Cut VAT or Increase TAX.

Sea Sharp

In relation to the governments response to the budget deficit.
They've opted for the increasing taxes approach as opposed to cutting VAT. There is evidence to suggest that cutting vat would stimulate the economy and hence create more income tax revenue.

Hmm, so do you think there is any pros to the approach the government has taken.

We are eventually going to have to decrease minimum wage and the dole soon enough. This approach ensures there is less money in the economy and will lead to deflation of cost of living.

Any thoughts?

Euro_Kraut

There was no increase in VAT in the last budget. The October budget increase it by .5%. The increase we have seen were in the area of income tax.

Its is far from clear that cutting VAT at a time when prices are falling anyways will be beneficial. A look towards the UK (ex NI at least) would suggest that the 2% cut there had little impact on consumer spending. Right now prices are falling without the Govt having to do anything (inflation is about -2.6%). Depsite this fall in prices consumer spending has not increased - therefore a further drop in prices might not help at all.

The upshot would be that consumer spending remains stagnant and the amount of tax revenue we bring in to the state coffers drops.

ejmaztec

Euro_Kraut wrote: »

There was no increase in VAT in the last budget. The October budget increase it by .5%. The increase we have seen were in the area of income tax.

Its is far from clear that cutting VAT at a time when prices are falling anyways will be beneficial. A look towards the UK (ex NI at least) would suggest that the 2% cut there had little impact on consumer spending. Right now prices are falling without the Govt having to do anything (inflation is about -2.6%). Depsite this fall in prices consumer spending has not increased - therefore a further drop in prices might not help at all.

The upshot would be that consumer spending remains stagnant and the amount of tax revenue we bring in to the state coffers drops.

The VAT reduction in the UK may have little effect on homegrown consumers, but with people here heading up North and many thousands flying into the UK for some "consumer" tourism, I'd say that they're reaping more benefits than the stick-in-the-mud bunch we have here.

nesf

ejmaztec wrote: »

The VAT reduction in the UK may have little effect on homegrown consumers, but with people here heading up North and many thousands flying into the UK for some "consumer" tourism, I'd say that they're reaping more benefits than the stick-in-the-mud bunch we have here.

People are flocking North because of cheap Sterling not a 2% cut in VAT.

snubbleste

The UK VAT decrease has been widely acknowleged to have been shortsighted as it led to a fall in revenue - so the same would happen here

Sand

A cut in vat would help us recover our competiveness, by reducing costs and moderating wage demands.

But its not going to generate additional economic activity in the short term - confidence, both in terms of consumers and investors is so low right now.

Euro_Kraut

nesf wrote: »

People are flocking North because of cheap Sterling not a 2% cut in VAT.

Exactly. Movements in the Sterling-Euro exchange rate are a far bigger determinant of price differential than VAT rates. Over the past two weeks the pound gained about 5% on the euro. This is the equivalent of a 5% cut in Irish VAT rates. It appears to have had little effect on the volume of cross boarder trade though and has got scant attention from the media.

P. Breathnach

GaNjaHaN wrote: »

...There is evidence to suggest that cutting vat would stimulate the economy and hence create more income tax revenue...

What evidence?

ejmaztec

nesf wrote: »

People are flocking North because of cheap Sterling not a 2% cut in VAT.

It all adds up to widen the gap, although Sterling seems to be creeping up again.

nesf

Euro_Kraut wrote: »

Exactly. Movements in the Sterling-Euro exchange rate are a far bigger determinant of price differential than VAT rates. Over the past two weeks the pound gained about 5% on the euro. This is the equivalent of a 5% cut in Irish VAT rates. It appears to have had little effect on the volume of cross boarder trade though and has got scant attention from the media.

The average shopper going North probably doesn't keep that close an eye on Sterling. It'll be more of a "sticker shock" when they see their credit card/debit card bills I imagine.

ejmaztec wrote: »

It all adds up to widen the gap, although Sterling seems to be creeping up again.

Sure, but 2% isn't a large enough difference to get people to drive for several hours to shop in the North.

gurramok

I do watch the exchange rate regularly for the monthly shop. Its still worth going up north even if it falls back to 67p.

