Taxing times

As we're all feeling poorer after this month's VAT hike, Hannah Langworth decides to take a closer look at all things fiscal

What's the point of tax? This question may well have crossed your mind as you clocked the small, but noticeable increase in the price of your morning coffee or when coughing up (as it's January, probably literally) for supplies to tackle your winter cold in Boots. For as if the average British January wasn't miserable enough, this month UK taxpayers have had to face a hefty 2.5 per cent hike in VAT.

The answer? The first one normally cited is to provide government revenue to be spent on administration, infrastructure and government services, which is the justification being given by the coalition government for that extra 2.5 per cent. Team Cameron claim that the UK's budget deficit is so big that this large-scale whip round is the only option. But you might find yourself thinking that it's all rather unfair. Isn't it a bit like when you're in an eaterie with your friends and find that the stack of £20 notes on the table is not quite what you need to pay to avoid the washing up. Everyone puts in a bit more, but you can't help thinking that you shouldn't have to pay as much as a friend who earns significantly more than you.

Redirecting

In the same way, some argue that tax, a large scale version of our restaurant example, should not only have to fund collective spending, but should also redistribute wealth more directly, for example, by taxing the earnings of the wealthy to fund social security. VAT fails on this criterion because it is levied on everyone indiscriminately unlike income tax. VAT and other taxes which make no allowances for personal circumstances (known as indirect taxes, in contrast to direct taxes such as income tax, which do) are often unpopular. Poll taxes are perhaps the most notorious example of this kind of fiscal strategy and can take the credit for both the Poll Tax riots of some twenty years ago against the Thatcher government's attempts to bring in such a tax and also, to look a little further back, the Peasants' Revolt of 1381. (The thought of the Black Death, circling Europe at this time, certainly puts those January sniffles into perspective now, doesn't it?)

The idea that tax should instead be redistributive is controversial, as political debates over inheritance tax have shown, which essentially ask how much money the wealthy should be allowed to pass on to their children and how much should go into a communal pot. While some argue taxes such as these are essential for promoting social justice, others argue they run the risk of being a disincentive to enterprise.

Social life

What should be becoming clear is that tax is about more than money: your views on it are a pretty good indicator of how you think society should function. You could also say that a nation's tax system is a reflection of its values (or at least the values of those in power.) Tax, as the flipside to the demands citizens can make on central government, is a key element of the relationship between individuals and the state - opinions, of course, differ on how this relationship should operate. This balancing act of tax and rights is encapsulated in the slogan "no taxation without representation", first widely used by American revolutionaries in the mid-18th century as they made the assertions of independence which led to the birth of the modern American nation. In Washington DC ironically, citizen complain that this linkage is not being upheld because the creators of the U.S. wanted the seat of government to be neutral, inhabitants pay their dues but do not enjoy the benefit of a representative in the Congress.

So by his VAT increase, Cameron is as much making a statement about the philosophy of his government as raising extra revenue. But I think that this insight is unlikely to provide much consolation as we count out those extra pennies.

VAT: Did you know...

Ever wondered why you pay more for a sandwich if you eat in, but if you buy soup the price is the same wherever you sit down for lunch? That's because VAT is charged on all food eaten on the premises and on hot take-aways, but not charged on cold items eaten out. And what about why some shops have suspiciously large children's sizes? That's because no VAT is charged on most children's clothes, so by putting an item in the children's section, retailers can offer it at a lower price to their customers.

And what about our favourite VAT anecdotes? (Yes, we are that sad.) We love Jaffa Cakes here at The Gateway - not only as a tasty snack, but also because they were the subject of a notorious VAT test case. In the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes. So, believe it or not, the question of to which category the orange-flavoured treats should be allocated led to a prolonged courtroom battle. (In the end, those arguing for cake were victorious.)

But tax isn't all fun - spare a thought for Gordon Brown who, when delivering his spring budget in 2000, was too embarrassed to announce his cut to the VAT charged on the price of feminine hygiene products, but he still earned the thanks of the nation's women.

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