Tuesday, 22 June 2010

It Could Have Been Worse...

So, Budget II: The Revenge is unleashed.

I can't say I disagree with these measures:

  • Reforming and reducing benefits to target those most in need;
  • Cutting Corporation Tax to attract new investment and bolster the economy;
  • Reducing National Insurance to lower a financial disincentive to employment;
  • Increasing the Income Tax allowance for the lowest paid;
  • Consolidation of complex reliefs and allowances to save time and money.
All in all, it could have been a lot worse.

George Osborne's new favourite toy

However, there was one, wasn't there?

VAT.

It was bound to happen. The potential to raise so much revenue could not be ignored. And, of course, typically, much of the debate (read: screaming at each other) has been along ideological lines, rather than from the application of common sense.

So allow me to apply some.

Certain 'essentials', such as food and children's clothes, are exempt, or 'zero-rated' (they're charged VAT at 0% - important difference) from VAT. As such, people on lower incomes will be less affected by the tax rise than those on higher incomes, as they will be spending a greater proportion of their income on such essentials. So it's not as bad as Labour make out.

But here's the catch: not all 'essentials' are actually essential, and some things that are essential aren't actually 'essentials'.

For example, VAT is still charged on fuel, energy, adult's clothes, household appliances, most utility bills like telephone and broadband (odd, but an increasingly relied-upon resource). So the effect of the rise on the lowest paid isn't as minuscule as the Conservatives would have us believe.

So, the lowest-paid will not be as badly affected by the VAT rise as the well-off. So that's good, right?

Wrong.

VAT is a tax on goods and services. It is a tax on purchases. It is a tax that can be easily and legitimately avoided.

Did it not occur to the Chancellor that, if the price of just about everything is about to go up, people might not spend money that they otherwise would?

Raising VAT might not generate as much revenue as the Government think.

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