I said that Gordon Brown’s VAT cut was too small to notice – yet I have just saved £15 on furniture imports from Bali. Of course, £15 is a serious, noticeable amount of money. Problem is, it only helps people who have £600 to fork out on furniture. And here this is another defect of Brown’s useless VAT cut: it helps people like me – who are saving like mad to atone for their borrowing sins – instead of helping the lower-income groups who are most likely to spend extra money. The VAT and duty cuts announced in the last pre-Budget report are, in fact, perfectly regressive – helping the richest the most and the poorest the least.
This should not be so – at least not in theory. Sales taxes are flat and, ergo, regressive as they take a greater proportion of poorers people’s income. So cut them and you should, in theory, help the poorest the most. I suspect Brown reasoned this way before going ahead with the VAT cut (alongside a calculation that if helped every shopper so they should all be grateful to him).
But this hypothesis collapses when you factor in spending patterns. For example, the poorest spend most of their money on food and children’s clothes – and VAT isn’t payable on them. It’s people like myself, fortunate enough to be able to import furniture from old honeymoon destinations, that get the biggest savings. Here is a graph from the redoubtable Institute for Fiscal Studies showing just how the VAT cut helps the richest the most.
Gains: % of spending, by spending level
VAT + duty changes in 2008 Pre-Budget Report
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