How much can a VAT increase hurt an economy?

**Denny Crane!** · January 04, 2011, 10:54 AM

The news is awash today with reports about how much the VAT rise will hurt the UK. This is 2.5% which makes the price rise a matter of a pound or even ten pounds on the biggest ticket items like a TV. Is this really that big a deal considering it will raise 13.5bn pounds a year for the treasury?

I personally only really bemoan the extra administrative cost to business during the turnover and the price of fuel which due to the weak strength of the pound is extortionate.

**MathiasOfAthens** · January 04, 2011, 11:00 AM

I buy stuff off of Amazon.co.uk all the time. I avoid the VAT by purchasing used instead of new unless I absolutely must and even then I still save money when I compare the cost on Amazon to the cost in a store near where I live.

If its only raising the tax on Tvs then I dont see how it will hurt your economy... if someone wants to buy a TV they generally buy one. Its not usually an item seen as "Oh I got to have this one too", I forget the word. Anyway VAT raised on smaller items like video games and books would of course hurt the economy. These items are less and less necessary at the immediately moment someone is purchasing something. I know when I buy something I always check the final price and if its over a certain amount I go back and delete an item and buy it next month. Raise the VAT and people will just wait until next month to buy something.

**justicar5** · January 04, 2011, 11:35 AM

This 2.5% one? Not as much as new labour claim thats for sure, seriously? It's not going to do much to comsumer spending, businesses that can will absorb it, leaving ticket price pretty much unchanged, those that can't must have been running razor thin margins anyway.

**Viking Prince** · January 04, 2011, 12:22 PM

I guess the question is whether on the margin a 20% vat reduces consumer demand sufficiently as opposed to the existing 17.5% vat to damage the sale and distribution of new goods. Obviously there will be an effect. Since this is after the government has cut back expenditures as well and not instead of cutting expenditures, the issue is harder to sort out. A better question would be if revenue is to be raised, is a vat the best means to do so? Consumption taxes are clearly better than taxing income.

**nemgod** · January 04, 2011, 12:55 PM

Worse than a lowering of the VAT would do. It might not change prices much BUT emotionally and psychologically it will cause an issue. People will see prices go up and be put off. Stop buying and save money for a later time. This will lead to a LESS amount of money taken for tax instead of more. Also adding the tax to Petrol/Diesel it will hurt on deliveries of goods to stores who will then push the price to the consumer.

A VAT drop would have been a much better idea. It would mean psychologically people will think they can afford and spend more. Although less tax money per item the amount of items sold will go up. Due to not only less tax on the goods but also less costs pushed onto the customer due to having to pay less on deliveries etc. when it comes to total amount of goods sold there will be more tax for the gov to play with (IE waste).

**High Chunker Greens** · January 04, 2011, 12:57 PM

Does anyone else think that censorship should be used for things like this? I swear if the news never reported such things people would never notice the difference and initiatives like this would work as they are intended.

**MathiasOfAthens** · January 04, 2011, 01:51 PM

lol like the American healthcare reform... if the media didnt report it and then get into all the opinions we could have universal healthcare by now. Opinions

things up just look at the straight facts on some issues.

Originally Posted by nemgod

Worse than a lowering of the VAT would do. It might not change prices much BUT emotionally and psychologically it will cause an issue. People will see prices go up and be put off. Stop buying and save money for a later time. This will lead to a LESS amount of money taken for tax instead of more. Also adding the tax to Petrol/Diesel it will hurt on deliveries of goods to stores who will then push the price to the consumer.

A VAT drop would have been a much better idea. It would mean psychologically people will think they can afford and spend more. Although less tax money per item the amount of items sold will go up. Due to not only less tax on the goods but also less costs pushed onto the customer due to having to pay less on deliveries etc. when it comes to total amount of goods sold there will be more tax for the gov to play with (IE waste).

Well the only prices that go up are the tax and that doesnt show up on the price tag until after you get through the register. So people wont see an increased price while cruising the aisles looking at cool things.

So your a trickle down kinda of guy....

**nemgod** · January 05, 2011, 09:24 AM

Originally Posted by MathiasOfAthens

Well the only prices that go up are the tax and that doesnt show up on the price tag until after you get through the register. So people wont see an increased price while cruising the aisles looking at cool things.

