Whenever the "cost of living" comes up as a topic, we often hear lists of consumption taxes that can be reduced to lower it. Most recently have been the green levies on energy bills; last year a big deal was made about fuel duty; the year before it was the top rate of VAT. Some people even argue that taxes on cigarettes and alcohol hit the poorest and should be cut back.I'm certain that there's all sorts of taxes that we'd like to lower, but there's no such thing as a free lunch, and any tax we lower requires us to raise another tax or cut spending elsewhere. Wealth taxes, and even a high rate of land value tax, would only raise so much, so if we're to cut tax then we're going to have prioritise.
My position is: whichever consumption tax you'd like to reduce, we'd be better off using the revenue to raise the Income Tax and Employee NI thresholds. This is for three reasons:
1) Progressiveness
Progressiveness is often our key concern when it comes to cutting taxes - will the tax cut most benefit the richest, or the poorest?
£12bn is the estimated "cost" of reducing VAT back to 17.5%. For the same £12bn, we could raise the income tax threshold by roughly £2,500, giving each full time worker £500 a year. For someone to make the same saving from the VAT cut, they'd need to spend £23,500 on top rate VAT goods, so not even including essentials like food or rent.
Cutting the top rate of VAT gives a big tax cut to big spenders and just a little tax cut to small spenders. Raising the threshold gives everyone the same amount. Much more progressive.
2) Choice and fairness
The problem with cutting a particular consumption tax is that the benefit will go entirely to people who consume a lot of that particular type of thing. Cutting the green levies will best benefit those who use a lot of energy, cutting fuel duty only those who drive and the main basics, such as food and rent, have no consumption taxes on them to cut in the first place.
Raising the tax thresholds gives everyone the same fair amount (£700 in our case) and then it's entirely to them how best to use it. It's the same for everyone and everyone gets to make their own choice on what to spend it on.
3) Economic effect
Another issue with taxes is the economic effect. Do they discourage people from doing a certain thing? In the case of consumption taxes, this is often the intended effect. We want people to lower their intake of cigarettes and alcohol and to reduce the CO2 emissions due to their fuel and energy usage. Even top rate VAT goods are often luxury items that use up minerals and/or leave waste.
At the least it's less harmful than taxing income!
In Conclusion
Whatever consumption tax you'd like to cut, using the revenue to instead raise income tax thresholds would be fairer, more progressive, give people more choice and have a more positive economic effect.
I'd even like to see more of them, like taxes on unhealthy foods and taxes on legalised and regulated drugs, but that's another topic altogether…