Free market think tanks unite against increase in VAT

Tim Montgomerie

Four of London's leading think tanks have all attacked today's increase in VAT to 20%; an increase that George Osborne intends to be a permanent rather than emergency fixture.

Leading the charge has been Matthew Sinclair of the TaxPapers' Alliance. Speaking to the BBC earlier he pointed out that David Cameron had broken a promise not to raise VAT. The Lib Dems even ran a poster campaign against higher VAT (remember this?).  Matt Sinclair said taxes were high enough in Britain and more should have been done to cut spending.

Philip Booth of the Institute of Economic Affairs sets out the alternatives to higher VAT in a powerful piece on Coffee House:

"The NHS has been ring-fenced, even though it has experienced huge budget increases and has a shocking productivity record. Pricey gimmicks given to pensioners such as the Winter Fuel Allowance, free television licences and free bus travel remain in place, whilst the government has promised to increase state pensions in line with the higher of inflation, earnings or 2.5% - the “triple lock”, as the government calls it. This last profligacy is wholly unnecessary at a time when much of the working population is experiencing real wage reductions. A 2.5% trim of the NHS budget, not increasing the aid budget, the abolition of the pensioners’ gimmicks and not implementing the triple lock would enable the government to cancel the VAT increase with considerable room to spare."

Dalibor Rohac, a research fellow at the Legatum Institute, disputed the idea that a VAT rise was less economically harmful than other alternatives:

“There can be no question about the fact that the British economy would benefit from further downsizing of the public sector, but one can understand how difficult it is implement sizeable spending cuts, especially in the short run. This being said, the Chancellor is mistaken if he believes that a rise in the VAT will have a smaller impact on the economy than a rise in the income tax. For all practical purposes, the VAT and the income tax have the same economic effects and lead to equivalent economic distortions. Even if we were to accept that tax increases were needed, there are alternatives to a VAT hike, which would have a much smaller impact on incentives to work and do business.”

Tom Clougherty of the Adam Smith Institute (which recently calculated that Tax Freedom Day will be three days later this year) argued that the Coalition should be CUTTING tax to stimulate growth and revenues:

“Rather than increasing taxes, government should be looking at making targeted tax cuts to encourage economic growth. Raising the VAT might be the “least worst” option, but it still risks putting a dampner on our economic recovery.”

I have argued against the VAT rise but now regard it as a battle lost and surrender.