Regional VAT, an idea for Ed Balls

by Dan McCurry

When I was in Arizona, I kept getting overcharged in the shops. At least I thought I was, until I objected and was told that the extra 7% was the state sales tax. They weren’t including it on the price tickets, because Americans are weird. These days Arizona charges a whopping 9%, compared to Virginia at 5%, and New Hampshire at 0%. There is no strategy between these different rates. This is America. The states just do their own thing.

In the UK we pay 20%, and we call it “Value Added Tax”, because we’re not weird.  Imposed centrally, we apply this tax at a uniform rate across the country, but if we wanted to, we could charge different rates in different regions, while continuing to collect it centrally.

There is a potential serendipity to Labour’s economic policy, when looking at two of the main drivers of stimulating the economy in Labour’s five point plan for jobs and growth: house building and a VAT reduction.

Mass house building is firstly intended to create demand in the economy, but by solving our chronic housing shortage, we reduce our private sector rents, and thereby counter poverty. It all seems so neat that, however, there is a flaw in this strategy.

The area that needs massive house building is London and the South East, but the economy is fairly frothy in this area, so there is not much of a demand problem. Much of the rest of the country doesn’t needs housing, but does have a lack of demand.

So although there are many infrastructure projects in other parts of the country, the stimulus from house building would mostly effect the south east, which is not where it is mostly needed.

The other policy of Ed Balls is to affect consumer spending through a reduction in VAT.

The problem with VAT is that it can be fiddly. When Gordon gave us a 2.5% cut, I don’t think I’m the only one who was irritated at being given coppers in change for my coffee, and it didn’t take long before the coffee price went back up and the vendor pocketed the difference. Retail prices tend to gravitate to round numbers, meaning that VAT cuts need to be substantial to be worthwhile.

If Ed Balls concentrated his VAT cut on the regions that are not getting a house building boost, then he’d probably be able to double the size of the VAT cut. In simple terms, let’s imagine the counties in north of England have their VAT reduced to 10%.

This could have potential effect on reducing the north/south divide. Rather than people going on shopping trips to London, it could be the other way around. Londoners could go to Leeds. This happens elsewhere. Germans go to France to shop, same as Americans cross state borders to get a better deal.

To deliver it as a deliberate policy would not be so controversial. The “Booze Cruise” phenomena of the ‘90s  was born from an EU policy to encourage cross-border trade.

The abuse by professional bootleggers came about because the difference in prices was so great. A 100% difference, rather than the 10% that we’re talking about here.

The main objection to this policy would be on the political difficulties.  If the Texas legislature wishes to raise or lower sales tax, they can be voted in or out as a result. That’s not the same if Westminster imposes different tax levels on different regions.

However, it is worth noting that council tax is collected locally, but then appropriated by central government and redistributed across the country, along with considerable subsidies, which are paid for by other forms of taxation.

The reason people don’t complain about council tax going to central government is because it is complex and opaque. VAT is the most visible of taxes. This could cause government to be accused of favouritism. So how do we avoid being divisive?

If a lower VAT were introduced to individual counties, then borders would be less of an issue, and we would then need a formula to decide which would benefit, in order that the policy is seen to be objective. I imagine the criteria would be on economic need. So in the case of Cornwall, the need is seasonal, but is enough to merit the advantage. Other areas have wealth and poverty cheek by jowl. Again, it would be the aggregate need of the county that would win the argument.

The policy would work best if it was viewed as long term prospect, as this would persuade companies and individuals to locate to these areas. There will be no long term without the support of the Conservative party. Would they abolish it for benefiting the poor at the expense of the rich? Possibly not.

The concept of using tax cuts to generate economic growth is the one principle of Keynesian economics that the Tories thoroughly agree with. They could still object to the fact that it benefits the poor, but if it is aimed at whole counties, then it will benefit the rural community as well as the cities.

Conservative party philosophy often concerns the difference between top-down and bottom-up policies. The existing “top-down” policy, involves collecting tax centrally, and then redistributing it to areas of need. This proposal is different because it calls for a reduction of the tax take from the areas of need, in order that they create their own economy. This is a “bottom up” policy.

