"To change VAT or not to change VAT – that is the question"

"To change VAT or not to change VAT that is the question"

VAT is an indirect tax which is levied on luxury products and ultimately passed on to the consumer. In this way a change in VAT would be expected to affect the AD of the economy as it would affect consumer spending. It is also more likely to affect consumer spending if it's increased than when it's reduced because of the wealth affect' and how consumers react to increasing prices.

A rise in VAT will undoubtedly have a detrimental effect on the overall welfare felt by consumers in the UK they'll feel poorer than they are and they'll have fewer new things to play with. But, this is a recession, maybe we need to get a grip.

Retailers won't welcome the changes in VAT after finally adjusting all their prices to the 15% rate. These incurred menu costs' are surprisingly high for retailers, especially larger chains. One of the ways retailers can deal with this is by gradually phasing the price changes in to circulation as new products are released, etc. instead of adjusting all the prices to 5% higher and redoing all the tags, labels, etc. This means that for a short period, the time-lag in changing prices and passing VAT changes on to the consumer, the retail market takes the hit of the new tax. On the one hand this is brilliant because it eases consumers in to the new tax rate; on the other hand it causes the retail industry problems it could probably do without.

Personally, I'm a big supporter of VAT being used as a way of raising additional tax revenue. The great thing about VAT is it's only placed on things that are deemed luxury' items and it's a voluntary tax: if you don't want to pay extra VAT, you don't have to buy luxury products. In a weekly shop for example, your essentials' (your bread, milk, fruits, vegetables) will not be hit by an increase in VAT, whereas your chocolate, soft drinks, etc. will be. Not to mention the positive impact it might have on obesity (excuse the flippancy) an increase in VAT means that only people who are able and willing to pay extra tax end up doing so. How can a tax be fairer than that?

Only time will really tell how the economy reacts to the change in VAT: consumers are typically difficult to predict because they are influenced in their spending by far, far more than just changes in the rate of VAT fingers crossed!

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