The Wages of Sin: UK VAT Tax Increase of 12%
Unbelievable but true.
From Bloomberg:
Osborne Increases U.K. Value-Added Tax Rate to 20% (Update1)
June 22, 2010, 1:01 PM EDT
June 22 (Bloomberg) — British Chancellor of the Exchequer George Osborne increased the value-added tax rate to 20 percent from 17.5 percent in the first permanent change to the levy on sales of goods and services in almost two decades.
“The years of debt and spending make this unavoidable,” Osborne told Parliament in London in his emergency budget today as he announced a package of spending cuts and tax increases to cut the U.K.’s record deficit.
The rate will increase from January and produce more than 13 billion pounds ($19 billion) a year of extra revenue by the end of this Parliament in 2015, Osborne said. “That is 13 billion pounds we don’t have to find from extra spending cuts or income-tax rises,” he said.
The VAT increase dwarfed other revenue-raising measures in a budget that sought to all but eliminate a deficit that reached 11 percent of gross domestic product last fiscal year.
The tax generates about 15 percent of total government revenue and retailers say the rise may dampen consumer spending as the economy emerges from its worst slump since World War II.
“We understand that the budget deficit needs to be tackled but we think the focus needs to be cutting public spending over tax rises,” Krishan Rama, a spokesman for the industry lobby group, the British Retail Consortium, said in a telephone interview yesterday. “What we’re concerned about is that the recovery at the moment is very fragile and consumer confidence is also fragile, so we don’t want something to fracture that.”
Jobs at Risk
The BRC said in May that a VAT increase of this size would cost 163,000 jobs over four years and reduce consumer spending by 3.6 billion pounds over the same period.
VAT has remained at 17.5 percent in every year except one since 1991, when John Major’s Conservative administration raised the rate from 15 percent to help plug a deficit. Gordon Brown’s Labour government introduced a temporary reduction to 15 percent last year as part of a 20 billion-pound stimulus package to fight the recession.
Britain’s 17.5 percent VAT rate is one of the lowest in Europe. Among major western European countries, only Spain has a lower rate at 16 percent. The levy is 19 percent in Germany, 19.6 percent in France and 20 percent in Italy. There is no VAT system in the U.S., where each state levies a sales tax.
Revenue Forecast
VAT is forecast to raise 80.7 billion pounds this fiscal year and 111 billion pounds in 2015-16, according to revised forecasts published today by the independent Office for Budget Responsibility.
A few items deemed necessities, such as food, children’s clothing and books, are exempt from VAT to protect the poorest households while domestic fuel is charged at 5 percent. Osborne said essential items would remain free of tax over the five years of this Parliament.
Danny Gabay, a former Bank of England economist and director of Fathom Financial Consulting in London, said the higher sales tax risks keeping inflation above the 3 percent upper limit of the government target well into 2011.
The increase will cost charities at least 150 billion pounds a year in unrecoverable tax, according to the Charity Tax Group, which represents more than 400 non-profit organizations. The government should introduce a rebate scheme for charities to help limit the damage, the group said in a statement.
Marks & Spencer Group Plc, the largest U.K. clothing retailer, said in a statement it welcomed the fact there was now clarity on VAT.
–With assistance from Clementine Fletcher and Thomas Penny in London and Celeste Perri in Amsterdam. Editors: Eddie Buckle, Craig Stirling.
To contact the reporter on this story: Andrew Atkinson in London at a.atkinsonbloomberg.net.
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net.
BIG Tax Increases Next Year ! Bush Tax Cuts WILL (?)Expire
People making $14,000 and under will experience a 50% increase to their income tax rate. The lowest tax rate,which was 10% under the Bush tax cuts, will revert back to the 15% rate that goes back to Bill Clinton’s tax increases. So much for only taxing people making over $250,000 a year, who will experience a 50% tax rate on average. Most people in the lowest tax brackets have “no tax status”, which means they pay no income taxes due to child tax and EITC credits. But many single working people with no children will find this 15% somewhat burdensome, since they are already paying 7.65% FICA taxes on their first penny if they are employees. If they are self employed they are already paying a net 14% in self employment taxes (after the self employment tax deduction) on any profits.
This from Marketwatch.com:
By Robert Schroeder , MarketWatch
WASHINGTON (MarketWatch) — Facing a gaping deficit but aiming to spur job creation at the same time, President Barack Obama’s fiscal year 2011 budget would hit top earners, oil companies and others while giving tax breaks to small businesses to help them hire new workers.
Obama submitted the $3.8 trillion budget plan to Congress on Monday, beginning an annual process of hearings and setting off a debate over spending priorities with newly emboldened congressional Republicans. Read full story on Obama’s budget proposal.
AM Report: Obama’s Budget Seeps Red Ink
The president’s $3.8 trillion budget will move deficit levels to an all-time high. The News Hub discusses the budget’s chance for passing Congress.
With job creation his top priority as the U.S. grapples with 10% unemployment, Obama proposed a $100 billion jobs package that includes a $5,000 tax credit for hiring new employees. The budget also proposes extending for one year the Making Work Pay tax breaks, valued at $400 a person and $800 a couple. The tax cuts, a key proposal of Obama’s presidential campaign, were due to expire at the end of this year. Read White House budget documents.
The budget foresees a deficit of $1.6 trillion for 2010 before it begins to decline, and the White House has set its sights on the wealthy and big companies to make up the shortfall.
Obama wants tax breaks proposed by President George W. Bush to expire this year. His budget would eliminate tax breaks on those making more than $250,000 a year, a move almost certain to be opposed by Republicans and perhaps some Democrats as the economy crawls out of the recession.
“We extend middle-class tax cuts in this budget,” Obama said Monday at the White House, but “we will not continue costly tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can’t afford it.”
Obama’s budget lands at the beginning of an election year that’s projected to be tough for Democrats. Congressional Republicans, buoyed by the win of Scott Brown in a special election for a Senate seat from Massachusetts, are likely to fight Obama hard over the budget.
Given the political outlook, Democrats may choose to delay the tax hikes, said Clint Stretch, managing principal for tax policy with Deloitte Tax, in Washington.
“I don’t see anything in the Democratic Party that says they’re not comfortable raising the top tax rates to the level they were in the Clinton administration. That does not mean they won’t avail themselves of the ‘we’re still recovering’ notion and say those should be effective in 2012 rather than 2011,” he said. “That might be one of the big fights coming here. The House might say 2011; the Senate may have more difficulty with it.”
Oil companies would lose $39 billion in tax breaks and the budget would raise $24 billion over the next decade by closing a loophole for certain investment managers.
The budget also includes new tax cuts for investing in small businesses and tax breaks for retrofitting homes to save energy, Obama said Monday.
Big banks also face a fee under the budget that would put about $90 billion in government coffers.
Robert Schroeder is a reporter for MarketWatch in Washington.