“Easy Option”, Hard Consequences

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The Taoiseach has defended the proposed 2% increase in the higher rate of VAT, saying it won’t apply to food, but only to purchases where the consumer has a choice. Certainly this was the spirit of the original VAT rules – the zero rate of VAT was clearly intended for basic staple items. You can see this, for example, in the rules on candles. The zero rate applies to the plain ones, defined as white and cylindrical, while spiral or perfumed “luxury” candles attract the higher rate of 21%.

Relatively discretionary items such as DVDs, wine, televisions and so on also fall into the 21% bracket. If it were as simple as this, there wouldn’t be much of a problem with the 21% rate moving up to 23%. If it were only a tax on luxuries, then it would be hard to argue against a 2% hike these days, when tax must be raised from somewhere.

But VAT isn’t that simple. It’s not simple at all, in fact. It can be ridiculously convoluted. Take printing: books are zero-rated, while magazines and periodicals are taxed at 13.5%. So the Beano is taxed, but the Beano Annual isn’t. If a book is serialised, and sold in instalments with a binder, it remains a book and avoids the tax, despite, perhaps, resembling a magazine. E-books are not books at all, so they are taxed. A diary is taxed at 21%, unless it has very few blank pages, in which case it’s a zero-rated book. A printed bookmark is taxed at 21%, unless sold with a book which would reduce the tax to zero.

The situation in food is even more complex. Yoghurt is zero-rated until it’s frozen, when it’s taxed at 21%. A sandwich could be zero-rated, unless sold from a vending machine, in which case it’s taxed. Ice-cream bought in a supermarket to take away is taxed at 21%, but if you eat it on the premises as part of a meal, the VAT is only 9%. Similarly, a bottle of juice will attract less tax as part of a meal than if sold to take away. Bread is zero-rated unless it has too much fruit or flavourings. Sausage rolls sold cold are taxed less than hot ones, but bread hot from the oven is considered cold, and so zero-rated. A jar of caviar is zero-rated, but a bottle of water attracts the luxury rate.

Not that it’s called the luxury rate. It’s called the standard rate, and perhaps that’s fair. After all, it applies to such “luxuries” as toothpaste, soap and spectacles. What’s unfair is that its paid by everyone at the same rate – homeless people, students, the unemployed, old age pensioners, millionaires. In fact a homeless person subsisting largely on takeaway food, or a child buying ice-cream and comics both pay a far higher proportion of their income in VAT than someone earning enough to save some of their money. It’s a regressive tax, attractive mainly because of its relentless efficiency, and relative invisibility.

A two percent change sounds small, but that is also deceptive. VAT is what you pay from your net income, after Income Tax and the Universal Social Charge. So a change from 21% to 23% on something like a pair of glasses will have a magnified impact on the amount of gross salary you need to earn to afford them. This on such luxuries as notebooks and pens, detergent, paper or cutlery. An increase like this cannot but curb consumer spending. In some ways, it’s the opposite of a stimulus package to the economy.

VAT is complicated and regressive, paid by everyone regardless of income. A 23% rate would be harsh for people on low incomes or none, and hard on those for whom it is doubled up by taxes. Right now, VAT brings in roughly a third of all Irish tax revenue, and yet people barely notice they’re paying. It must be almost irresistible for the government to dip into this particular well to raise more revenue. Taxes have to be levied, and this could look like an easy option. Let’s not pretend, though, that it’s a tax on luxuries. Let’s not pretend it will do no harm.

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9 Responses

  1. CMK

    November 21, 2011 5:07 pm

    Also, remember, the vast, vast, majority of inputs – goods and services – to the multinational sector are supplied VAT free. I’d like to see a breakdown of VAT returns by sector (i.e. business v. consumers) – I’d be eternally grateful if anyone could supply a link. A business busybody was reported in yesterday’s Sunday Business Post as stating that SME’s pay half of the VAT take. Don’t know how true that is, but I doesn’t ring true.

  2. Sheila Killian

    November 21, 2011 9:11 pm

    @CMK I agree that doesn’t sound right, though I didn’t see the paper. It might be that half of all VAT is collected by SMEs, but it’s unlikely that it’s a cost to them, as they would be passing on most of it to customers. VAT more or less accumulates as a good or service moves along the value chain, and ultimately it’s all paid by whoever is at the end of the line. That’s generally a consumer who isn’t registered for VAT – most of us, in other words.