So taking into account that the policy would benefit rural areas, and that the economic effect would be bottom-up, it is likely that the policy would achieve cross-party consensus. The disagreements, as always, would be in the details.

Dan McCurry is a Labour activist who blogs here


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14 Responses to “Regional VAT, an idea for Ed Balls”

  1. Julian says:

    American stores don’t post prices inclusive of tax because they’re weird. They do it so their customers know what they are paying for the goods and services and what the government is taking. Let’s have prices here shown without VAT. Many people would be shocked.

  2. Nick says:

    Value added.

    Where’s the value?

  3. Danny says:

    An interesting idea. I’m not au fait with the legislation, but is a regional variance on VAT actually allowed under the EU?

  4. swatantra says:

    Makes sense.
    While we’re on tax, lets scrap Council Tax and bring in local income tax,which would be easier for the average Jo the Plumber and me to understand.

  5. Ex-Labour says:

    There is no clear economic evidence in your idea that shows this would work. Whilst ideas are good, they surely must be evidence based.

    As an example under previous Labour administrations they tried to use the public sector to economically grow the regions outside of the South East by moving public sector organisations and jobs across the UK. Good idea in principle but did it work? The result was for every £1 of government regional investment i.e. setting up some new tax offce etc, there was £20 of private investment in London and the South East. Even under recession conditions the South East has grown massively in comparison to the rest of the country.

    The housing crisis in the south east will takes years, maybe decades, to address and if the investment profile continues this way, then it may never be solved at all.

    This would suggest that tinkering around with VAT is not going to generate anywhere near what is required for towns and cities outside of London in terms of economic regeneration.

    I dont think people would drive miles to save a few pounds on something – it would cost more in petrol. Also who decides which counties get the tax break and how much ? For those that don’t or can’t does the government offer some back up plan ?

  6. e says:

    Interesting but if such a discount was to prove useful wouldn’t there then be a danger of severely disadvantaging adjacent areas unless a VAT map complete with buffer zones could be drawn…

  7. McCurry says:

    Danny, there is no common tax rule for the EU. They did want one a while ago, but John Major vetoed it for fear of Europe becoming a federation.

    e, You’re right that the devil is in the detail.

    ex-labour It’s a bit difficult to have evidence for something that hasn’t been done, but you could look up the effect of President Johnson’s tax cuts on the US economy.

  8. canard says:

    Who would be allowed to vary VAT in the devolved bodies? Assemblies or local councils?

    Why restrict to only VAT?

  9. SEAN MCKEE says:

    VAT is a condition of EU membership. Within that states can only slightly vary rates downwards.

    I am no tax geek but there are a few immediate problems with any moves to introduce VAT regionalisation within the UK:

    1. What regions are more deserving than the others and what metrics used to pick?
    2. The “wrong side of the line” factor – what happens to small businesses on the full rate side? Will they eventually go to the wall? Would we see seriously reduced economic activity in zones beside boundaries?
    3. Would you have a lower rate on everything inside a designated region? eg: fuel, energy, general sales?

    thanks

  10. Peter says:

    Isn’t VAT required to be at least 15% by EU law?

  11. McCurry says:

    I’ve checked. It is minimum 15%.
    If that’s the case then there wouldn’t need to be a concern about shops on one side or other of the border, since it is only a difference of 5%. However, by the region being given this advantage, it would provide an aggregate boost.

  12. Ash says:

    Local sales taxes are incredibly annoying for this Brit when travelling inter-state in the US. You never know how much extra you’re going to get charged.

    Also why bother if it all goes to HM Treasury?

  13. Angus McLellan says:

    If Dan McCurry had read the interim report by Johann Lamont’s “devolution commission”, ‘Power for a purpose’, he’d find that this had already ruled out the idea of different VAT rates in Scotland (and thus elsewhere too). As the report says (p. 10): “At this stage, only devolving Value Added Tax (VAT) can be completely ruled out, as European law does not permit this”. That’s perhaps a slight overstatement of the detailed position, but it’s true in outline.

  14. uglyfatbloke says:

    Thankfully very, very few people will ever read the ‘devolution commission’ , which will save everybody a lot of embarrassment.
    Odd name though… why don’t we call it the European Union tax?

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