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.VAT reduction should at least damp inflation as retailers and service providers could be encouraged to pass on the cut
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.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.
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.
Not necessarily as I have pointed out above.this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.
What do you mean by "sticky downward"?Conversely, consumer prices are probably sticky downward if VAT were reduced, by say 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.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%.
Why? If a retailer can increase margins further without impacting demand then they will.It might not come through as reductions, but it should at least stave off price increases.
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.
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......
The ECB target rate of inflation is based on consumer price index, not money supply.
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.
VAT is a great tax.
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.
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?
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.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.
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......
VAT is a great tax. It's relatively easy to collect..
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.
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