Since You Asked

VAT reform would keep our pasties hot

“David Cameron has attempted to dispel Labour claims that he leads an elitist ‘out of touch’ government, when he declared his love of Cornish pasties, one of the hot foods that will be taxed more under Budget VAT rises.”

Financial Times, March 29

The FT? Surely The Daily Mash or The Onion.

No, it’s true. This really is the topic of the day. You clearly feel it’s not serious.

I can think of bigger issues. At the risk of being po-faced about the whole thing, do you realise how much is at stake here?

I do. The tabloids are full of the story. And the Guardian quoted the finance director of the West Cornwall Pasty Company as saying that introduction of VAT at 20 per cent would raise the price of a pasty from £3.40 to £4.50.

You, the Guardian and the finance director of the West Cornwall Pasty Company might want to do the maths on that. I’ll wait.

Hm. You have a point. It’s more like 33 per cent than 20 per cent, isn’t it?

That’s not the only way in which this tax rise has been blown out of all proportion. Government tax revenue is £575bn. Her Majesty’s Revenue & Customs reckons the pasty tax will raise £50m this year. You did such a good job on the last maths problem, can you tell me what percentage of the total tax base £50m is?

Not a very big one.

Quite so – about 0.01 per cent, although HMRC reckons it will rise to closer to 0.02 per cent over time. To put it another way, every British citizen pays an average of almost £10,000 in tax and the pasty tax will raise one pound a head.

But people who subsist solely on hot pasties and sausage rolls will be sorely affected.

Well, that’s true. And it was great to see Ed Miliband and Ed Balls calling attention to their plight by travelling to a Greggs bakery to eat sausage rolls in front of the cameras. Whoever said that great ideological clashes were a thing of the past?

I don’t think you appreciate the seriousness of the issue.

Probably not. My father made himself a sandwich lunch almost every day of his working life, so I never got to experience first-hand the lifestyle of someone who eats so many hot sausage rolls that this makes a big dent in the standard of living.

Such people do exist.

I am sure they do, but the budget already cut income tax for low- to middle-income families by over a hundred pounds a year, which will buy a lot of pasties. And if you care about poor families, note the cut in the welfare budget by £10bn a year, or 200 times the sum at stake with the pasty tax.

There’s a broader principle at stake here.

Which is?

Um . . . Well, maybe there isn’t a broader principle at stake here. It just feels like rotten politics.

I don’t disagree.

And it creates absurd anomalies – for instance, a warmish sausage roll will be subject to VAT, or not, depending on whether it’s a cold day or a hot day.

I agree, but VAT is already subject to absurd anomalies, such as whether Jaffa Cakes are cakes or biscuits, and thereby exempt from or subject to VAT.

Biscuits, obviously.

Obviously. But the courts disagreed, so Jaffa Cakes enjoy a tax break relative to chocolate digestives. But serious tax-watchers reckon that the UK’s VAT system makes very little sense, and the pasty tax is a perfect example of it.

How so?

When you wait for a pasty to cool down in order to consume it free from tax, everybody loses: the taxman doesn’t get his tax and you don’t get your hot fresh pasty. That distortion leads to what we economists call “deadweight loss”. The UK system is full of such distortions because so many items are VAT exempt.

So what should be done?

The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.

So you’re arguing that VAT shouldn’t just be introduced for sausage rolls, but for everything?

Yes. Fancy a sandwich?

Also published at ft.com.

31st of March, 2012Since You Asked • Comments off