If an increase in VAT is introduced, it would be better that a luxury rate of 25% is introduced for higher-value items.
The coalition government’s first budget is going to be quite an earful. At its formation in the week after the election any increase in VAT was said to be in the future, but recent comments hinted at extending VAT, God forbid, to the exempt sectors, such as food, children’s clothing, and shoes and to industries in terminal secular decline, namely books and newspapers.
Now, the volume has been turned up on a VAT increase to 20% before this first budget later today. If the allure of a “simple” £12.5 billion increase in tax receipts has got the better of the Chancellor already, then here’s why he would be wrong.
The main plank of the coalition’s structure is the Lib-Dem insistence on taking about a million of the poorest taxpayers out of tax altogether, by increasing CGT from 18% to 40% or higher. Any increase in CGT will receive a huge boo from Tory voters, but then to saddle the lowest paid with higher VAT will render this plan into a financial Spanish omelette, with the Tories complaining that the higher CGT has been forced by any such VAT increase, a self-inflicted taxation oxymoron.
If an increase in VAT is introduced, it would be better, if the idea of supporting the poorest still holds, that the standard rate is left at 17.5% while a luxury rate of 25% is introduced for higher-value items. If your Range Rover Sport sets you back £46,000, would you not buy it for £49,000? And if your bottle of wine costs over £20.00 would you baulk at paying £21.50? Or if your new suit or garment costs over £1,000, would you not buy it at £1,075? (Wedding dresses and beer would be exempt, naturally. And why let foreign buyers escape the 7.5% luxury rate on their purchases in the UK when they leave the country?)
This increase would help the poor and not deter the rich and would probably give the Treasury what it was looking for.
Anyway, we will know in two hours' time. Yet in an economy where the public sector accounts for 52% of GDP, the real action must be focused on the public sector cuts to be announced in the autumn…