This article outlines how the UK can eliminate the value reduction tax called VAT.
VAT can be cut completely with a 15% reduction in real wage costs (relative to VAT) in the public sector and the elimination of the Department of Business Innovation and Skills.
And yes, it really is that easy.
VAT in the UK and Wales is currently 20%. This means most products are 20% more expensive that they would be if there were no VAT. This article will paint some broad strokes outlining how the UK can cut VAT to 0% making everything 17% cheaper. First of all wages.
Cutting VAT to 0% immediately boosts the spending power of everyone. This would open up a whole new range of low paid jobs for the masses and in the process decimate unemployment.
By boosting spending power, low-cost jobs would once again become viable due to wages going 17% further than they did with VAT. This would also have knock on effects in increasing government income tax revenues.
The effect of the VAT elimination could go further is businesses decided to cut wages by 17%. And remember, without VAT a 17% wage cut would lead to no reduction in buying power for the worker.
Assuming the labour cost to a business is 30% of the overhead, reducing the pay of workers by 17% in line with the VAT cut , would be mean the overhead of the business would be reduced by 5%. This would mean a further reduction in prices of 5%.
In effect, a 17% wage cut would lead to workers benefiting from a 5% reduction in the cost of products and services. Another win-win situation.
This article, I hope, shows many win-win situations. Tax cuts are a massive virtuous circle leading to increased buying power and lower prices for everything.
In summary cutting VAT would lead to around a 17% drop in the price of products and services if wages stayed the same and a 22% drop in prices if wages were cut in line with the VAT cut. Worse case scenario, products and service become 5% cheaper, best case things become 17% cheaper.
So how much money does VAT bring in to the government each year?
So where would the money come from the fund the elimination of VAT?
Lets look at what a 22% reduction in wage costs would mean to the government’s payroll (assuming public sector wages are cut inline with the VAT and in relation to the new price of products and service without VAT)
In 2008 the UK government spent 174 billion Euros on wages. A 22% reduction in the wage bill would lead to saving of 38 billion pounds a year. So the UK government could cut the salaries of government workers by 22% with no reduction in the spending power of the government workers. This would have to be classed as a virtuous circle.
That leaves a 40 billion pound gap.
The old DTI now called BIS has a yearly budget of 22 billion GBP. This department can easily be cut completely. It was originally designed to promote trade between the USA and the UK. The spread of the internet has meant the individual citizen is more than capable of making contact with businesses in other countries.
The developments of international shipping companies has also meant transportation is much more straight forward. In short, individuals and businesses are more than capable of contacting new suppliers and reaching new customers in the UK and anywhere in the world. It is so easy it is hard to imagine how any external party could make it easier, if anything outside interference could hinder the process.
The next department that could be cut would be the department of energy. Fortunately this department was absorbed by the DTI and the BIS so it will be eliminated along with the BIS.
This leaves an 18 billion pound gap. I would propose cutting the wages of public sector workforce by an additional 10% to bring public sector salaries in line with the private sector.
I would also encourage a 10% reduction in wages to motivate public sector workers to find a productive job in the private sector rather than being dependant on private sector taxes while working in the public sector.
This would neatly leave a gap of around 2 billion pounds.
The reduced admin costs due to no VAT and the boost it would give UK exporters due to the lower wages costs would more than make up for this 2 billion GBP shortfall.
And this is ignoring the increased income tax revenue and reduced social security payments due to reduced unemployment by lower cost jobs once again becoming viable.
As mentioned, this a broad stroke plan but it is clear than tax cutting is a virtuous circle and the immediate savings of cutting taxes will amplified by multiplier effect due to lower wages costs, lower social security payments, increased income tax revenues and a more competitive economy in relation to other countries.