So your a trickle down kinda of guy....

Here it does show up before you get to the register. Total price is included on the labels with no pre or post tax differences shown. Also in stores and supermarkets I have seen price rises on all goods when there is a tax or price rise in petrol (or Gas to our US friends).

Also I wouldn't label myself as trickle down. Basically I don't have a full understanding of the terms. All I will admit to knowing is what I see and hear (which to be honest isn't that much either).

**MathiasOfAthens** · January 05, 2011, 02:32 PM

Originally Posted by nemgod

Here it does show up before you get to the register. Total price is included on the labels with no pre or post tax differences shown. Also in stores and supermarkets I have seen price rises on all goods when there is a tax or price rise in petrol (or Gas to our US friends).

Also I wouldn't label myself as trickle down. Basically I don't have a full understanding of the terms. All I will admit to knowing is what I see and hear (which to be honest isn't that much either).

So the tax is included in the price on the barcode on the shelf in Britain? Anyway I live in Sweden and I always use Amazon.co.uk to purchase American things or English books.

Anyway this page provides some examples of Vat and without VAT The price difference between Sales tax and VAT is very minimal...

**Rolling Thunder** · January 05, 2011, 08:38 AM

Well, here's to inflation.

**RO Citizen** · January 05, 2011, 10:04 AM

Well, I don't know in other countries, but a rise from 19% to 24% can effectively give the ultimate pwn to an economy, in the long term

**Musthavename** · January 05, 2011, 10:54 AM

The main "hidden cost" is this VAT rise increases the price of fuel, which because of it's nescessity in order to transport everything, increases the price of everything else. I think it's vastly preferable to a NI increase anyway (even if employee's NI is going up regardless because of some Liberal policy).

Still, it'll mean people have slightly less money to spend, and they won't buy as many luxuries. It certainly won't help some retailers, but it won't be that damaging at all. The real danger is if people see the price of food go up (which could happen anyway) and then start demanding inflation-busting payrises.

**JNS** · January 05, 2011, 11:36 AM

Taxes on goods consuption are an awful way to raise goverment income. It will decrease the amount of stuff people buy, as the perceived increase in cost may cause people to putt off purchaces for later, or just outright not purchase things that are not vital. In Puerto Rico we had no consuption tax until 2005. The goverment was (and still is) highly in debt and with an unbalaced budget. Rather than cut unessesarry legistaluture privileges (like paid cars, celphones, food etc, on top of a pretty good salary) they employed a 7% tax on everything. Let's just say that that decision among a few other caused us to go into a mini recession right about 2006 which was worsened by the 2008 crisis.

**Col. Tartleton** · January 05, 2011, 03:08 PM

I think sales taxes would be reasonable if that was the only tax in the land. You can't tax people on every stage of everything. You shouldn't tax someone for his income, tax someone for things when he buys things, and then tax him for owning things.

Income + Sales + Property Taxes are unethical. Pick one. And imaginary God help you when you try and throw in an Estate Tax...

Honestly, that's crazy. They tax you when you earn salary, spend savings, and possess property. Then when you die they tax your savings again...

One Tax.

**Viking Prince** · January 05, 2011, 04:03 PM

Originally Posted by Col. Tartleton

I think sales taxes would be reasonable if that was the only tax in the land. You can't tax people on every stage of everything. You shouldn't tax someone for his income, tax someone for things when he buys things, and then tax him for owning things.

Income + Sales + Property Taxes are unethical. Pick one. And imaginary God help you when you try and throw in an Estate Tax...

Honestly, that's crazy. They tax you when you earn salary, spend savings, and possess property. Then when you die they tax your savings again...

One Tax.

In the USA it is often that differant taxes are assessed by differant levels of government. Income taxes at federal and state levels. Sales taxes at state and local levels. Property taxes at local and often school district levels. Severance and tariffs at State and Federal levels.

And then the nature of the economy changes or levels of economic activity change. Bam!! Differant levels of government get squeezed and other taxes produce more than expected. Surprise though -- the surpluses are spent and the other taxes still 'need' to be increased.