23 November 2019

Our consumption taxes are a nonsense – it’s high time for reform


With both parties turning on the spending taps to varying degrees it looks like we can expect higher taxes in the future. With spending pressures set to mount in the next few decades, there now needs to be a serious political debate not just on rate of tax, but what kind of taxes we use to raise revenue.

Our tax system is riddled with needless inconsistencies and is, in many places, devoid of strategy. Nowhere is this clearer than in the way we tax consumption. By international standards, the UK’s VAT base is unusually narrow, with a wide range of exemptions and reduced rates. One measure of this is the OECD’s ‘VAT Revenue Ratio’ (VRR). The index ranges between zero and one, where one denotes a VAT system that applies a single rate to all expenditure on goods and services. The UK’s VRR score stands at 0.44, well below the OECD average of 0.56.

Many would argue that having such a narrow VAT base is a good thing – after all, why shouldn’t certain goods be zero-rated in order to incentivise certain behaviours? This is a valid point, and indeed one of the primary functions of consumption taxes. However there are many cases where goods are zero-rated without any discernible purpose. Why, for instance, should flapjacks be zero-rated while cereal bars are subject to the standard rate? Is there a good reason for zero-rating vegetable crisps and applying standard-rate VAT to potato crisps?

But VAT is just one of our poorly designed consumption taxes. Different sources of pollution are taxed in various ways: we have fuel duty, air passenger duty and the climate change levy to name a few. If all of these are targeting the same thing, it would surely be preferable to adopt a broader carbon tax. Similarly, duty on alcohol varies wildly, but not on the basis of alcohol content: a 6% cider is taxed at just 7p per unit, but a low-strength wine, also at 6% alcohol content, incurs 50p of duty per unit. In short, many forms of consumption tax do not fairly and consistently target the behaviour they are intended to discourage.

It has often been said that even if consumption taxes do need to be reformed, it will never happen; one need only look at the ‘pasty tax’ debacle in 2012, where the then-Chancellor George Osborne attempted to apply VAT to hot takeaway food, to see how politically difficult a bold reform in this area would be.

Yet the idea of taxes associated with personal choice does have appeal among voters. The principle of consumption taxes is in fact broadly accepted by the public; indeed, ‘sin taxes’ such as those on alcohol and tobacco receive widespread support across party lines. What voters object to is a system of consumption taxes that is complex, poorly targeted and often arbitrary. Given that taxes will almost inevitably have to go up, it’s high time that politicians articulate a vision for Britain’s much-maligned consumption taxes and ensure that they tax what they are supposed to.

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