When I started driving in the mid 1960's petrol was the equivelent of 17P per GALLOM, that's was lessthan 4p per litre.

Just look at it now.

VAT on utility bills used to be 17.5%, Ken Clarke had that bright idea. It was Gordon Brown who slashed VAT on energy bills to 5%.

I hope Indoo remembers Ken Clarke's " Bafoonery "

For me, it's Fig 1
http://www.ons.gov.uk/ons/dcp171776_239565.pdf
showing the rich spending a smaller % on VATed goods that needs explaining. Mortgages, school fees, elderly care home fees, employing staff, second home costs etc, covers it, I guess

Oh dear, astonishing number of economic illiterates and innumerates on here today incapable of understanding basic mathematical concepts such as percentages and nominal values. Starting from bottom up, those who need to go back to school: Louis, Stu, InduPendant, Alastair X.

1) The poorest *fifth*, i.e. 20% of the population... not the very poorest.

The problem is, if you look at the Treasury calculations, the poorest 10% get hit even harder than next decile up (the 10%-20% bracket).

2) Who doesn't own a TV? And what family can you think of who doesn't own a camera, even if it's a crap one? And cars... outside of London you pretty much need a car unless you're one of the lucky people who lives near a good public transport link. And "meals out"... VAT applies to your local fish and chip shop or burger bar.

If you want to look at other VATable goods... look at fruit juice, cornflakes, clothes, childrens toys.

AlastairX
1) When I earnt less than I do now... I was indeed poorer! The VAT rise would have made me even poorer. The snapshot in the moment is important to the people who don't have money *at present*. Yeah, sure, I may be richer at some point in my life... but that doesn't help me when I need the money the most!

2) Although there isn't a perfect correlation between income and wealth, they correlate to a reasonable extent in the real world. If you want to deal with accumulated wealth, then introduce a proper wealth tax.

3) And the "slightly progressive" thing... is based on a commonly used, but flawed, definition of what constitutes progressive. If you define progressive as the poorest being charged less of a percentage of their income than the richest, then the 50% vs 50.1% would satisfy that criteria. It would also make the poor considerably worse off than they are at present. This is something 'progressives' tend to be against.

@Paul Hillyard

You are only looking at VAT in isolation and not holistically with other taxes, state benefit and the long term progressive nature of VAT.

You have let the red mist make you short sighted.

A few points...

- As I said, I accept that income and wealth are different things. However, someone with a very low income is hit by VAT... as is someone with very low wealth. Whether you define poverty in terms of wealth or income, people in poverty are made poorer. This is not something *any* analysis, IFS/ Treasury/ONS disputes.

- If you look at the Treasury figures (that I referenced in my very first post in this thread) the the bottom *decile* is hit harder than the second bottom decile. So it is hitting the poorest hardest!

- Remember that VAT is not just payable on the goods you mentioned, it's also payable on a lot of household essentials... even on a few foods that virtually everyone buys (conflakes, fruit juice, chocolate for example). It's near impossible to avoid having to purchase some VATable items.

- Finally, as I mentioned in another post in reference to... "Extra VAT paid by people buying new cars, meals out, holidays, and camera equipment is not hurting the poorest in our society."... remember some of these things are relatively low quality. e.g. A trip to Chicken Cottage is a vatable experience, we're not talking about the Ritz.

- If you say that poor people should just avoid everything vatable, you have condemned them a pretty crap life... one that I certainly wouldn't want to live.

The poor have enough money to buy flat screen tvs smart phones etc. This is why share of VAT has gone up. The best way to compensate the poor is to increase the tax free threshold which the coalition are doing but it needs to go higher I would like to see 15k. Its worth noting the greatest chancellor I.e. Alistair darling did not rule out vat increase as part of his deficit reduction plan.

Must sa, its an odd phrase to use when describing the spending habits of the very poorest, even though the cost of each of those items has reduced consderably. For new cars maybe 2nd hand cars; for meals take away meals; and holidays abroad just the one to Greece or Spain a year.

Osbourne was right. It IS a progressive tax. It is progressing to make the gap between rich and poor even greater.

Was that what he meant?

"The data, however, tells a different story"

You are delusional. The point the IFS (and Osborne) made was that you should judge the impact of a consumption tax by the expenditure distribution, not the income distribution.

This is because the bottom end of the income distribution notably includes people who are temporarily unemployed, but maintain spending habits from savings, and students, who don't have income, but spend a lot.

And yet, you cite data which *looks only at the income distribution* to disprove this point? Silly, silly, silly.

VAT is a progressive tax when supported by more progressive income tax and state support for the most vulnerable. The more people consume the more they pay.

