Why Lowering Taxes Will Not Work (this time)
Fret not conservatives - I too agree that taxes are a disincentive toward the taxed behavior and agree that lowering or removing taxes reduces the disincentive. But not this time.
The UK recently lowered the VAT tax (see this earlier entry for an explanation of VAT) from 17.5% to 15% to help stimulate consumer spending. Here’s the relevant portion of the previous entry for lazy readers:
“The finale is the VAT’s cloak of invisibility as a hidden portion of every final item price, rather than as an added line-item amount at check-out (like sales-tax in America). So, not only do Europeans hear that they are ‘adding value’, they actually never see the VAT at all. Brilliant! I applaud the effort for added consumer convenience of a transparent price rather than calculating 8.75% +19.99 while shopping. But… “
Now, back to the issue of the lowered VAT. As a consumer, I may spend marginally more if I have less overall tax expense. My mother first illustrated this point to me when we visited the Nordstrom’s in Portland (where there is no sales tax). However, remember that in the UK the VAT is included in the price. So this system requires a pas de deux between the consumer AND the business owner who prints the price tags.
Would a rational business owner, say of a Subway sandwich restaurant, reprint every menu and signboard to change the price for a “5 GBP Footlong sub” to “4.89 GBP Footlong” to help that cash-strapped consumer save his extra 2.5%? Doubtful. Instead most businesses simply pocket the 2.5% as profit. Some of the clever stores are offering a line-item discount at check-out to refund the 2.5%, but that eliminates the cloak of invisibility that is the brilliance of the VAT.
Unlike Michael Moore, let’s consider the opposite side. What happens when the VAT rises back to 17.5% (or higher) as it is scheduled to do at the end of 2009. Will businesses raise prices? Will they add a line item of extra VAT at check-out, again ruining the cloak of invisibility and the promise of “what you see is what you pay” price labels? Unlikely. They will probably just keep prices the same (and take a loss) or re-price their entire inventory and menu at a substantially higher price by rounding up to a whole number.
Consumers should know they live in a anti-consumer country when the tax scheme functions better when the taxes rise.
Six GBP footlongs coming soon.
