The trouble with taxes

I read today that the UK is set to raise the VAT rate back to 17.5 pct. This is guaranteed to put the UK back into the 2nd cycle of a double dip recession. You only have to look back at the collapse or the Japanese bubble in 1990. As soon as there were signs of economic activity after the big sell of the Japanese government raised consumption tax from 3pct to 5 pct. The result 20 years of stagnation and zero growth.


The UK is effectively copying Japan's mistake. Why? I know that polytricians are hindered by the "Next Election" but its less than 20 years ago. Less than a generation. Surely someone in the UK government must realize this.

There is also underlying strong inflation. Good! Every economy needs a cycle of inflation every so often. Don't try and cripple it like Reagan and Thatcher did. Inflation was not the bogeyman then, They were!!!

The trouble with tax is it is a compound instrument.

Lets assume 1Kg of raw meterials.
* Raw material producer provides the materials. His cost is GBP100, for profits he adds 33pct. The cost is now GBP133. He has to add VAT at 17.5pct (GBP 23.28) making the sell on price GBP 156.28

* The Factory or fabricator buys the raw materials for GBP 156.28. He makes a widget with the raw materials, adds his profit of 33pct to cover salaries, labour and packaging. The price is now GBP 207.85. He has to add VAT at 17.5% (GBP 36.37), so now the sell on price is GBP 244.22.

* The wholesaler/retailer purchases the widgets for GBP 244.22 and he adds his profit 33pct to cover storage, staff, heating and lighting costs and now the price is GBP 324.81. He adds 17.5%VAT (GBP 56.84) and the price now to the user or purchaser is GBP 381.65

The revenue has received GBP 116.49 the overall cost is nearly four times the raw materials. When you consider that the average working person probably pays 30pct income tax, the end consumer has to earn GBP 496.15 before tax to buy one widget.

It is clear that our not only is our taxation system wasteful and extravagant, but our system of making and producing and selling goods is also wasteful. We need to integrate and streamline. One company has to collect raw materials, fabricate, deliver, sell for one profit margin. This company has to be run efficiently and fairly.