Simplify VAT to cut costs and raise revenue

Simplify VAT to cut costs, raise revenue and help the poor,
says study prepared for the Mirrlees Review

According to a study commissioned by the Mirrlees Review of the UK tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies abolishing zero and reduced rates of VAT would cut compliance and administration costs for business and government, interfere less with people's spending decisions, and raise enough revenue both to improve the living standards of poorer families and to cut other taxes by £11billion.

The study by Ian Crawford (Oxford University and IFS), Michael Keen (International Monetary Fund) and Stephen Smith (University College London and IFS) found that the current 17.5% standard rate of VAT is around the average for industrial countries, but the UK applies zero rates more extensively than most other countries.

Children's clothing, most foodstuffs and residential housing are among the items zero-rated, while a reduced rate of 5% applies to domestic energy and other items such as contraceptives, children's car seats and some energy saving products.

Comparing the revenue currently raised from VAT with the amount that which would be raised if the

standard rate were applied to all consumer spending, the UK has a relatively narrow VAT base by industrial country standards. New Zealand comes closest to applying a uniform rate to all consumption.

Applying zero or reduced rates of VAT to items on which poorer households spend a relatively large proportion of their budgets is a blunt instrument with which to help the less well off, as richer households typically gain more in cash terms from these tax breaks than poorer ones.

Scrapping the existing zero and reduced rates of VAT-perfectly consistent with EU rules-would raise around £23 billion. If £12 billion of this extra revenue were spent increasing means-tested benefit and tax credit rates by 15%, this would leave the poorest three-tenths of the population better off on average while still raising £11 billion to cut other taxes or to spend in other ways.

It would also have only a temporary effect on inflation, reflecting a