Regional VAT, an idea for Ed Balls

When I was in Arizona, I kept getting overcharged in the shops. At least I thought I was, until I objected and was told that the extra 7% was the state sales tax. They weren’t including it on the price tickets, because Americans are weird. These days Arizona charges a whopping 9%, compared to Virginia at 5%, and New Hampshire at 0%. There is no strategy between these different rates. This is America. The states just does their own thing.

In the UK we pay 20%, and we call it “Value Added Tax”, because we’re not weird. Imposed centrally, we apply this tax at a uniform rate across the country, but if we wanted to, we could charge different rates in different regions, while continuing to collect it centrally.

There is serendipity to Labour’s economic policy. Mass house building is firstly intended to create demand in the economy, but by solving our chronic housing shortage, we reduce our private sector rents, and thereby counter poverty. It all seems so neat that, however, there is a flaw in this strategy.

The area that needs massive house building is London and the South East, but the economy is fairly frothy in this area, so there is not much of a demand problem. Much of the rest of the country doesn’t needs housing, but does have a lack of demand. So although there are many infrastructure projects in other parts of the country, the stimulus from house building would mostly effect the South East, which is not where it is mostly needed.

The other policy of Ed Balls is to affect consumer spending through a reduction in VAT.
The problem with VAT is that it can be fiddly. When Gordon gave us a 2.5% cut, I don’t think I’m the only one who was irritated at being given coppers in change for my coffee, and it didn’t take long before the coffee price went back up and the vendor pocketed the difference. Retail prices tend to gravitate to round numbers, meaning that VAT cuts need to be substantial to be worthwhile.

If Ed Balls concentrated his VAT cut on the regions that are not getting a house building boost, then he’d probably be able to double the size of the VAT cut. In simple terms, let’s imagine the counties in north of England have their VAT reduced to 10%.

This could have potential effect on reducing the north/south divide. Rather than people going on shopping trips to London, it could be the other way around. Londoners could go to Leeds. This happens elsewhere. Germans go to France to shop, same as Americans cross state borders to get a better deal.

To deliver it as a deliberate policy would not be so controversial. The “Booze Cruise” phenomena of the ‘90s was born from an EU policy to encourage cross-border trade. The abuse by professional bootleggers came about because the difference in prices was so great. A 100% difference, rather than the 10% that we’re talking about here.

The main objection to this policy would be on the political difficulties. If the Texas legislature wishes to raise or lower sales tax, they can be voted in or out as a result. That’s not the same if Westminster imposes different tax levels on different regions.

However, it is worth noting that Council Tax is collected locally, but then appropriated by central government and redistributed across the country, along with considerable subsidies, which are paid for by other forms of taxation.

The reason people don’t complain about council tax going to central government is because it is complex and opaque. VAT is the most visible of taxes. This could cause government to be accused of favouritism. So how do we avoid being divisive?

If a lower VAT were introduced to individual counties, then borders would be less of an issue, and we would then need a formula to decide which would benefit, in order that the policy is seen to be objective. I imagine the criteria would be on economic need. So in the case of Cornwall, the need is seasonal, but is enough to merit the advantage. Other areas have wealth and poverty cheek by jowl. Again, it would be the aggregate need of the county that would win the argument.

The policy would work best if it was viewed as long term prospect, as this would persuade companies and individuals to locate to these areas. There will be no long term without the support of the Conservative Party. Would they abolish it for benefiting the poor at the expense of the rich? Possibly not.

The concept of using tax cuts to generate economic growth is the one principle of Keynesian economics that the Tories thoroughly agree with. They could still object to the fact that it benefits the poor, but if it is aimed at whole counties, then it will benefit the rural community as well as the cities.

Conservative party philosophy often concerns the difference between top-down and bottom-up policies. The existing “top-down” policy, involves collecting tax centrally, and then redistributing it to areas of need. This proposal is different because it calls for a reduction of the tax take from the areas of need, in order that they create their own economy. This is a “bottom up” policy.

So taking into account that the policy would benefit rural areas, and that the economic effect would be bottom-up, it is likely that the policy would achieve cross-party consensus. The disagreements, as always, would be in the details.

2 Responses to Regional VAT, an idea for Ed Balls

  1. Dan Filson says:

    Regional states taxes work in the USA because distance between and within states makes it not worth doing cross-border fiddles to save 2%, whereas in the UK borders woud be too close for variable sales taxes. In any case, slew taxes, which are by their nature regressive, are a way of avoiding imposing income taxes, which are progressive So I favour lower indirect taxes relative to income taxes. At the moment we in Labour are calling for VAT reductions for a quite different reason, namely that they are easy to implement, can e time-limited, and effectively increase spending power and thus demand more effectively than income tax reductions, where the richer you are the higher your propensity to save a part of your increased spending power rather than spending it all. At present the need to boost demand is key to our economic revival. Interestingly, or not, states in the USA do not use reduction in their states sales taxes as a way of increasing demand in a recession; for one thing, they are dependent on the revenues to keep them afloat, and some states have worse financial positions than the UK.

  2. Dan Filson says:

    Apologies for typos: ‘woud’ should be ‘would’ and ‘slew taxes’ should be ‘sales taxes’

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