UKIP has almost done something truly amazing

Patrick O’Flynn (he of Philip Scofield impersonator non-fame) did something flabbergastingly interesting the other week, he announced a fairly interesting UKIP policy. You can tell how good UKIP policies are by how quickly they are dropped and dismissed by Nigel Farage. Particularly stupid ones, like grammar schools and leaving the EU, become party dogma, stupid but mostly harmless one, like painting all the trains maroon and making taxi drivers wear uniforms, last an election before being dismissed as drivel by the dear leader and the relatively sensible ones, such as making the Circle Line circular again, vanish relatively quickly. Mr O’Flynn’s policy was so sensible it had a life span of about 23 hours.

In his address to the UKIP conference O’Flynn suggested that a VAT rate of 25% be imposed upon luxury goods, he cited examples of handbags costing more that £1000 and cars selling for in excess of £150,000. The very next day Farage popped up to say that the tax, which had by then been dubbed the ‘wag-tax’, was just out there for discussion and “isn’t going to happen”.

There are, however, several reasons for taking a much closer look at a higher rate of tax on conspicuous consumption. VAT is actually quite an unprogressive form of taxation, no matter how rich the buyer of a good is the tax levied is the same rate. (currently 20% on most items) This in itself means that the tax is not progressive yet it gets even worse when you consider that the tax is only levied when you buy something and because of the diminishing utility of money richer people can save more and spend a smaller proportion of their income in the shops. Poorer people meanwhile have to spend just about all their money scrambling from one paycheck to the next and therefore pay a greater percentage of their income in VAT than the well off. A higher rate of VAT on things that only rich people buy would help to redress this.

Nor is the idea of variable VAT rates foreign to us, the Treasury currently charges VAT at 5% on all sorts of things, mobility aids and solar panels for example while a whole host of other things are VAT exempt, this catagory includes books, newspapers and children's’ clothing. If we reduce VAT on some items it doesn’t seem particularly absurd to increase it on others.

So what would this tax be on? The specifics can be decided later and and subject to a debate, but broadly speaking the higher rate should be imposed upon Veblen goods, goods which are consumed conspicuously. If at a time of national belt tightening you decide to buy a Rolls Royce rather than a BMW I think it is reasonable assume you have more money to spare. The same may be said expensive wrist watches and handbags. The tax may even be helpful to the buyer of these goods. The reason that people buy Ferraris and the Rolexes is not that they are particularly functional and useful (in many cases they are the opposite), but because they are conspicuous; people will look at them and think “ooo goodness, isn’t he rich”, a higher rate of VAT will make them a bit more expensive and thus a bit more ‘ooo’ worthy.

Practically the tax has a number of advantages: The fact that the tax is paid at the point of purchase means that it is harder to avoid. This also means that it is relatively bureaucracy   light. If you introduce a new tier of income tax you generally need to hire approximately 3.2 billion more civil servants to implement and administer it, because this tax is paid when you buy the good the responsibility for collecting the tax actually falls on the retailer, who would sort and then pass the money onto the treasury in much the same way they do at the moment. This means that the tax would be relatively cheap to collect.

Its not an idea that will fix the deficit, of fill the shortfalls in NHS spending but it would help normal working people feel that perhaps we are all in it together and, as they say, every little helps. More flexible VAT rates is one way of making an unprogressive tax slightly more progressive and as such is the sort of policy that Labour would do well to consider  stealing and shouldn’t dismiss out of hand as another stupid UKIP policy, like the one to build prison ships.