Why is VAT a regressive tax?

I admit that I am not very good at sums and that I am easily confused by economic arguments. So I hope that somebody will be able to explain a comment made by Roger Williams on Sunday's Politics Show and by David Milliband on today's Daily Politics - that raising VAT is a regressive tax because it falls most heavily on the poorest in society.

If a poor person spends £20,000 a year and a rich person spends £200,000 I would have thought that the richer person would pay at least 10 times as much in purchase taxes than the poorer person. Because VAT is a purchase tax that is only charged on luxury goods, with essential goods being exempt, I would also have thought that it stands to reason that the richer person would spend a greater percentage of his money on luxuries whilst the poorer person would spend a large proportion of his money on tax exempt essentials. If this is the case then the richer person will pay even more in tax. This doesn't appear regressive or disproportionate to me; it appears to be fair and proportionate. So how do Mr Williams and Mr Milliband come to the opposite conclusion to me?


  1. Labour label VAT a 'regressive' tax because the rate of 17.5% (excluding exempt items) is paid by all regardless of income - unlike income tax where the rate increases as the taxable base amount increases. Sales Taxes are are common used example of 'regressive taxes' in economic text books, see: http://en.wikipedia.org/wiki/Regressive_tax

    That said, I pretty much agree with your analysis.

  2. Druid has it right. It's not only luxury goods that have VAT. Adults' clothes attract VAT, for example, as do many other goods and services.

  3. No MOF has it right. It is a proportional tax. All pay the same percentage of their spending.

    UNLESS some items are exempt as we have in Britain and as these are necessities like food, children's clothes, etc (on which poorer people spend a bigger percentage of their income), this means poorer people spend a lower percentage of their income on VAT related goods and so the tax is mildly progressive.

    Good thing is that unlike income tax crooks, benfit scroungers and all in the cash economy have to pay VAT opn many goods they buy.

  4. If he is to understand simple economics, it is possible that the "Miserable Old Fart" could benefit from a brain transplant forthwith!

  5. Thank you, anonymous 13:28, for your informative and insightful contribution to the discussion.

    I don't think that there is that much disagreement between Fred and the Druid, Efrogwr.

    There are oddities in the way "luxuries" are defined. New furniture is taxed but second hand furniture is exempt, which means that a wonky flat pack costing £100 attracts the tax but a Queen Anne Bureau costing £200K doesn't – I can see why some might see that as a bit on the regressive side; I think that there is something quite disgusting about female sanitary products being taxed as "luxury purchases" – they should be exempt!

    But, having sorted out these oddities, as they surely can be sorted out, I still can't see why VAT can't be used as a proportional or progressive tax.

    I agree with Fred that one of the advantages of extending progressive VAT would be that it is a tax that those in the black economy might have difficulty in avoiding.

  6. "FRED said...

    No MOF has it right. It is a proportional tax. All pay the same percentage of their spending". I hear what Fred is saying but percentage of spending is not relevant to the regression point. The key is that the spending is not the same percentage of people's INCOME or wider WEALTH. Everyone needs to buy some goods, such as shoes or household items, which attract VAT. Those with less income/wealth pay a larger proportion of their income/wealth in VAT.

  7. Not all purchases attract VAT. The things poor people tend to buy tend to be subject to VAT (clothes, food, etc.). The things ring people buy are less likely to be subject to VAT (expensive houses, private school frees, private healthcare, financial services).

    As a result, it is a statistical fact that:

    The richest 10% pay one in every 25 pounds of their income in VAT; the poorest 10% pay one in every seven pounds as VAT

    VAT is a highly regressive tax, and there is a lot of evidence to show that affects the poor disproportionately.