Tax rises appear increasingly likely. Polly Toynbee discusses some possible tax changes, including VAT (Both left and right agree taxes must rise. Time for Labour to get creative, 12 August). My view is that a 2.5 percentage point rise in the average VAT rate is the most viable option to raise sufficient revenue without reducing growth.
Toynbee also discusses possible changes to inheritance tax and the introduction of a wealth tax. These policies may be redistributive but are unlikely to raise substantial revenue. As an example, Norway currently imposes a wealth tax that raises less than 3% of its non-petroleum tax revenue.
Given the urgent need for revenue, a VAT raise is likely to be the UK’s best option. First, VAT raises significant revenue, at about 17% of total UK tax revenue. This means that a 2.5 percentage point increase may raise as much as £21bn yearly. This is roughly five times more than what it is expected the government will raise from the stricter taxation of non-domiciles.
Second, VAT poses limited harm to growth. Since it also applies to people who are outside the labour market, it dampens work incentives less than income taxes do. A VAT rise may partially replace the government’s failure to reform disability benefits. In addition, increases in VAT do not reduce incentives to save, as costs go up by the same ratio today and in the future.
And third, VAT can be quite progressive. While new savings are unaffected, old savings that people spend in the future are subject to VAT increases. Most importantly, while the VAT rate is flat, using the revenue to support public services disproportionally benefits the poor. This means that raising sufficient revenue may be most important for progressivity.
Kristoffer Berg
Lecturer, Trinity College, University of Cambridge
• Anent Polly Toynbee’s tax suggestions for Labour, if it regains its heart, may I add two. The best taxes not only raise money but also do societal good. So why not use one to address climate, inequity and safety issues, by taxing cars by their weight and annual mileage as reported at the MOT test? Both relate directly to their energy use.
Anthony Seaton
Emeritus professor of environmental medicine, University of Aberdeen
