How regressive is VAT?

Tim Horton told the Jeremy Vine show – in a discussion with Ruth Lea in which she proposed 50% on luxury yachts from the right – used a very good concise summary of how to get across the point that VAT hits the poorest hardest.
The richest 10% pay one in every 25 pounds of their income in VAT; the poorest 10% pay one in every seven pounds as VAT.

This is “The effects of taxes and benefits on household income” from the Office for National Statistics. (PDF file)

If you look at table 14 (appendix 1), which shows the income, taxes and benefit for all household decile groups. The figures are for 2007-08.

You can see that the bottom decile have an average gross income of £8820, and pay out £1240 in VAT – that is one pound in seven.

You can see that the top decile have an average gross income of £92936, and pay out £3688 in VAT – that is one pound in every twenty-five.

Gross income is the conventional way to look at what is the appropriate tax mix.

If we were to instead take disposable income (after direct taxes have been levied), the poorest 10% are in fact paying a higher proportion (one pound in six) in VAT – an even more striking impact – while the richest 10% are paying one in nineteen pounds. That again shows how the impact of VAT is very regressive.

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