At last, an idea that makes economic sense: reduce VAT instead of stamp duty!

[dontaskme]

[broken link removed]

Referring to a call to reduce VAT instead of trying to cut stamp duty.

VAT reduction should at least damp inflation as retailers and service providers could be encouraged to pass on the cut, whereas cutting stamp duty would probably just reduce the Government's cut of house prices.

 

[ClubMan]

Re: At last, an idea that makes economic sense

VAT reduction should at least damp inflation as retailers and service providers could be encouraged to pass on the cut

Why would they necessarily? If they know people will put up with the VAT inclusive price then why would they not simply keep prices as they are (more or less) and pocket increased margins? We all know how many Irish people are content to pay what they consider high prices and then only moan about supposed rip-offs after the fact so there's no evidence to suggest that there would be any great pressure on retailers to cut prices in the face of such taxation changes.

 

[room305]

Re: At last, an idea that makes economic sense

High prices are not inflation they are the result of inflation. The only way to combat inflation is to reduce the money supply and tighten credit lending practices. Since we cannot set our own lending rates, the government should be looking to increase taxes rather than reduce them.

 

[edo]

Re: At last, an idea that makes economic sense

Complete Red Herring

Just a another lobby Group kite flying a wish list ahead of what is expected to be a "giveaway" budget.

As Clubman and Room305 have said - the market takes care of pricing - in our case the average irish consumer exercises about as much financial restraint and forethought as a 6 year old with Daddy's credit card in a toy factory.

 

[NorfBank]

Re: At last, an idea that makes economic sense

Agreed in theory.

Except for the fact that the 6 year old must have had a great deal of forethought to get to Daddy's credit card without his knowledge and unless he has the PIN or is a dab hand at forgery then the financial restraint will be severe.

 

[edo]

Re: At last, an idea that makes economic sense

A

greed in theory.

Except for the fact that the 6 year old must have had a great deal of forethought to get to Daddy's credit card without his knowledge and unless he has the PIN or is a dab hand at forgery then the financial restraint will be severe.

heh heh - eloquently put! - then again the ease with we irish seem to gain access to credit would make you wonder if a six year old couldn't do all the above - We definitely must be the world's experts at getting cash out of people , from the Taoiseach down - Its how and what we spend it on would make you feel there wont be a nobel prize for this category coming in our direction anytime soon.

 

[dontaskme]

Re: At last, an idea that makes economic sense

High prices are not inflation they are the result of inflation. The only way to combat inflation is to reduce the money supply and tighten credit lending practices. Since we cannot set our own lending rates, the government should be looking to increase taxes rather than reduce them.

this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.

Conversely, consumer prices are probably sticky downward if VAT were reduced, by say 3%, but retailers and service providers would be suspected of price gouging if they were putting up prices at the same time that their margin is increasing by 3%. It might not come through as reductions, but it should at least stave off price increases.

 

[ClubMan]

Re: At last, an idea that makes economic sense

this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.

Not necessarily as I have pointed out above.

Conversely, consumer prices are probably sticky downward if VAT were reduced, by say 3%

What do you mean by "sticky downward"?

but retailers and service providers would be suspected of price gouging if they were putting up prices at the same time that their margin is increasing by 3%.

So what? Look around - many people ultimately pay what they think are high prices and just moan about it after the fact even though there are often cheaper alternatives.

It might not come through as reductions, but it should at least stave off price increases.

Why? If a retailer can increase margins further without impacting demand then they will.

 

[room305]

Re: At last, an idea that makes economic sense

this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.

You are making the mistake of thinking inflation can be controlled by lowering the prices of goods and services. Inflation is an increase in the money supply (usually faciliitated by loose credit) which results in an erosion of the purchasing power of that money.

What percentage of a price is composed of tax is completely irrelevant from an inflation perspective. If anything the government should look at increasing the VAT on goods. The prices won't change but it will remove liquidity from the system (by putting it in the government's coffers) and help combat inflation.

 

[darag]

VAT is a great tax. It's relatively easy to collect but more importantly it's a tax on consumption. This encourages investment (i.e. saving) over consumption which is good for the economy long term. Our relatively high consumption tax and low income tax is probably a happy accident but a beneficial one.

 

[owenm]

didn't one of the governments try this in the 80's, halved vat to cut inflation? it worked for 12 months only because they would have to more than halve vat again (or eliminate it altogether) in the next budget to have the same effect....

Room305 is right, inflation is excess money not rising prices. we just use prices to gauge it

Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......

 

[dontaskme]

Re: At last, an idea that makes economic sense

You are making the mistake of thinking inflation can be controlled by lowering the prices of goods and services. Inflation is an increase in the money supply (usually faciliitated by loose credit) which results in an erosion of the purchasing power of that money.

The ECB target rate of inflation is based on consumer price index, not money supply.

What percentage of a price is composed of tax is completely irrelevant from an inflation perspective. If anything the government should look at increasing the VAT on goods. The prices won't change but it will remove liquidity from the system (by putting it in the government's coffers) and help combat inflation.

It is the change in the percentage that makes the difference, it is not supposed to work as a long term fix, it just reduces it while the change passes through the system. Profit margins etc. should return to their long-term mean after a while.

 

[dontaskme]

didn't one of the governments try this in the 80's, halved vat to cut inflation? it worked for 12 months only because they would have to more than halve vat again (or eliminate it altogether) in the next budget to have the same effect....

