Why is vat regressive tax

This is despite strong growth in the number of PIT taxpayers and significant wage growth amongst higher-income earners. Importantly, a SARS study shows that the share of tax paid by those earning above R1million has fallen between and , and fallen more than their share of overall taxable income, meaning their relative contribution has declined.

This includes direct taxation on assets such as property , income from holding assets such as capital gains and inheritance. Considering that large amounts of wealth were accumulated under apartheid, that this wealth is passed between generations, and that black earners have less assets to begin with and must support a higher number of dependents, these low taxes on wealth are indefensible and perpetuate inequality. The ability of SARS to raise the requisite revenue has been undermined by state capture.

Specialist units pursuing tax evasion have been gutted while there is indication that companies and individuals associated with state captured are not tax compliant. Regressive taxes include property taxes , sales taxes on goods, and excise taxes on consumables, such as gasoline or airfare. Excise taxes are fixed and they're included in the price of the product or service.

Sin taxes , a subset of excise taxes, are imposed on commodities or activities that are perceived to be unhealthy or have a negative effect on society, such as cigarettes, gambling, and alcohol. They're levied in an effort to deter individuals from purchasing these products.

Sin tax critics argue that these disproportionately affect those who are less well off. Many also consider Social Security to be a regressive tax. An individual's earnings above this base are not subject to the 6. Employers pay an additional 6. Higher-income employees effectively pay a lower proportion of their overall pay into the Social Security system than lower-income employees because it's a flat rate for everyone and because of this cap.

Just as Social Security can be considered a regressive tax, it's also a proportional tax because everyone pays the same rate, at least up to the wage base. A proportional or flat tax system assesses the same tax rate on everyone regardless of income or wealth.

This system is meant to create equality between marginal tax rates and average tax rates paid. Other examples of proportional taxes include per capita taxes, gross receipts taxes, and occupational taxes. Proponents of proportional taxes believe they stimulate the economy by encouraging people to work more because there is no tax penalty for earning more. They also believe that businesses are likely to spend and invest more under a flat tax system, putting more dollars into the economy.

Taxes assessed under a progressive system are based on the taxable amount of an individual's income. They follow an accelerating schedule, so high-income earners pay more than low-income earners. Tax rate, along with tax liability , increases as an individual's wealth increases. The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners. This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more.

The U. Its schedule of marginal tax rates imposes a higher income tax rate on people with higher incomes, and a lower income tax rate on people with lower incomes. The percentage rate increases at intervals as taxable income increases. Each dollar the individual earns places him into a bracket or category, resulting in a higher tax rate once the dollar amount hits a new threshold.

Part of what makes the U. The amount of the standard deduction changes from year to year to keep pace with inflation. Taxpayers can elect to itemize deductions instead if this option results in a greater overall deduction.

Many low-income Americans pay no federal income tax at all because of tax deductions. Estate taxes are another example of progressive taxes as they mainly affect high-net-worth individuals HNWIs and they increase with the size of the estate. As with any government policy, progressive tax rates have critics. Some say progressive taxation is a form of inequality and amounts to a redistribution of wealth as higher earners pay more to a nation that supports more lower-income earners.

Those who oppose progressive taxes often point to a flat tax rate as the most appropriate alternative. The percent of U. The following examples of regressive, proportional, and progressive taxes show how they work in practice:. Under a proportional income-tax system, individual taxpayers pay a set percentage of annual income regardless of how much they earn. The fixed rate doesn't increase or decrease as income rises or falls. In the U. This puts the effective tax rate at just below Income taxes can be both progressive or proportional.

Progressive taxes impose low tax rates on low-income earners and higher rates on those with higher incomes, while individuals are charged the same tax rate regardless of how much income they earn.

Regressive taxes may seem fair because they are imposed on everyone regardless of income, but they hurt low-income earners more than others. That's because they spend a larger portion of their income on regressive taxes than people who earn more.

The IFS dispute this. They produce the following data in evidence:. They say of this:. It shows that the percentage of net income paid as VAT varies relatively little across most of the income distribution, with the biggest exception being that the bottom decile group does pay a higher fraction of its net income on VAT than do other income groups.

And they then use this claim to justify the fact that in their opinion VAT paid is not regressive with regard to income.

The slight problem for them is that this overlooks the very obvious fact that it is. Replotting their data and excluding the bottom decile as they would like the following graph can be drawn:.

The linear regression shows a clear downward trend that makes very clear VAT is regressive. Surprisingly the IFS ignore this obvious fact and go on to claim:. However, looking at a snapshot of the patterns of spending, VAT paid and income in the population at any given moment is misleading, because incomes are volatile and spending can be smoothed through borrowing and saving.

Consider a student or a retiree: their current income is likely to be quite low but their lifetime earnings could be relatively high. The student may borrow to fund spending, whilst the retiree may be running down savings.

Similarly, many people in the lowest income decile will be temporarily not in paid work and able to maintain relatively high spending in the short period they are out of the labour market. Because their spending is higher than their current income, these people will be paying a high fraction of their current income in VAT.

Similarly, those with high current incomes tend to have high saving, and so appear to escape the tax, but they will face it when they come to spend the accumulated savings.

However, this requires that a number of further conditions hold. In fact, the consumption patterns of the rich for school frees, private health, leisure travel, second homes and financial services products are all VAT free, unlike the consumption patterns of the poorest. In addition, the IFS has to abuse all known notions of measure for progressivity to reach this conclusion. The result is that far from the IFS claim being justified, it is vey obviously wrong, and very poor quality research.

As a matter of fact VAT is regressive. None of which makes it easy to see how the IFS can sustain the claim that it:. The full paper is available here. It is, for example, defined as such in the Oxford Dictionary of Economics. Richard Murphy which I guess is the point. The starting point of analysis for any incremental tax change is its impact on total take.

Who actually bears the cost, and who everyone thinks is actually bearing the cost is kind of irrelevant. And absolutely wrong — who bears tax is of great significance — as is the distortion in the evidence beloved of neoliberals. More of an issue is that, linked to reduced government spending, it is a pretty direct way to reduce the money supply. Is this really what the government want, especially as they continue to encourage banks to lend and consumers and business to borrow.

A conversation about fairness has to be about the distinction between what is essential to staying alive and what is not. VAT is not and cannot be progressive until basics such as food and heat are excluded. We even have a figure enshrined in law I presume calculated by the Low Pay Unit or something similar which is used to calculate benefits, CT relief, etc — and then VAT is paid on goods in those very baskets.

The UK signed up to the treaty of Rome. As such an increase in VAT rate in the UK has been inevitable but the timing of the increase truly sucks! The UK did well years ago to get the zero rates which are contrary to the EC 6th Directive, which personally takes the edge the increase in the standard rate when it comes to essentials. My kids will be eating jaffa cakes and not chocolate biscuits from now on!