Thursday, January 6, 2011

Did VAT absolutely HAVE to go up?

In this week when the standard rate of VAT was increased to 20% the question has been asked as to whether it was necessary.

If you agree that TAXES had to increase the answer is 'Absolutely, yes, it had to be VAT'. If you favour other ways to resolve the deficit then the answer may be different.

Almost a year ago in February 2010 I wrote a post on this blog explaining WHEN tax rises actually generate money for the Exchequer. I focused on those key taxes that contribute the most money each year. So I looked at income tax, corporation tax, National Insurance and VAT.

I noted that VAT is the ONLY tax where a change of rate has an almost immediate impact on the taxes that flow into the Exchequer. For that reason, back in February 2010 I predicted, as did many other commentators, that the rate of VAT would rise to 20% - regardless of who won the election.

It is simply not credible to suggest that other taxes could have been increased instead of VAT to fill the gap in the short term. Some of the comments made this week by Ed Milliband and by his, self confessed, trainee Shadow Chancellor Alan Johnson, suggest that they do not understand this pretty basic point.

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