Whilst low VAT as Labour wants would win votes, in the long run once the system balances its self out it is regressive. But Labour policy is set based on chasing votes, not on supporting the 'biggots' or the national interest.

A key factor for VAT is that it is a tax on imports (which are VATed) but not on exports (which are VAT free). Its one of the few legal import tarriffs we are allowed to charge.

Look at the socialist model Denmark where VAT is 25%.

Imagine, we could raise VAT to 22.5% and use the money to create jobs:
- NI break for everyone under 25
- boost the throughput of engineering and science graduates
- reduce corporation tax (which allows companies to grow and increases inward investment)
- invest in infrastructue.

A problem with the UK is the a large proportion of discretionary income of consumers is spent on imports - the money is given away to China and the UK does not receive the benefit. Increasing VAT and redistributing the money
- reduces the money leaks away through imports i.e. a net stimulus to the economy
- recylces stimulus so that it lasts longer and has more impact
- creates jobs which benefits the least well off

Howvever, VAT is not popular with voters as the benefit are longer term. That is why the Labour elite are pursuing low VAT.

Think Denmark.

Just to emphasise the point, high VAT penalises Chinese imports consumed within the UK but does not burden exports of Rolls Royce engines. Over time it will reduce the trading deficit -- the impact can be accelerated with QE which devalues the currency.

High VAT is also an automatic stabiliser - when the economy booms, more tax is collected and when it recedes the tax take is reduced effectively acting as a stimulus. Over the long term this will flattern the boom and bust resulting in increase trend growth and more jobs.

But VAT is not popular with voters in the short term which is why reducing VAT, to win votes, is Labour policy.

VAT is regressive according to the Government's own calculations. Download the Government’s 2010 Budget and look at Chart A2 of page 67. Look at the green bars which represent the effect of VAT per income decile.
Even if, by the IFS’s calculations VAT is "slightly progressive", it is still a tax that makes the poorest poorer! According to their definition a 94% income tax rate on the poor would be progressive, providing that a 94.1% income tax in the rich was in place. However, whether or not this is a reasonable definition of progressive, VAT still reduces how much poor people can buy. Income tax doesn't do this... because the poorest don't pay income tax to begin with. They're either on benefits, or earn too little to meet the personal allowance.
In terms of imports/exports...
The reason VAT may reduce imports is it generally reduces their power to consume... just like *any* tax increase... the difference being is that VAT is hitting the poorer harder than the alternatives.
In terms of the stimulus 'leaking'... VAT only stops a stimulus leaking because, if raised now, it would it render a stimulus ineffective! VAT lowers consumption because, just like any kind of tax, it eats into people’s power to consume. If you raise VAT at the same time as enacting another stimulus measure... e.g. an NI cut... sure, you're stimulus hasn't leaked... but only because your stimulus hasn't had any effect at all because you haven’t increase aggregate demand! You’ve given with one hand and taken away with the other.

People can’t buy more... therefore there are no extra jobs created in retail... no extra jobs created in manufacturing... and no market for companies to expand and sell their goods too.

Denmark... I agree with how the Danes run their economy in almost every respect; however, I’d more look to their 60% top rate income tax than their 25% VAT.
And on this ‘Automatic Stimulus’ point... no! The reduced VAT ‘take’ is not increasing aggregate demand, only a *decrease* in VAT level would do that. Again... the stimulus is mediated through people’s power to consume.

I wonder what time period the ONS dataset is from - and how the "luxury goods" purchased by the less well off compare to those on higher incomes.

Most adults in the country, irrespective of income, will probably have purchased a new item of AV equipment over the past few years, in the form of either a TV or a digibox.

Holidays abroad? It would be interesting to compare the type / cost of holidays among different holiday goers. With the rise of budget airlines in the past decade and internet booking, it may be possible to book an overseas holiday for significantly less money as a proportion of income than before these services arrived.

Meals out? Given the number of pubs offering 2 meals for the price of 1, a couple can eat out for under £20 including a drink each. Or if they go to a fast food restaurant, they could dine out for under £10.

New cars - presumably on a finance deal not available in 1986. Added onto which a new car may cost less in tax / fuel than their previous one, not to mention the Scrappage Scheme from a few years ago.

Photographic equipment - price reductions / buying on credit cards / "Keeping up with the Joneses", perhaps?

This 250% increase in "discretionary" spend amongst lower income groups presumably includes the purchase of computer equipment and internet connections.
Which, given succesive governments drives to "e-enable" essential public services and education, are in effect becoming more non-discretionary, if people are to participate in modern society.

It would also include car use which, with the dispersal of job opportunities, limited scope for moving areas and lack of investment in public transport, have also become less discretionary.