scrubbedexpat141

In the UK, or another similar location, instead of taxing people on their salaries / income, everyone was subject to far higher VAT levels. What would the outcome be?

Similar levels of revenue for the government?

Irishbeekeeper

Thats a very good question. I would think the population would play a major factor in that statistic.
I dont have an form of finance background but my first question would be what is the entire number of registered businesses with the chamber of commerce of the UK (or a similar body) VS the entire population of the UK? Because VAT will hit everyone wouldnt it. The earners, non-earners, the traders the manufacturers, the importers.
VAT basically is 5% of any business's gross profit and keeps on carrying that same equation (i.e. earning for the government) till it hits the end-user.

scrubbedexpat141

Exactly. It generates revenue from people at all stages of life, all income levels and all areas.
Old people would still be contributing, for example.
Very few would manage to avoid any forms of VAT given it's prevalence.

UKCityGent

You currently have VAT on the majority of goods so it would need to be a hefty increase which would include the National Insurance contribution - so instead of 20% maybe 35-40% VAT may balance the books ?

One of the things that peeves me off is uninsured drivers - i think the Government should raise the price of fuel by an extra 1p a gallon and that would ensure that everyone has the minimum level of insurance automatically.

Millhouse

You are suggesting to moving to a 100% consumption tax system (a bit like Dubai then if you think about school fees as tax etc).

Under such a system, the poor would take a much larger pro-rata share of the tax bill while the rich would get richer. The middle classes would see some relief of their taxes. Asset prices would probably rise significantly and the poor would be totally priced out of it.

There would be no easy way to implement tax allowances for the poor so we would expand the welfare and subsidy system to compensate.

scrubbedexpat141

Would have to be that high or even higher I think.

Interesting second point. Cars would have to not be deemed 'luxury' or an extra to allow the government to subsidise the running of them (insurance).
If it applied to everyone then I guess it may help provide basic cover if someone bumps and runs? Is that what you mean?


I think you're right about the pro-rata element, but the incentive to work would be high wouldn't it? Low paid jobs suddenly take home a fair chunk more than they did. Prices go up but people would convince themselves they'll spend less (or something, perhaps).

Tax allowances would almost have to be individual, or coupons. I can't see how it would work either.

NOTE:
I am not saying it's right or wrong, someone suggested it to me the other day and I argued it wouldn't work...

Bahtatboy

It runs against the basic principle that people should pay according to their ability to do so. There's no perfect system, but the proposition would severely disadvantage the poorest strata, so other measures would need to be put into place to address the imbalance and so protect them. I can't see the point, and implementation (with all the other measures) would be a nightmare.

Millhouse

Well not really - the poor probably don't pay much income tax thesedays in the UK. The initial tax-free income allowance makes sure of that. Your proposal means they will start paying tax from the first cent earned. Not sure if this is an incentive or disincentive to work.

Subsidies on goods (inefficient), exceptions (also inefficient) and cash handouts given directly (often unpopular).

I actually prefer consumption taxes to income taxes as a general system - you can elect to avoid certain ones by changing consumption patterns etc, but it is a system that disproportionately allocates the bill; in a way that probably favors me.

Miss Ann Thrope

I agree with Millhouse and Bahtatboy. Furthermore, the economy would probably be severely undermined as all purchases that people could possibly divert abroad would go there, again further punishing the less well-off who could less afford to do this and for whom a far larger proportion of their expenditure would be on food essentials. Lots of new dodgy domiciles would appear from shady parts sucking up property and driving up house prices in sectors well below the billionaire threshold. Probably a boon for the Republic of Ireland in the new magical techno-border-free fantasy land for which we are apparently headed...

So overall an even stupider idea than Brexit!

Millhouse

I generally prefer it when you don't agree with me and snipe from the sides. This feels uncomfortable.

Miss Ann Thrope

Only at first, I promise...

scrubbedexpat141

What if the VAT rate didn't rise as much?

Would people spend more if they earned tax free cash and has more disposable income?

Millhouse

Yes - but not in the areas you'd probably want. There's only so much shit people can consume so you'll create asset bubbles, probably in real estate - ever wondered why Dubai housing is 2x UK prices? and is falling quicker than a jam sandwich on to new carpet at the only smallest introduction of tax.

GolfGardener

What an interesting question!

Let's look at some real numbers: In the UK in 2017, Income tax plus NI raised £363m, while VAT raised £162m (see https://www.ukpublicrevenue.co.uk/download_single_year). So other things being equal, your VAT's going to have to increase from 20% to 65% in order to balance the books (i.e. a 225% increase).

At the moment, the median household pays around the same amount in direct taxes as in indirect, so they should come out pretty much even.

Those below the median will suffer severely, because as Millhouse has already pointed out, the poor don't pay much income tax today but still have to spend money on stuff to live. In 2010/11 those in the bottom 40% paid on average 11.5% of income in direct taxes and around 23% in indirect (see The Effects of Taxes and Benefits on Household Income, 2010/11 - ONS). So while they're going to get back that 11.5%, the increase in VAT will push the indirect take up to around 80% of their income if they continue to consume in the same way as today. In order for those people not to starve, minimum to average wages will need to increase significantly or additional cash transfers from the state will be required, which will in turn feed into even higher prices for goods and services and/or higher VAT requirements. It's difficult to see where that cycle would balance out.

The rich would be moderately richer, as they currently pay more in direct taxes than indirect (22% versus 12% for the top 40% of earners).

And of course other things wouldn't be equal. Inward tourism would pretty much cease and controls would need to be put in place to prevent UK citizens from spending their tax-free incomes overseas. Think Eastern Europe under communist rule.

I'm not sure it's such a good idea...

Millhouse