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.
Latest posts by Sheila Killian (see all)
- “Easy Option”, Hard Consequences - November 21, 2011
- Collateral damage? The impact of Ireland’s Tax Strategy on Developing Countries (Part II) - July 23, 2009
- Collateral damage? The impact of Ireland’s Tax Strategy on Developing Countries (Part I) - July 22, 2009