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VAT is inherently regressive

06 Nov

From: http://www.bbc.co.uk/news/business-15519727

Poorest spend higher proportion on VAT than richest

The poorest 20% of UK households spend a higher proportion of their disposable income on VAT than the richest 20%, the Office for National Statistics said.

Its research covered 2009/10, which was before the increase in VAT from 17.5% to 20% in January 2011.

When Chancellor George Osborne announced the increase in his 2010 Emergency Budget, the government said that VAT was a progressive tax.

But the ONS research suggested that is not the case.

It said that the poorest fifth spent 9.8% of their disposable income on goods attracting VAT in 2009/10, while the richest fifth spent 5.3%.

That figure for the poorest fifth showed a considerable fall from the figure of 10.7% in 2008/9 and 12.1% in 2007/8.

It is sometimes argued that the poorest households are not hit as hard by rises in VAT, because the tax is not charged on essential items such as food and non-alcoholic drinks.

The ONS research also found that the poorest households spent 58% of their expenditure on goods on which VAT was charged in 2009/10, much higher than the 45% they had allocated to VAT-charged items in 1986.

“This latest piece of research reinforces what is widely perceived to be the fundamental inequality at the heart of VAT: the poorer pay more of it relative to their incomes than the wealthy,” said David Breger of HW Fisher & Company chartered accountants.

“It’s clear that the Government needs to reconsider the full effect of VAT, which is inherently regressive.

Proportion of disposable income spent on VAT

  • Poorest – 9.8%
  • 2 – 7.4%
  • 3 – 6.9%
  • 4 – 6.3%
  • Richest – 5.3%

Source: ONS

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