Why VAT cuts help the poorest least

Augustus

A sound economy helps the poorest the most. Fiddling with VAT may stimulate purchases somewhat, but stimulating sound and constructive investment stimulates the economy most.

kinglear

The real problem is that the stuff we buy is almost universally now imported - so it won't help our economy one bit - it will help exporters in other countries.

RW

Fraser, you have not saved £15 on £600 worth of furniture, you have saved £12.77. I thought you, of all people, were supposed to be good at sums?

Tory Boy in the City

Whichever group you look at, they still gain the square root of bugger all

Chuck Unsworth

Those with large disposable incomes benefit the most from VAT cuts. It follows that those who are tightening their belts - or who simply are on the breadline - have proportionately less to gain.

Brown should have raised the tax thresholds of the lower paid and unemployment benefits - if he wanted to help them, of course. At least they could then afford to eat and heat their homes.

Maybe he's hoping for an increased winter mortality rate to reduce the two cost burdens of unemployment and the elderly poor.

Ann

You 'save like mad' but import 600 pounds' worth of furniture from Bali.
You couldn't make it up.

Alex R

Fraser,

Is worse than that. Remember poorer people will spend disproportionately more of their incomes on food, energy and probably childern's clothes; none of which are affected by the VAT change. Again, Brown will have been very aware of this when he decided on the change.

Rhoda Klapp

You can't build an economic stimulus on poor people's spending. The rich are far more likely to spend money, they are the ones who have it. Unpalatable though this may be, that's the way it is. So this govt must pretend to give money to poor people, useless though it is. And then it decides to do it through VAT, which is no good anyway, as it cuts out all expenditure by vat-registered business from benefit. All of which is obvious to me, and probably to the guys in the treasury who thought of the plan. Leaving the question, why?

Fraser Nelson

RW, what a slur! £600 was the price of the furniture - VAT@17.5%=£705, VAT@15%=£690 so saving=£15. And I don't claim to be good at sums, I just like them.

Fergus Pickering

Rhoda Klapp, you are surely wrong. The poor spend ALL the money they have. Yougive a beggar a pound and he buys a cup of tea. Give him five pounds and he buys a packet of fags.Give me a fiver and I'll very possibly bank it. So if the Government goes out, like Good King Wenceslas, giving fivers to poor men, they will spend these fivers immediately and stimulate the economy. That's the argument, isn't it? But if the Government givs the fivers to rich men, they will stuff them in the bank and that will not stimulate the economy. So Gordon, get those wellies on and uour sack of fivers. Go to it!

Augustus

Fraser -
In the shops I visit furniture price tags include VAT. So a retailer with £511 worth of furniture to sell would add £89 to make £600 for 17.5% VAT, but only add £76.65 for 15% VAT. Therefore one can see RW's point, i.e. a saving on the previous price of £12.35 or thereabouts. Surely?

Labour Matters

'Gain as a percentage of expenditure' is the incorrect measure because, as you point out, those on the lowest income pay less VAT on their total expenditure because of the effect of zero rated and reduced rated items, which they spend more of their expenditure upon.

If VAT is regressive (and it is) then the converse can not be true too, QED.

In fact, this is a statistical sleight of hand (and to see this hypothetically assume that the Chancellor had raised zero rated and reduced VAT items to 17.5% at the start of his PBR speech, and then reduced them back to where they were whilst still reducing VAT on the rest from 17.5% to 15%. Instantly, the tax changes become progressive!)

If you measure the effects of the actual tax changes, which only affect those items taxed at 17.5%, and apply them to the real world (where the poorer people tend to increase their spending on zero rated items if they have more money) then the VAT change (can) also become progressive. For example, if the original tax saving is subsequently spent on items which have no VAT for the poorest, whilst those who aren't hungry spend it (like you) on items which have only had their tax reduced by 2.5%. The poorest therefore save 2.5% plus an additional 15% of that tax cut, whereas you save just 2.5%.

Funny things statistics!

Athesius the Facilitator

Therefore you have used a "Brownie" in your article. I think Miss Jean Brodie would say you are a naughty wee toe rag. Surely the COST of your furniture has to include the VAT.

Fraser Nelson

Augustus/RW, herewith my defence... When you import furniture direct from the supplier there is not retail price because there is no retailer. The shop which sells my retailers' products (at five times the cost I pay) has prices which include VAT. I email the guy, he gives me a price - £600 for what I wanted - and I had prepared to pay £705 for it with the VAT. Turns out I just need to fork out £690.

Labour Matters, please keep coming by CoffeeHouse. I do like your posts. If you look at the IFS presentation they make all this clear: you can look at it by income groups, where it is theoretically progressive, but when dividing by spending patterns (as the graph above shows) it's regressive. In my case, If I knew about the VAT cut before I sent my order, I wouldnt have spent more. And if I had, a few Indonesian carpenters would have been raising a toast to Brown for helping their economy. Problem is, they can't vote.

Athesius, the COST of my furniture would also include fumigation and the £200 I paid to get it shipped up from Southampton but I figured I'd spare you guys the details.

Fraser Nelson

Augustus/RW, herewith my defence... When you import furniture direct from the supplier there is not retail price because there is no retailer. The shop which sells my retailers' products (at five times the cost I pay) has prices which include VAT. I email the guy, he gives me a price - £600 for what I wanted - and I had prepared to pay £705 for it with the VAT. Turns out I just need to fork out £690.

Labour Matters, please keep coming by CoffeeHouse. I do like your posts. If you look at the IFS presentation they make all this clear: you can look at it by income groups, where it is theoretically progressive, but when dividing by spending patterns (as the graph above shows) it's regressive. In my case, If I knew about the VAT cut before I sent my order, I wouldnt have spent more. And if I had, a few Indonesian carpenters would have been raising a toast to Brown for helping their economy. Problem is, they can't vote.

Athesius, the COST of my furniture would also include fumigation and the £200 I paid to get it shipped up from Southampton but I figured I'd spare you guys the details.

Rhoda Klapp

It#s not the 1% for the poor vs 2% for the rich. It's the multiplier, 2% of how much, that determines the degree of stimulus (if you are a believer, I'm afraid I have to suspend disbelief every time). The poor don't have enough money to make a difference.

Andy Leeds

Buying furniture from Bali is a serious lapse of good taste. Fraser is guilty as charged. Lets us proceed to sentence. . .
(PS. Now is an excellent time to but buy good piece of fine Georgian furniture. They are as cheap as chips)

Praguetory

I like Labour Matters' posts too, because his/her arguments are easy to demolish.

Athesius the Facilitator

Its still a "Brownie" Whatever way you read your post Fraser the whole story was not told. We have been misled. I think you may have a dodgy dossier on furniture. Anyway you should buy British.