Hitting the Poorest Hardest with VAT Hikes

In the rush to talk tough on the deficit Alistair Darling is expected to announce an end to Labour’s limited-time-only 2.5% cut in VAT this year.  That means VAT will go back up to 17.5% or, if Darling’s feeling even more stern, to 20%. Since VAT is one of the most regressive taxes this gives the Tories a golden opportunity to shun a tax rise that hits the poorest, hardest.  The chart from the Taxpayers’ Alliance [pdf] shows that the poorest quintile pay over ¼ of their in indirect taxes, the richest only some 10%.

The Tories are refusing to rule out the same rise in VAT to 20%. That makes the Lib Dems the only party to promise substantial tax cuts with a plan to raise the income tax threshold to £10,000. If you are going to hit the low paid hardest with indirect taxes surely it makes sense to compensate them by raising the income tax threshold accordingly? Lower taxes for the low paid has got to be a vote winner.  In any event Guido has a suspicion that Darling’s PBR won’t schedule any rise until after the election…




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