Will proposed VAT rate increases be counter-productive?

randomhuman

I see that both FG and Labour are proposing to increase the standard VAT rate (though FG are proposing a temporary reduction in the lower VAT rate) by 1 - 2%. I'm sure that with the UK having recently increased their rates the circumstances that caused the last increase to be such a disaster no longer exist, but won't an increase be counter-productive anyway? Obviously the government has to generate revenue somehow, but a major goal of the next government will be stimulate economic growth, won't a VAT rate increase work against that by pushing prices up and stifling economic activity?

ilovesleep

I think VAT should be reduced to encourage those up north to shop down south. But no, that wont happen. We'll be taxed into poverty.

Lawrence1895

randomhuman wrote: »

I see that both FG and Labour are proposing to increase the standard VAT rate (though FG are proposing a temporary reduction in the lower VAT rate) by 1 - 2%. I'm sure that with the UK having recently increased their rates the circumstances that caused the last increase to be such a disaster no longer exist, but won't an increase be counter-productive anyway? Obviously the government has to generate revenue somehow, but a major goal of the next government will be stimulate economic growth, won't a VAT rate increase work against that by pushing prices up and stifling economic activity?

Have you got any link, please? I guess, some people still think, FG would not cause any harm

randomhuman

Lars1916 wrote: »

Have you got any link, please? I guess, some people still think, FG would not cause any harm

Sure thing. I read about Fine Gael's proposal here (see page 23):

http://www.finegael2011.com/pdf/LessWasteLowerTaxesStrongerGrowth.pdf

They want to up the standard VAT rate to 22% in 2012 and then to 23% in 2013. They want to cut the lower rate to 12% for two years, but don't say when that would be effective from. Their rationale seems to be that the higher rate of VAT effects "import intensive" consumption, while the lower rate will bolster "labour intensive" services, but that doesn't make much sense to me. People can't really choose to substitute higher-priced goods with services, they will just not be able to afford as much goods. If the goal is to reduce imports in favour of local production then I would say that that is a good idea, but an increase in the higher VAT rate won't really do that either because Irish goods and imported goods are taxed at the same rate. I suppose a direct tax on imports is probably out of the question though, thanks to the EU...

Shockingly, if you google "fine gael vat rate proposal" you get a page of links talking about the proposed cut to the lower rate, but no mention that I could see of the increase to the standard rate (though I must say I did only skim the returned pages).

The details of Labour's plan are here (page 16):

http://www.labour.ie/download/pdf/labour_election_manifesto_2011.pdf

They just say they want to increase the standard rate by 1% purely to increase revenues, with no pretence that it will have a favourable impact on the economy. Which would seem to be a more honest position anyway I have to say.

clerk

YES. We're 2 1/2 Years into what is starting to look like a 10 Year depression. People have no disposable income due to huge tax increases in a very short time frame and it's going to get worse.

My advise to anyone who is not tied down by a mortgage, family commitments etc. is to leave the Country as fast as possible.

We have been betrayed by our Politicans and the ordinary working people have been signed up to pay back the bad debts of the nutter developers and bankers. On yes and not one banker is in jail yet.

VAT increases take money off the very poorest in our society and they cannot take anymore. It will led to a recessionary spiral.

This debt we have been signed up to cannot be repaid by a working population of approx 2 million and with net emigration of something like 5,000 a Month.:mad:

randomhuman

clerk wrote: »

VAT increases take money off the very poorest in our society and they cannot take anymore. It will led to a recessionary spiral.

It certainly won't do anything to get people spending, because our money just won't go as far, and increasing economic activity is surely the key to creating growth and getting us out of this hole.

It kind of makes a **** of their claims that they won't increase income tax for anybody earning less than €100,000 as well. It won't matter if our income taxes don't go up if the price of everything goes up because of an increased VAT rate. The effect for the individual and society is the same: your income doesn't go as far, economic activity is suppressed, the economy won't grow.

That's my take on it anyway. Has anybody got an explanation of how an increased VAT rate will help our situation?

Respublica

I seems to me that VAT is about the worst possible tax to raise in the midst of a recession. It will reduce demand even further.

Until we start to recover it would be better to increase taxes on savings and investments (DIRT, CGT, etc).

VAT is also a regressive tax as it hits the poor hardest, which makes the policy a bit disappointing coming from the Labour Party. It's laughable for them to laud the fact that they're not raising income taxes for most people, but to add 1% on VAT which is even worse for those they're supposed to defend.

randomhuman

Respublica wrote: »

I seems to me that VAT is about the worst possible tax to raise in the midst of a recession. It will reduce demand even further.

Until we start to recover it would be better to increase taxes on savings and investments (DIRT, CGT, etc).

VAT is also a regressive tax as it hits the poor hardest, which makes the policy a bit disappointing coming from the Labour Party. It's laughable for them to laud the fact that they're not raising income taxes for most people, but to add 1% on VAT which is even worse for those they're supposed to defend.

