Support 100 years of independent journalism.

  1. Business
  2. /
  3. Economics
  4. /
4 January 2011

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

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

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.

Sign up for The New Statesman’s newsletters Tick the boxes of the newsletters you would like to receive. Quick and essential guide to domestic and global politics from the New Statesman's politics team. The best of the New Statesman, delivered to your inbox every weekday morning. The New Statesman’s global affairs newsletter, every Monday and Friday. A handy, three-minute glance at the week ahead in companies, markets, regulation and investment, landing in your inbox every Monday morning. Our weekly culture newsletter – from books and art to pop culture and memes – sent every Friday. A weekly round-up of some of the best articles featured in the most recent issue of the New Statesman, sent each Saturday. A weekly dig into the New Statesman’s archive of over 100 years of stellar and influential journalism, sent each Wednesday. Sign up to receive information regarding NS events, subscription offers & product updates.
I consent to New Statesman Media Group collecting my details provided via this form in accordance with the Privacy Policy

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.