A rightwing thinktank will back Labour’s planned VAT cut in a significant new report revealing how tax is the biggest expenditure for those living in poverty.
The Institute for Economic Affairs (IEA) concludes that indirect taxes are a central cause of Britain’s cost of living crisis. Despite significantly lower rates of alcohol consumption and car ownership, the poorest income group spends twice as much on what the report describes as sin taxes and VAT than the wealthiest income group, as a proportion of their income.
Last year the shadow chancellor, Ed Balls, said he favoured a cut in VAT because, as a tax on sales rather than income, it would be the “fastest and fairest” way to boost the economy. He was criticised for pledging to reverse the government’s 2.5% VAT rise at a cost of £12bn. However, the IEA’s new report, Aggressively Regressive: The Sin Taxes that Make the Poor Poorer, to be published on Monday, proposes cutting taxes on fuel, alcohol and tobacco by half, scrapping green-energy subsidies and reducing VAT to 15%. This, it says, would put money back in the pockets of those who need it most. The poorest households, the report finds, pay 37% of their gross income in direct and indirect taxes.
Christopher Snowdon, the author of the report, said: “It’s clear that an increase in taxes on the goods families consume is making life harder for people. This is especially true for the poorest who spend a much higher proportion of their income on high-taxed products such as alcohol and tobacco.