In the run up to this year’s General Election there is continuing speculation that both Labour and the Tories have secret plans to increase the rate of VAT to 20%. There are grounds to suspect that, in the event of a majority government for either party, the continuing fear of raising Income Tax may prompt such a move. Of course the Tories have always been keen enthusiasts for regressive taxation such as VAT, and they look the more likely to push for an increase. After all, they do have something of a history.
When Margaret Thatcher arrived in Downing Street in May 1979 the rate of VAT stood at 8%. Within a month Geoffrey Howe, in his first Budget as her Chancellor, had raised the bar by almost double to 15% and thus prompted a massive shift in the tax system from what we earn to what we spend. So began the Tory love affair with VAT.
Value Added Tax was introduced by Ted Heath’s Conservative government in 1973 as part of the conditions for Britain’s entry to the European Economic Community and the initial rate was set at 8% (with a 12.5% rate for certain luxury goods). During the 1979 Election the Tories repeatedly denied that they had any plans to double the rate of VAT, hiding behind the pedantry that a rise from 8% to 15% wasn’t quite double the rate they inherited. No matter, twelve years on Norman Lamont completed the job by raising the tax to 17.5%, the rate it stands at today. The 1991 hike was supposed to be a temporary measure to cover the cost of the switch from the failed Community Charge (Poll Tax to you and I) to the only slightly less unfair Council Tax. Unsurprisingly the Major government never reversed the rise.
The Tories love VAT because it is a tax on spending, it is easy to collect and enables rates of Income Tax on the highest earners to be reduced. Taxes such as VAT always have the biggest impact on the poorest in society because naturally a larger proportion of their income is spent on day-to-day items. The net effect is that the lower your income, the larger the percentage of it that goes to the Treasury.
David Cameron and George Osborne are being very cagey on the subject at the moment, but if the Tories manage to form a government after the election no one should be surprised if VAT stands at 20% before the end of the year. The generational Tory denial about this most regressive of taxes is highlighted by the continuing lack of concern that their largest individual donor, Michael Ashcroft, seems strangely reluctant to clarify whether or not he pays tax in the UK at all. It’s hardly breaking news to point out that the Tory approach to taxation is based on two very different sets of rules: one for the rich and one for everyone else.