Room305 is right, inflation is excess money not rising prices. we just use prices to gauge it

Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......

yes, it is not a long term fix.

And 1% is a miserly amount anyway (as one could expect from McCreevy )

 

[room305]

Re: At last, an idea that makes economic sense

The ECB target rate of inflation is based on consumer price index, not money supply.

Exactly. Rising prices are the feedback loop to tell the ECB to throttle the amount of money they are pumping out. Falling prices would imply the opposite. What you are proposing is attacking the effects of inflation rather than the cause.

If I present myself at the doctor covered in red spots that might indicate meningitis, it would be a pretty poor doctor that suggested I cover the red spots with concealer and forget about it.

It is the change in the percentage that makes the difference, it is not supposed to work as a long term fix, it just reduces it while the change passes through the system. Profit margins etc. should return to their long-term mean after a while.

I am saying that reducing the tax on goods will increase inflation because it will increase the amount of money in the system. I am not following what you are saying about change and long-term profit margins. Surely the price the retailer sets is the highest he can get away with?

 

[Western_Sean]

VAT is a great tax.

Aren't forms of taxation which are unfairly incident on lower wage earners generally considered poor and inequitable?

The ECB target rate of inflation is based on consumer price index, not money supply..

Wasn't the ECB originally using M3 money supply as part of it's approach?
I suspect that this only changed in response to economic issues that arose subsequently, perhaps we are now observing the beginnings of a return to this method?

 

[dontaskme]

Re: At last, an idea that makes economic sense

Exactly. Rising prices are the feedback loop to tell the ECB to throttle the amount of money they are pumping out. Falling prices would imply the opposite. What you are proposing is attacking the effects of inflation rather than the cause.

Talking about cause and effect of inflation is like debating chicken and egg.
According to wikipedia inflation is a rise in the general level of prices and that is good enough for me.
The ECB also pay close attention to money supply measures.

I am saying that reducing the tax on goods will increase inflation because it will increase the amount of money in the system. I am not following what you are saying about change and long-term profit margins. Surely the price the retailer sets is the highest he can get away with?

as an example assume someone grows a cabbage and sells it for 1.21 and 21% is vat so the guy keeps 1 euro and passes 21 cent to revenue.

Now assume vat is reduced to 10%. Now the guy keeps about 1.09c and passes 12c to revenue. Now assuming that someone else is competing with the cabbage seller and cuts their price to 1.11, now they keep one euro (which is what the pre-tax price was before the change) and pay 11 cent to revenue.

If the other cabbage seller wants to compete, he has to reduce prices as well, he can't keep the difference as an extra profit margin.

In other words, the retailer charges as much as he can, with competition acting as a limiting factor.

 

[Sherpa]

Didn't McCreevy cut the top VAT rate from 21% to 20% in one of his budgets and then promptly raise it back to 21% again when it became clear that retailers were just pocketing an extra 1% margin?

 

[ClubMan]

Re: At last, an idea that makes economic sense

Talking about cause and effect of inflation is like debating chicken and egg.
According to wikipedia inflation is a rise in the general level of prices and that is good enough for me.

Fair enough - let's just accept that for the moment. So why do you think that reducing tax will necessarily reduce prices charge by retailers as I have asked above? There is nothing to suggest that this would be the case. If the retailer knows that the VAT inclusive price is one that the market/consumer will bear then s/he will charge it. If VAT is abolished then that changes nothing. The breakdown of the price into its constituent components (e.g. cost of goods, margin, tax etc.) is irrelevant. I think it's all to do with price elasticity of demand or something but my macroeconomics is a bit rusty and was never chrome plated in the first place.

 

[ubiquitous]

Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......

That was McCreevy's excuse. It was easier for him to blame the business sector for the 1% VAT hike than to admit that he needed to do this to shore up the public finances which were in the red at the time because of his own reluctance to introduce public spending cuts in advance of the 2002 election.

VAT is a great tax. It's relatively easy to collect..

I don't agree. There is a remarkable level of VAT fraud in this country, and indeed internationally - if you don't believe me, ask anyone who has ever paid cash for domestic service work. That's leaving aside the spectacular international VAT frauds that cost the UK government alone a number of Billions last year. The VAT system, as currently structured, creates an immediate and direct competitive advantage for tax-dodging businesses at the expense of compliant businesses. In certain sectors this advantage is so pronounced that the dellboys flourish while legitimate businesses find it difficult to survive.

 

[dontaskme]

Re: At last, an idea that makes economic sense

Fair enough - let's just accept that for the moment. So why do you think that reducing tax will necessarily reduce prices charge by retailers as I have asked above? There is nothing to suggest that this would be the case. If the retailer knows that the VAT inclusive price is one that the market/consumer will bear then s/he will charge it. If VAT is abolished then that changes nothing. The breakdown of the price into its constituent components (e.g. cost of goods, margin, tax etc.) is irrelevant. I think it's all to do with price elasticity of demand or something but my macroeconomics is a bit rusty and was never chrome plated in the first place.

It's up to the consumer to look for the lower price. It won't necessarily reduce prices, but it should act as a damper on inflation.

If you have a plumber round at the end of December and he charges 100 euro and comes round in January for the same thing, and if you know he is paying 5% less tax, and he tries to charge 100 euro again you can try to pressure him to pass on the reduction. And you would be very sceptical if he tried to charge more.

Reducing inflation does not mean reducing prices, but slowing the rate of price increases.

So even if the reduction is not passed on (which consumers should be demanding), the price should at least be not increasing.