Is the Chancellor hitting the poor with the VAT rise?

Thursday, 24 June 2010 04:20
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Much of the uproar over the VAT increase has focussed on whether it is regressive and bad for the poor.

This is very much missing the point about VAT. It is very bad for business, especially smallish ones. Either they cannot claim back the VAT paid on inputs (if they are unregistered) or they are saddled with the administrative costs, which are considerable. And they have to build the VAT into the prices they charge, which does not bring customers into the shop. To say nothing of the fraud that goes on.

VAT has much the same effect on the economy as pouring a mixture of sand and water into a machine. It is especially damaging for service industries such as building and catering. It puts people out of work and onto the dole or into the so-called Black Economy.

And all this from a supposedly pro-business Conservative chancellor.

So what is its effect on the poor? In that benefits are linked to prices, the VAT rise will also mean that government expenses will go up. Welfare payments must include a sum to cover the cost of the VAT on the money that claimants spend, leading to an inflated bill for benefits, even when these are little more than bare subsistence. This leads to more ”churning”. It also raises the minimum cost of labour. It is at this point that the poor are hit, since the higher the level of benefits, the more they are priced out of employment. Thus the real mischief inflicted by VAT on the poor is to aggravate welfare-dependency. It does not help people stand on their own two feet, as Conservative rhetoric would have them do.
 

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