Standard VAT Rates on All Goods ‘Could Cut Other Taxes by £11bn’.
If a VAT rate change was made so that all items, including food and children’s clothing were the standard 17.5%, it would raise enough revenue to increase benefits for poorer families and cut other taxes by over £11bn, a leading economic think tank says today.
The pre vat rate change 17.5% duty is around the average for industrial countries but Britain applies zero rates more extensively than most other countries, according to the Institute for Fiscal Studies.
Residential housing, children’s clothing and most foodstuffs have no VAT added to them, while a reduced rate of 5% is applied to items such as domestic energy, contraceptives and children’s car seats.
The study, which feeds into the wider Mirrlees Review of tax system reform by the IFS, was carried out by Ian Crawford from Oxford University, Michael Keen from the International Monetary Fund and Stephen Smith from University College London.
They said applying zero or reduced rates of VAT to items on which poorer households spend a large proportion of their budgets was not a good way to help the less well off, as richer households gained more in cash terms from these tax breaks than poorer ones.
Scrapping the zero and reduced VAT rates would raise around £23bn, the study found.
Around £12bn of this could be spent on increasing means-tested benefit and tax credit rates by 15%, leaving the poorest three-tenths of the population better off on average, the IFS said.
The remaining £11bn could be used by the Government to cut other taxes or spend in other ways. It would therefore not be difficult to compensate most poor losers from the move to a uniform VAT - and the extra revenue raised could improve their living standards, economists said.
But the authors acknowledged that the barrier to implementation would be the reluctance of politicians to be seen to propose taxing “essential” items.
IFS director Robert Chote said although VAT was widely recognised as one of the most efficient taxes, there were “real improvements to be made”.
The study also examined excise duties on cigarettes and alcohol, which are substantially higher in the UK than in many other EU countries.
The authors said it was “far from clear” that the high rate of tobacco duty could be justified given that smokers die early, saving the rest of society a “considerable sum” in pension and old-age care costs. But they conceded that the high rates may be appropriate to help protect people from the consequences of their own decisions.
High levels of alcohol VAT were not particularly “well targeted” as levels high enough to curb abusive drinking by a minority imposed significant welfare costs on the majority of non-abusive drinkers.