    @William – thanks!

  3. Small Girl

    November 21, 2011 10:03 pm

    “A two percent change sounds small, but that is also deceptive. VAT is what you pay from your net income, after Income Tax and the Universal Social Charge”.

    About two years ago I made the very same point to my local town council who were charging me a parking fee to park in the ‘public space’ of the town square so that I could be charged VAT while patroning the businesses in my local town (thus helping to keep them alive) and all this with cash that I had already paid tax on. The town council replied that parking charges helped to alleviate congestion in the town thus making it more attractive for local people to shop in. Obviously they missed the bit in my letter where I said I was local and a shopper!!

  4. Sarah c

    November 22, 2011 12:09 pm

    In fact it nearly is a poem ! The proposals/threats plans for a general increase in Vat remind me of the tax on children’s shoes scenario that felled a government here. I wonder if Sheila’s article here might help us to pick out one aspect of something ridiculous that will be subjected to the vat increase and cause something similar?

  5. Small Girl

    November 22, 2011 12:42 pm

    Poetry indeed.

    Does anyone have any idea why I (and the rest of the country) am charged 13.5% VAT on the Standing Charge and the Carbon Tax on my gas bill?

    And 13.5% VAT on the Standing Charge and PSO Levy on my electricity bill from the same company, Bord Gais?

    Is that not like paying a value added tax on a tax/levy? And I’m paying that taxed tax out of an income that has already been taxed before I get it. I’m not being poetically rhetorical, I’m wondering if that’s even legal and if so how it’s justified.

  6. John Fitzgerald

    December 5, 2011 11:03 pm

    Lower Coyne Street,
    Callan,

    Kilkenny,

    Ireland

    Email: jfitzg3@eircom.net

    Anti-Hare Coursing publication now a Free E Book

    December 5th 2011

    Dear Sir/Madam,

    Just letting you know that my book Bad Hare Days, about the anti- hare coursing campaign in Ireland and its impact on the campaigners, is now available as a free e book.

    I am hopeful that the book’s wider availability will assist the campaign to abolish this medieval so-called “sport”. There are many books promoting blood sports in shops and libraries, but this one promotes the campaign to protect the Irish Hare from the organized savagery of coursing clubs while also highlighting the sacrifices that campaigners have had to endure over the years for taking up this cause.

    The national hare coursing organization in Ireland is politically well connected and very powerful. The coursing clubs affiliated to that organization will do anything to suppress opposition to the barbarism they promote.

    But they fear the glare of publicity. Anyone seen with a camcorder at a hare coursing event is immediately ejected from the venue, and some would-be recorders of the truth about this blood sport have been assaulted before being forced to leave.

    Pro-hare coursing contributors to Internet forums dealing with greyhound industry issues have attacked Bad Hare Days in the most vitriolic language, expressing outrage at its message and contents. All the more reason in my view to make the book as widely accessible as possible!

    I hope that campaigners against the various forms of animal cruelty/exploitation in whatever country may find the book useful or of interest.

    Bad Hare Days can be read or downloaded at either of the two links below and I’d be delighted if could you add this link to your website…or just pass on my message to another organization or campaigner for animals:

    First link:

    http://banbloodsports.files.wordpress.com/2011/11/bad-hare-days.pdf

    Alternative link:

    http://www.tinyurl.com/downloadbhd

    I have a Facebook page devoted to this also at:

    http://www.facebook.com/home.php#!/pages/Bad-Hare-Days-Free-E-Book/165979236831841

    Many thanks for your attention and best wishes,

    John Fitzgerald,

    Campaign for the Abolition of Cruel Sports,

  7. UB

    December 19, 2011 9:44 pm

    Let’s not forget telecommunications. Is a telephone in rural Ireland considered a luxury?
    And what is office supplies to an SME that may be able to offset the VAT is pens, stationary, rulers, erasers, calculators etc. to ordinary schoolchildren in ordinordinary families. Hardly a luxury!!!

  8. UB

    December 19, 2011 9:44 pm

    Let’s not forget telecommunications. Is a telephone in rural Ireland considered a luxury?
    And what is office supplies to an SME that may be able to offset the VAT is pens, stationary, rulers, erasers, calculators etc. to ordinary schoolchildren in ordinary families. Hardly a luxury!!!