Kit Malthouse: the road to tax reform

In The Times, Mayor Johnson's policing deputy writes:

Politicians will spend the next few weeks arguing endlessly about how much tax to charge, but hardly a word will be said about the method of extraction from your wallet or purse. Rather than arguing about "how much?" we should think about "how?".

Note that inclusive "or purse". His wife has a degree in gender studies, you know. He continues:

Because in the end, all tax, whatever it's called, comes out of that increasingly battered wallet or purse. Companies, for instance, don't actually pay tax, you pay it for them when you buy their goods or services; they just price in tax as another overhead. All that national insurance, corporation tax and even the income tax of their employees forms part of the price of everything you buy, with VAT on top.

So if all taxes, including VAT, form part of the price of the stuff we buy, why do we bother to charge and collect them separately? What would happen if we were to lump everything together, phase out all taxes and just charge higher VAT? Well, several things.

There follows a list, including a defence against objections that taxes on consumption hit the least wealthy hardest. He also mentions Bentleys and public transport, though there's no reference of what happens if you end road-related taxes. Kit's secret VAT plan to end congestion charging, shock? Well, he's never been terribly keen on it.


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  • Worktimesurfer Worktimesurfer

    6 Apr 2010, 1:01PM

    I generally come at things from the left but I think there is something in this. I saw a study in the Economist that suggested replacing the tax and benefits systems with a sales tax of 23% and an annual payment to all British citizens of (it was suggested) £10,000. The savings in administration would obviously be enormous.

    One mistake that Malthouse makes, and which makes me wonder if in truth he really knows what he is talking about, is to talk about 'Sales Tax' and 'VAT' as if they are the same thing. They are certainly not. VAT is assessed on the value added by any business and paid by the consumer. Sales Taxes are applied at some percentage to the retail price and are paid by businesses and consumers. The advantage to the government of VAT is that in all the stages in the supply chain they are only ever on the hook for the difference between the sales and purchase VAT. With Sales Tax they are on the hook for the whole amount at the retail point of sale.

    On a separate note, you can change VAT to a 'carbon added tax' (CAT) quite simply. Business purchase invoices would state the mass of CO2 inherit in their purchase, their sales invoices would state the CO2 in all their purchases so that in any period (month quarter year) the business would have a zero carbon balance. Then the mass of CO2 is converted into 'tax' at the till, so consumers (the real cause of CO2 emissions) pay a price that is directly related to the CO2 emissions inherent their purchase.

  • chaz1 chaz1

    6 Apr 2010, 2:02PM

    I'm not an expert on the field but I note that Malthouse makes heroic assumptions about the amounts saved by cutting other taxes and makes no assumptions about any complications, and seemingly assumes all this change will come at no cost at all. Meanwhile, as this is a rejig of taxes, there will be many, many losers in such a scheme but Malthouse only wants to point to the winners. Smells a bit iffy to me. And exactly how much would really be saved (as a proportion of GDP) ... 0.5%? 0.25%? 0.1% Is that really going to lead to a revolution?

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