23 06 2020

VAT has always been a stealth tax – it's about time we cut it

Rishi Sunak plans to cut VAT, but when Labour chancellor Alistair Darling did the same after the financial crisis he was derided

News of the government’s plans surfaced, as they always do these days, in a private briefing – that the chancellor, Rishi Sunak, plans to slash VAT, in an emergency measure to stimulate spending and boost the post-Covid economy, from 20% to 17%. We should note, before anything else, that this must be a plan in the making rather than the finished document. As any fool knows, the first principle of VAT is that you should be able to calculate it in your head, when you’re standing on someone’s doorstep, telling them how much it will cost to order them a new basin. Hence 12.5, 15, 17.5, 20 percent – 17% makes no sense at all. But even a plan in its incipience tells you more than you might at first think.

I am exactly the same age as VAT, and here follows its political symbolism over a lifetime. It was introduced in 1973, when the UK joined the European Economic Community, to replace purchase tax, which had been structured in a much more progressive way – its rate moved up, according to the luxury of the good being levied, so even though purchase tax was still indirect, it fell more heavily on the wealthy. With the introduction of VAT, the rates were harmonised – with some exceptions, goods like food or children’s shoes charged at a zero or lower rate – so the burden fell equally on everyone. This made it regressive, and the higher the VAT rate, the more regressive it is.

The EU, over time, set a minimum level of 15%, except in special circumstances – which, considering sales tax was previously set at 10%, even by a Conservative administration in 1973, made the EU the driver of an essentially anti-progressive policy. It’s a useful, if tangential thing to remember, for the despairing remainer: the EU wasn’t perfect. If we’re ever going to make our peace with the coming breach, we need to make a clear-eyed account of what the past was like.

Yet in special circumstances, an individual nation could insist on a lower rate for VAT: Alistair Darling didn’t need to, following the financial crisis in 2008, since he just wanted to reduce the rate from 17.5% to the minimum 15%. You really had to be there to remember the ridicule this generated. It was piecemeal, it was pathetic, yet at the same time it was crazily expensive and horrifyingly risky. It was the act of a chancellor who didn’t know how much trouble the nation was in, but also one who panicked and couldn’t keep his head. In 2009, the Institute for Fiscal Studies, among many others, judged it to have been a significant success, and the lesson from this isn’t so much about the tax itself as the business of commentary. Did anyone ever say: “We got this wrong, it turned out he’d thought slightly harder about this than we had?” Not to my knowledge. Perhaps it sounds like petty media-bashing, but there was something calcifying in this decade: no critique of a policy was ever measured against its outcome. The same people who ridiculed Darling will now be praising Sunak as a visionary. A commentariat that lacks the inclination to revise its view, to eat its hat or humble pie, creates a politics lived in the perpetual present.

Nothing is more depressing in VAT history, though, than to remember the downfall of Labour’s former shadow chancellor Alan Johnson. He made a mistake, failing to understand, or at least to flag that he had understood, that there was no VAT on food. He became a pariah as a result, and on that butterfly’s wing, Ed Balls became the only possible shadow chancellor of the early 2010s, ushering in Labour’s mea culpa strategy of accepting responsibility for a global financial crash and not opposing austerity. The expectation of competence we had back then – 2011 – was unbelievably high. We’re now in this world where a minister of government might not know where France is relative to England, until he is literally standing in Dover, and manage to shrug it off; where ignorance and incuriosity are paraded as proof of populist credential. I feel a degree of sympathy now for politicians who were pilloried by the standards of a different age, and even more for those who were castigated wrongly. But more than that, I miss the days when we used to have standards.

VAT in its early years was a manifest statement of political intent: Labour chancellors kept the base rate very low, then went wild with the luxury rate (Denis Healey at one point had the higher rate at 25%). Conservative chancellors would then come in and “harmonise”, and this was a classic framing triumph: who could possibly disagree with bringing harmony? Yet, of course, it meant saddling the general population with a tax that was previously weighted for the broad-shouldered.

From 2011, VAT has been at 20%, the highest general rate since its incipience, and it came in and held without meaningful dissent. It is the one stealth tax that the right doesn’t seem to mind. It accounts for nearly a fifth of all tax revenues, which ought to underline that this is not some sideline tax burden, unseen except by wonks, but a significant feature of everyone’s financial life, as political as income tax but nothing like as scrutinised or contested. The fact that a Conservative chancellor is readying to cut it signals something important that perhaps we already knew: that really a Conservative chancellor has nothing up his sleeve, post-Covid-19, that a Labour chancellor hasn’t already tried. All cats are grey in the dark, and all governments are Keynesian in a crisis.

https://www.theguardian.com/commentisfree/2020/jun/22/vat-stealth-tax-time-cut-rishi-sunak-alistair-darling