - surprise me! That we have no money in the treasury to keep this country afloat.

Tue, 2011-01-04 18:35 — Hugh Markey (not verified)

No the ConLib government budget was not jotted down on the back of an envelope a la Michael Hasletine. Neither was it constructed on a tablecloth at the Ritz as per the Vodoo Reagonomics of the eighties. George has Lord Home's matchbox - replete with matches. An inheritance, no doubt!
The Chancellor bears a marked resemblance to Mr Bean - despite Vince "Mr Magoo" Cable's parliamentary one-liner. Beetle-browed Gordon Brown looks nothing like Mr Bean or the mustachioed Renaissance man reviewing the Red Square Parade. But personal resemblance and remarks apart, this isn't funny. The US sales tax ( state/city/whatever ) is added on at the point of sale. From personal experience it makes a lot more impact. And for accountancy reasons ...it's also very transparent!
Stagflation

Tue, 2011-01-04 11:25 — frances smith (not verified)

my assumption would be that the flaw in the ifs's argument about the progressive nature of vat is that yes, the poor do pay less, but only because they spend a larger proportion of their income on food. but then all that is is an indication of how little disposable income the less well off have. which is nothing to be proud of.

anyway, the permanance of this arrangement depends, i suspect, on the ability of this lunatic coalition to stay in power.

i think perhaps osborne thinks his powers are greater than they are.

Tue, 2011-01-04 11:28 — Bull (not verified)

So you're not counting the re raise to to 17,5% because it wasn't done by a Tory?

Tue, 2011-01-04 12:05 — Nick (not verified)

It's all very well Osborne saying that the increase won't affect the less off so much because they spend more (proportional to income) on VAT exempted items such as food. What he clearly hasn't stopped to ponder is to get such items, one has to travel. We've already heard how fuel prices are set to rocket as our public transport costs. This will affect all people; it's foolish to say otherwise.

The fact is that the anti-recessionary reduction to 15% did a great deal to avoid a recession turning into a spiralling depression. The increase to 20% is regressive and those who say 'it's only 2.5%, you'll hardly notice' are clearly of sufficient means to be able to shrug it off. What baffles me though is how the same people reel in horror at any suggestion that Income Tax should be increased.

Osborne never gets his maths right, this will never lead to a 13 billion reduction in our deficit, in much the same way that tuition fees will do nothing to reduce our borrowing.

I note that Osborne is being increasingly careful not to keep blaming Labour for the structural deficit, what economic report is around the corner I ask myself?

Tue, 2011-01-04 13:07 — Richard asquith (not verified)

There is a bigger globalisation point here.

Governments are having to cut business taxes (corp tax, payroll taxes) to stay competitive with low-cost economies. To fund this, they increase VAT and other consumer taxes (eg IPT up from 5% to 6%).

This is happening all over the world.

Tue, 2011-01-04 13:14 — Tim J (not verified)

To be fair, if the poor buy their food by using public transport, they will not actually pay any more VAT as that is also zero-rated. But dare to run a car or use a taxi, and they're caught.

Surely VAT is a regressive tax because the poor pay proportionally more of their income on it. That bit extra hits them a lot harder than it does the better-off.