Teaching Comparative Government and Politics

Monday, December 01, 2008

Comparative taxation

If your students haven't traveled outside of the US very much, they probably are not familiar with VAT ("value added tax" which is essentially a national sales tax). One reason that income taxes in the UK (and most other Western European countries) are more progressive than those in the US is because of the regressive nature of the VAT.

Here are some numbers to remember when examining comparative taxation.

Ministers considered raising VAT over 18.5%, admits Brown

"The row over "secret" Treasury plans to increase VAT escalated today as Gordon Brown admitted a proposal to raise it above 18.5% had been considered.

"The prime minister said "all options" were looked at but the government decided to lower value added tax to help hard-pressed families...

"Cameron [Conservative Party leader] asked the prime minister [in Commons] whether there had been a plan to the increase VAT above 18.5% ...

"Brown replied: 'We looked at all options; we rejected the option of increasing VAT… we decided we would lower it and I hope he will support that.'..."

Retailers rush forward tax cut

"The Christmas price war intensified this morning when Tesco, J Sainsbury and John Lewis rushed forward the government's cut in VAT, stealing a march on high street rivals including Marks & Spencer...

"Officially the cut in VAT from 17.5% announced in the pre-budget report does not come into effect until Monday, December 1. But the three companies hope to lure shoppers by cutting the VAT on all applicable non-food items to 15% on Friday..."

Meanwhile there's doubt that the tax cut will do much to spur the economy.

Retailers wrestle with repricing amid doubts that VAT cut will work

"Retailers were working out yesterday how and when they will cut prices to take account of the chancellor's reduction in VAT - just as the governor of the Bank of England said the move was unlikely to provide a boost to spending.

"Alistair Darling reduced the rate from 17.5% to 15% until January 2010 in the hope of prompting a pre-Christmas spree. But Mervyn King told MPs that it might not encourage spending until late next year, when the rate was about to go up again.

"The government has not said how big a boost to spending it hopes for from the VAT cut - but the signs are it will be more of a blip than a boom. One leading retailer said yesterday that the small cut would have 'almost zero impact' on sales..."

See also: Tax Rates Around the World

Labels: comparative methodology, concepts, economics, globalization, UK