The weasel tax
• VAT brings in more revenue that income tax, four times more than the capital gains tax levied on profits from trading shares or property, and twice as much as was paid by all the companies in the country
• It is paid by everyone and impacts disproportionately on the poor
• Our VAT rates are among the highest in the EU
• None of the political parties are proposing to cut VAT
By Sheila Killian
In the run-up to a May election, we are beset on all sides by headline-grabbing promises of income-tax cuts. However, no political party seems willing to reform the hidden tax we pay every day, regardless of income or wealth. VAT, the original stealth tax, goes unchallenged.
Value Added Tax is not a tax on value added, but a consumption tax, borne ultimately by the final consumers of goods and services. Businesses are generally registered for VAT. That means they charge VAT on supplies to their customers, and claim a refund on any VAT paid in the course of their trade. The only people for whom VAT is a real cost are the “ordinary citizens”, the ones constantly being told by political parties that we live in a low-tax economy.
Last year the state earned over €13bn in VAT. That about equals the total from corporation tax, stamp duties, capital gains tax, gift and inheritance taxes combined. While the VAT rates have been higher in the past – 35 per cent and 21 per cent in the 1980s – Ireland has never been so dependent on VAT to fund public services. Twelve years ago, for example, income tax brought in about 40 per cent of all taxes and VAT about 25 per cent. Since then, the position has been steadily reversing, so that now VAT brings in 30 per cent of all taxes collected and income tax just over 27 per cent.
That's more than income tax, over four times more than the capital gains tax on profits from trading shares or property, and twice as much as was paid by all the companies in the country.
VAT is paid by everyone who spends money in Ireland, regardless of their income. Unlike capital gains tax, which is charged on windfall profits on the sale of property, VAT is paid by the unemployed, by the homeless, by students, everybody who buys anything (almost). And we pay more of it than most.
Our standard rate of VAT is one of the highest in the OECD, topped only by Scandinavian countries, Poland and Hungary. We rely more heavily on VAT than any European country except Iceland. Our income taxes are low by OECD standards, but politicians are lining up to reduce them further, while maintaining VAT as the main pillar of our revenue.
So why might VAT, a tax which falls disproportionately on the poor, be so popular with political parties across the spectrum? Because it has a number of key advantages from a government point of view. It is predictable. The structures are in place to ensure that traders do much of the administration of collection. No matter how high the rates, it won't scare away multinationals for whom it does not represent a cost. It comes in evenly throughout the year. Best of all, it is invisible. It doesn't appear on our payslips; the prices we pay have the tax built in so that we, the voters, are rarely confronted with a bill. Politically, a dream tax.
From time to time someone puts forward the argument that a tax like VAT, a flat tax or consumption tax is a fairer way to raise revenue than income tax. Such views generally get airtime in the immediate aftermath of an announcement that, say, a dozen or more millionaire taxpayers in Ireland have paid no tax at all in the past year.
If there were only a flat tax which everyone paid, its proponents argue, then people would not spend a fortune avoiding taxes. Everyone would be taxed on what they spend, so the wealthy, who spend more, would pay more. The problem with this line of argument is that the wealthy do not need to spend more. The wealthy can afford to save and invest. As a proportion of their income, poor people must spend far more on essential goods and services, simply because their total income is closer to subsistence level. They pay more VAT per euro earned on unavoidable purchases than wealthy individuals, and this is what makes VAT an unfair basis for raising revenue.
There are good things about the Irish VAT system. We don't pay VAT on books, for example, or medicines, or famously, thanks to the late Jim Kemmy, on children's shoes. However, we pay the 21 per cent rate on toothpaste, as though it were a luxury. We pay 21 per cent on children's car seats, compared to 5 per cent in the UK. There are countless examples. The key thing is that we pay VAT without noticing. We pay a great deal of it, and we call it high prices. But it's not. It's a tax. It's as much part of government policy as income tax. And any politician serious about cutting taxes on the less well-off, or creating a low-tax economy should start with the obvious, and address our VAT system.π
Sheila Killian is Lecturer, Accounting and Finance at the Kemmy Business School and the University of Limerick