Debate Magazine


Posted on the 29 July 2016 by Markwadsworth @Mark_Wadsworth

I recently received another email extolling the virtues of VAT and saying that it fixes perceived problems that LVT can't.
Firstly, there is allegedly massive corporation tax avoidance, so VAT is a way of collecting a share of (taxable) profits at source. Nonsense, in relative and absolute figures, there is far more VAT avoidance/fraud that corporation tax avoidance/fraud. For example, Google were invoicing UK customers from the Rep of Ireland to avoid VAT, allegedly.
Secondly, it discourages consumption - the logic being that it thereby encourages investment instead. Duh. You will only invest in a business if it can produce and sell stuff profitably. If the amount of stuff it can produce and sell profitably is significantly reduced by VAT, then there is significantly less investment.
Thirdly, VAT falls more heavily on services (cutting each other's hair) than on exports of goods (which are zero-rated for VAT). That is blatant mercantilism and the opposite of free trade. Plus what's wrong with cutting each other's hair if it adds to the sum total of human happiness?
Finally, to the extent that you perceive the trade deficit as a problem, clearly, having 20% VAT has not reduced the trade deficit at all, unless some maniac wants to suggest massive import duties and 40% VAT? So it's an interesting theory but fails completely in real life.
Ask yourself, if we buy stuff from abroad, what is the foreign exporter going to do with its GBP?
A buy UK government bonds
B buy land (and collect rent in future which worsens deficit)
C buy shares in UK monopolies (railway, utilities, banks etc)
D buy shares in productive UK businesses
E invest directly in expanding a UK business
F buy goods and services from us
If the government is not running a deficit then A is not a problem, and deficits would be lower with LVT. Even if it is running a deficit, what matters is whether the money is being spent/invested wisely. Ultimately, those UK govt bonds will never be repaid and the interest cost is minimal, with or without LVT.
B - If we have a significant reduction in taxes on production and a corresponding significant increase in LVT, then they can't do B. If they acquire land, they will end up paying back their GBP to the government. The accumulated trade deficits melts away. So this also reduces future trade deficits (rental stream won't be going abroad).
C- Remember that what foreigners really like buying is rental stream/monopoly profits - railways, utilities, banks. This is not really "investment" at all. We can collect that rental stream at source via the tax system i.e. under the same principles as LVT.
D - If they want to buy existing businesses, then fine. Somebody builds a business and he can sell it to who he likes. The UK government always retains a 20% via corporation tax anyway.
E is always cheaper than D. UK shares trade at three times real assets, the rest is "rent", so why not buy plant and machinery and set up on your own? Clearly, whoever sold us "stuff" is good at making "stuff" and is well placed to make "stuff" in the UK, especially if the worst taxes on UK business (VAT and NIC are reduced/scrapped). He can spend £1 on shares for 4p a year dividends or spend £1 on plant and machinery for a 12p return. So more real foreign direct investment.
F - what are foreign exporters going to do with their remaining GBP, having exhausted A to E? They will spend it on UK goods and services.
(The foreign exporter could of course just leave the money in the bank, which the banks can then lend to UK businesses, which achieves D by the back door).
As a result of which, the trade deficit melts away, output goes up, unemployment is reduced, this is one of those things that LVT sorts out on its afternoons off, it is not the main event.
I really don't know what is so difficult to understand.

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