During the last election campaign in 2010, one key Conservative key message was ‘vote Blue, go Green’.

The idea was that you could have your cake and eat it virtuously too: a vote for fiscal responsibility would have the neatly foreseeable by-product of being a vote for ‘Britain’s greenest ever Government’.

Today, the optimism of that language is unthinkable, and the situation not so simple. Vote Green, get Conservative? Vote UKIP, get Labour? Vote Labour, get SNP? Vote anyone, and get Nick Clegg? Because of the possibility of a hung parliament, not only do we have no idea about who is going to win, we have little idea about how to cast our votes in a way that will make the victory of our preferred party more likely.

The confusion about who stands for what, and how, has seeped into issues of policy. Labour, historically the party of high spending on public services, is currently attacking the Conservatives for pledging an extra ‘unfunded’ £8Billion to the NHS! Such role-reversing is confusing for voters, but can also catch out politicians.

Take the brief VAT controversy that flared up just as the campaigns were starting. Under pressure at the Treasury Select Committee in March Chancellor George Osborne appeared to evade questions about whether the Conservatives would raise VAT if they formed a new Government. Because VAT is a regressive tax, paid equally by billionaire and pauper, it ought to be a weak spot for the Tories, especially at a time when the dominant narrative about tax concerns the evils of the evasion allegedly perpetrated by corporations and the rich.

Osborne’s worst presentational moment as Chancellor was undoubtedly the 2012 Budget, when the top rate of income tax was cut from 50 to 45p. Labour was able to present the measure as a giveaway for Osborne’s hedge-fund managing pals; we were certainly not ‘all in it together’. Ed Milliband was hoping a VAT rise would provide an equally defining moment, confirming the impression of the Conservatives as party more than happy to whack up taxes for the ordinary person even as they reduced the contributions of their globetrotting friends.

It didn’t work out like that: challenged by Milliband at Prime Minister’s Questions to clarify his intentions, David Cameron cheerfully confirmed that there would be no VAT rise. Milliband had fallen into a trap set by Osborne; instead he was soon struggling with questions about National Insurance (the ‘jobs tax’).

Such backfires are probably intrinsic to debates about tax, because taxation is deeply counter-intuitive. Thus far, Labour’s major tax proposal has been for the elimination of non-domicile tax status. It is a classic redistributive measure. The Labour leader was vehement:

There are now 116,000 non-doms, costing hundreds of millions of pounds to our country. It can no longer be justified, and it makes Britain an offshore tax haven for a few.

But, as was immediately pointed out, it is doubtful that removing the exemption will generate extra revenue (even Ed Balls seemed to have acknowledged the point). On the contrary: the £8.2 Billion in UK income tax paid last year by the hundred thousand or so non-doms is now in jeopardy: because, being non-doms, they are, as matter of logic, highly mobile people. This is an element of the paradox identified by the Laffer curve (which we have written about here): beyond a certain point, the higher a tax rate, the less the revenue it generates.

Exasperatingly for parties committed to redistribution, the most efficient way of raising tax revenue is through regressive transaction taxes – such as VAT. It is far more collectible than income and corporation tax; it is paid in stages, rather than a single hit; it is not so mobile. Europe’s welfare model has been partly financed through VAT – invented in Europe, it is widely credited with being the most effective of indirect taxes (conservatives in the US have resisted implementing VAT be cause it is too effective!) In Europe, a regressive tax is paying for progressive projects.

So, despite the many wrinkles in the current European VAT system, EU Member States are very wary about changing existing arrangements. The fiasco over this January’s introduction of the VAT MOSS for electronic services is case in point. As there are lower VAT thresholds in the EU than in the UK, hundreds of thousands of micro businesses have been inadvertently dragged into the VAT net. The result, apart from a Twitter storm and embarrassment from HMRC, is a developing standoff between the UK, the Commission, and other Member States (including Germany France and Italy), who fear that altering the rules to benefit UK firms will cause them to lose large amounts of domestic VAT revenue. To top it all (and as Laffer may have foreseen), the numbers of businesses registering for the MOSS are only a fraction of those anticipated: 7000, as against a forecast of 200,000! That’s a lot of uncollected VAT.

I imagine that Member States will be very anxious about the unintended consequences of any further Europe-wide VAT reforms.

By |April 23rd, 2015|