GaNjaHaN wrote:

They've opted for the increasing taxes approach as opposed to cutting VAT. There is evidence to suggest that cutting vat would stimulate the economy and hence create more income tax revenue.

How can you stimulate consumer spending when the consumers themselves have one of the highest private debt(400bn+) burdens in the world?

ejmaztec

nesf wrote: »

Sure, but 2% isn't a large enough difference to get people to drive for several hours to shop in the North.

Of course it isn't, but 2.5% might be, should someone decide to buy something hugely expensive.:D

(give us a break - my brain goes to sleep on a Sunday):(

Tech3

GaNjaHaN wrote: »

In relation to the governments response to the budget deficit.
They've opted for the increasing taxes approach as opposed to cutting VAT. There is evidence to suggest that cutting vat would stimulate the economy and hence create more income tax revenue.

Hmm, so do you think there is any pros to the approach the government has taken.

We are eventually going to have to decrease minimum wage and the dole soon enough. This approach ensures there is less money in the economy and will lead to deflation of cost of living.

Any thoughts?

I was on the line of decreasing VAT along with a hard increase in income tax. One of the biggest shocks for me was the increase of diesel intoduced in the recent budget. The income tax was roughly around the amount I imagined. No decrease in VAT was a surprise. It needs to be brought down to 15% along with cuts in public spending to regain the loss in that revenue. The conversion rate is not as good as it was a few weeks ago and is steadily dropping (0.88)

Basically reducing the cost to live along with less wages is a sign of things to come in this recession.

johnnyskeleton

nesf wrote: »

People are flocking North because of cheap Sterling not a 2% cut in VAT.

Exactly, but also to do with the so called Paddy tax.

If you buy from amazon.co.uk they charge you VAT at the Irish rate (rather unfairly I think, and AFAIK not a legal requirement in either country) but notwithstanding that it is still a hell of a lot cheaper to buy something from amazon than from a retail chain in Ireland. It was also cheaper before the drops in sterling.

From doing some of my own rough comparisons, I would say that more than half of the price difference is due to the drop in sterling, maybe a third due to the higher costs, lack of competition, increased transportation and the general price insensitivity of Irish consumers and maybe 5% due to the difference in vat.

sceptre

I reckon cutting VAT only works as an economic stimulant if people think the economy is going to get better in the near future anyway. And at that point they're as likely to stop stuffing their money into mattresses because they think the economy is going to get better anyway.

What's happened here is that a pile of people are fearful. They've got little confidence that they'll definitely have a job in twelve months or they've lost theirs and have little confidence they'll find one. Hence they're not spending. Unless that's tackled, you can cut VAT to zero and see little difference in spending patterns.

gurramok

Thats very well on confidence sceptre, what about their household debt to be paid off first before they have that disposable income to spend again?

NewDubliner

Sand wrote: »

A cut in vat would help us recover our competiveness, by reducing costs

VAT is transparent in transactions among registered traders and not chargeable on exports.

Sand wrote: »

and moderating wage demands.

VAT is low to zero on essentials such as food.

Sand wrote: »

confidence, both in terms of consumers and investors is so low right now.

This is true. I can think of no sector of the economy that can feel confidence, unless you're a Zen-Buddist with a self-supporting farm in Tipperary.

oscarBravo

johnnyskeleton wrote: »

If you buy from amazon.co.uk they charge you VAT at the Irish rate (rather unfairly I think, and AFAIK not a legal requirement in either country) but notwithstanding that it is still a hell of a lot cheaper to buy something from amazon than from a retail chain in Ireland.

I'm pretty sure Amazon are legally required to charge Irish VAT because of the volume of sales into the country.

That said, if you want to save even more, it's often worth checking out The Book Depository - free shipping means they tend to come in cheaper than Amazon when delivering to Ireland.

Sand

VAT is low to zero on essentials such as food.

People tend to consider more than the cost of food when deciding what they want in return for their labour. Man cannot survive on bread and water alone. In fact food would probably decrease as a portion of spending as income rises.