Fine Gael are saying that they will put both CGT and DIRT up to 30% as well, so good moves there for sure. It won't convince me not to save though! Labour want to tier CGT at 30 and 35%, but I don't see anything about DIRT.

Pretty poor showing from Labour alright.

Sir Oxman

Respublica wrote: »

I seems to me that VAT is about the worst possible tax to raise in the midst of a recession. It will reduce demand even further.

Until we start to recover it would be better to increase taxes on savings and investments (DIRT, CGT, etc).

VAT is also a regressive tax as it hits the poor hardest, which makes the policy a bit disappointing coming from the Labour Party. It's laughable for them to laud the fact that they're not raising income taxes for most people, but to add 1% on VAT which is even worse for those they're supposed to defend.

It's an awful idea, though it is one of the IMF/EU's options/demands.
Leo Varadkar's appearance on VB Tonight last week in respect to this was awful as well - he didn't appear to realise that VAT is regressive, his other option was a property tax which he said was less desirable than a VAT increase because the 'will wouldn't be there to pay it', which is an extraordinary statement to come out with (he withdrew the 'will' bit later after VB got hold of him)
He also refused to believe poor health is directly correlated to low income.
I don't like Mr Varadkar and his politics at all.

KELTICKNIGHTT

putting vat up is the worst idea they have put forward, specially if whats said is true,do any of these people think before they propose these ideas and how it will affect the poorest specially,plus will even take longer too recover,looks as same as was done in 70's and 80's, put up taxes i would thin also, specially when you hear they promise nothing

Nothingbetter2d

bring on the cairo style riots

also introduce a new politician tax - 50% of their income is taxed to pay for ear muffs for the people of ireland that are so sick of hearing the same old bull plop from them

MaceFace

Will it be counter productive? No.
Will it hurt the economy? Yes.

Unfortunately we need to get money in from somewhere.

randomhuman

MaceFace wrote: »

Will it be counter productive? No.
Will it hurt the economy? Yes.

Unfortunately we need to get money in from somewhere.

You don't think that hurting the economy is counter-productive at a time like this?

MaceFace

randomhuman wrote: »

You don't think that hurting the economy is counter-productive at a time like this?

Not at all. You can cause damage to economy but the benefits of that action may outway the damage.
The problem is every cut or tax rise will cause harm, but what is the alternative?

Respublica

The problem is every cut or tax rise will cause harm, but what is the alternative?

Yes, but some taxes will be more harmful than others.

Our tax system currently provides big incentives for saving and investments, especially for pensions. That makes sense in ordinary times but is a very bad idea during a deep recession.

his other option was a property tax which he said was less desirable than a VAT increase because the 'will wouldn't be there to pay it'

This is a strange statement. I can only interpret it as code for, we won't introduce a property tax because our middle class supporters won't like it. It's telling that he can't think of an actual proper policy argument.

Personally I'm a strong believer in a land value tax, but in the short term there would need to be some kind of exemption for people in negative equity or any substantial property tax would lead to foreclosures.

randomhuman

MaceFace wrote: »

Not at all. You can cause damage to economy but the benefits of that action may outway the damage.
The problem is every cut or tax rise will cause harm, but what is the alternative?

It's true enough that every tax has an effect on the economy, but I don't agree that they all necessarily cause harm for a given set of circumstances. For example, the proposed increases to CGT and DIRT, while increasing revenue I'm sure, are really intended to encourage people to spend their money rather than to save it, thereby stimulating the economy. An increase in VAT will have the opposite effect. I'm not saying that the next government won't have to increase revenue, but they'll have to do it in a way that doesn't work against their other goals. For example, these jobs they're all promising to generate... A higher VAT rate would have been a great idea back in 2006/7, but now it just seems like a recipe for further disaster.

Scrambled egg

If anything the VAT rate should be lowered. This would serve to boost consumer spending resulting in more firms being able to keep their head's above water. It wouldn't make sense to increase it.

Hows about lowering the Corporation tax by a percent or two? Anyone think its a half decent idea as a jobs stimulus?

paul71

MaceFace wrote: »

Not at all. You can cause damage to economy but the benefits of that action may outway the damage.
The problem is every cut or tax rise will cause harm, but what is the alternative?

The alternative is real spending cuts, 30% of wages paid to government employees. We reached the point long ago where increased tax rates result in reduced tax revenue, so we must spend less.

nesf

Yes rising VAT will damage the country. So will, for that matter, a raise in income tax, cutting public spending on wages etc.

Thing is, in case ye hadn't noticed, we be ****ed lads and will have to take some decisions that will cause us short term pain so we can reap long term rewards. Personally I think there might be a better option than VAT to pick but we will feel some pain from deflationary measures regardless of what way you want to cut it*.


*Assuming you're actually serious about cutting the deficit and not in lalaland and think we can maintain current spending with a simple wealth tax or other such nonsense.

Respublica

We reached the point long ago where increased tax rates result in reduced tax revenue, so we must spend less.

This might be the case but are you speculating or is there actual evidence? Can you provide a link?