A progressive policy... that emanated from UKIP: Why the Luxury Goods tax is another necessary analgesic for the cost of living crisis

Saturday, February 7, 2015

 

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.”Adam Smith

 

LibLabCon seem eager to emulate UKIP’s tough attitudes towards immigration; Theresa May recently pushed this to the extreme by unveiling plans to crackdown on student visas (a type of move Enoch Powell actually denounces in his infamous Rivers of Blood speech). LibLabCon however should be looking to adopt the regrettably now discarded luxury goods tax postulated by Patrick O’Flynn at his party’s conference, if they’re in the habit of UKIP mimesis. Now progressiveness and UKIP are two things one often perceives to be mutually incompatible, so when I heard about this policy I was rather surprised: had UKIP undergone a political pupation? The answer to the latter is no, but nevertheless I think this policy was a good proposal and one that deserves to be further analysed.

 

Inequality is a huge problem in Great Britain. Wages have only recently caught up with inflation, and while they’ve been catching up, asset prices have been soaring due to Quantitative Easing. Not only that, but as the Taxpayer alliance reported “the bottom 10 percent of households paid an average of 47% of their gross income in taxes – by far the highest percentage rate of any income group.”  The standard VAT rate has been increased to 20%, increasing the price ordinary families pay on many goods. Furthermore, this also fits into the larger piketty problem of returns on wealth being greater than rates of growth. Wealth most certainly isn’t trickling down.  This truly is a ubiquitous issue; I agree wholeheartedly with Spectator Editor Fraser Nelson, in saying that this inequality should be the most precedent issue in the General Election.

 

The two most common policies proposed to better ensure wealth redistribution are the mansion tax and a higher rate of income tax on the top earners. I am opposed to a rise of the income tax rate on high earners; in my opinion a raise would be detrimental as it would encourage an exodus of the wealthy, as happened in France. The current 45p rate is working, as it was revealed that the top 3,000 earners (our nation’s 0.1%) are paying 4.2% of the nation’s total income tax – the Laffer curve is in action. The Mansion tax (an annual ad valorem tax on properties above £2 million) is something I am broadly supportive of given a few caveats: most notably the fact I feel that this tax could be unfair to income poor but asset rich households, particularly in regards to Londoners (notably in gentrified areas).

 

I feel that the ‘wag tax’ to use its better-known sobriquet, would be a more preferable option than these two for a multitude of reasons. The UK luxury goods market was worth £6.6 billion in 2012, and is set to reach a predicted worth of £12.2 billion in 2017 – by applying this new 25% VAT rate on these premium items government would be able to exploit this booming market, and gather vital public revenue. Because of global demand and British brands already being established (Harrods of London has seen sales to Chinese shoppers, its largest foreign contingent, increase by 50% a year since 2011) buyers wouldn’t be greatly deterred. Furthermore the tax would primarily target wealthy foreign shoppers who drive 55% of the UK’s luxury goods sales, and thus would not disincentivise domestic wealth creation. To those Chinese shoppers the emergence of the ‘super VAT’ will hardly be noticeable, as in China their luxury goods are 72% more expensive than they would be in France due to a combination of three types of taxes on the products.

 

 

This hypothesised tax wouldn’t even be the most discouraging piece of legislation towards foreign visitors - complex visa rules already do that. The majority of average middle-income households would not be as adversely affected by this new tax as it has been claimed, considering that according to the Drapers 2013 Luxury report’s customer breakdown section 53.9% of people in fact spend <£100 on luxury goods per month. I can’t deny that my former Luxemburgist self does take slight pleasure in assailing through this consumption tax avarice and the excessive petite bourgeoisie behavior that grips our culture. Currently government puts punishingly high duty rates on alcohol and fuel, why not ameliorate these high rates somewhat by fairly shifting duty towards opulent products that are only imperative to a minority. This policy would have to be well managed for it to properly work, if less exclusive goods started to be sucked in through unfair thresholds we could be looking at a Japan-like situation.

 

Regrettably antiquated articles in EU Council directive 112 hinder possible implementation however. The Hungarians have consistently had to face this in their attempts for a luxury goods tax. In its attempts to keep VAT code simplified, the EU is spitting a way to allow tax systems to be both more just and profitable. I believe that if we were to sign up to the European Financial transaction tax the EU would be more inclined to offer leeway.

 

A criticism I’ve seen thrown at the idea of the tax is that it would discourage aspiration. To those who say such I really worry what they must think of people if they think people will stop aspiring because there’s been a marginal VAT increase. Call me an idealist but I thought the yuppie mentality was fuelled more by a Nietzschian “will to power” impulse than crass consumerism.

 

Another criticism that’s thrown about is that this policy will discourage consumer-spending somewhat; I fail to see that as a negative; for too long has our current account deficit being growing, this deficit is hidden by ephemeral growth that’s driven considerably by consumer spending. Focusing in on consumer spending, one should note that this spending is impelled through debt; as the ONS recently noted during their observations of the third quarter of 2014, consumer spending was on the rise (+0.9%) while real household incomes had declined by 0.1% - a dangerous deficit that shows no signs of relenting, edging more people towards the precipice of insolvency. Slight spending discouragement on lavish consumer goods seems to be a necessary measure to curb our looming personal debt crisis.

 

The luxury goods tax would be a minor discouragement on excess, effective in promoting prudence and serving as a redistributive mechanism, while not being too hampering that it would devastate consumer confidence (which is at a nine year peak) and end up pushing more people to cheap credit (like the standard VAT rate rise has). For more information on the varying correlations between debt and household spending I recommend this Bank of England report.

 

It is hard to gauge just how much longer this market will grow for, so to ensure optimal exploitation enacting mustn’t be beguiled. The treasury shouldn’t be supine while for example the fashion industry, which is worth an estimated £26 billion to the UK economy, and furthermore draws foreign inflows that equated to up to roughly two thirds of buyers in London Fashion Week being foreign, doesn’t get properly milked for tax returns. The Gatsby tax, as I like to call it, would make a pragmatic (but unfortunately unlikely) addition to any party’s manifesto.

Share on Facebook
Share on Twitter
Please reload

Want to respond? Submit an article.

SUPPORT BACKBENCH

We provide a space for reasoned arguments and constructive disagreements.

Help to improve the quality of political debate – support our work today.