UK's poorest thumped by VAT rise

George Osborne's so-called "progressive" VAT rise is not progressive - and the Office of National Statistics have the facts to prove it, they say. The shift in VAT from 17.5% to 20% earlier this year means the poorest now spend 58% of their outgoings on goods which attract VAT compared to 45% in 1986. In other words, the poor pay proportionally more of their incomes on VAT than the rich.

Promises, promises

This theory has been well understood by many economists for a long time, though clearly not George Osborne. David Cameron even understands it. Indeed, he want as far as to make his understanding of it very clear back in April 2009.

"You could try, as you say, to put it on VAT, sales tax, but again if you look at the effect of sales tax, it's very regressive, it hits the poorest the hardest. It does, I absolutely promise you."

Here's another quote, this time from Nick Clegg: "Liberal Democrats have costed, in full, our proposals for tax cuts. We can tell you, penny for penny, pound for pound, who pays for them. We will not have to raise VAT to deliver our promises."

New car, anyone?

However, it's likely that Labour, had they got in, would have hiked VAT. But the ONS statistics are interesting for another reason. Even the poorest appear to be better off than in 1986 - substantially so.

"After taking into account changes in prices, the poorest fifth of households spent, on average, around 250% more on new cars, holidays abroad, meals out, audio/visual goods (including TVs) and photographic equipment combined, in 2009/10 than in 1986," says the ONS.

Thanks to cheap Chinese exports, many poor people own a DVD player. But new cars? Holidays abroad? Are the ONS really talking about the same people?
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