Austerity for Dummies Part 1 – An Illustration of Income Vs Consumption Based Taxation – FYI @George_Osborne @David_Cameron

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Here is an illustration of income-based vs consumption-based taxation.

Two people live next door to each other on the same street. Person A earns £100,000 per year and Person B earns £1,000,000 per year. Their houses are identical and the total outgoings for both Persons are £80,000 per year.

With only income-based taxation at 20%, Person A would pay £20k income tax and Person B £200k. Person A would end up with a balance of £0 and Person B, £720k, giving the local authority / exchequer a total of £220k income to the state.

With only consumption-based taxation, such as VAT on identical outgoings, Person A would pay £16k in tax and Person B would also pay £16k, both being 20% of £80k, leaving the income to the state of £32k.

Person A would have a balance of £4k and Person B, a balance of £984k.

With consumption-based taxation, both Persons are initially better off, but Person A is only marginally better off and Person B is very significantly better off, and the state, that needs to fund roads, health, eduction etc is reduced to a fraction, compared with income-based taxation.

With consumption-based taxation, either the level of state-funded services (of benefit to both Persons) would have to be reduced, or else Person A would have to bear a negative income, i.e. debt.

Sound familiar?

Of course, this is a gross simplification, but the principle is sound and this is why the argument for austerity is a fraud. Increasing VAT and reducing the top rate of income tax was a way of reducing the size of the state (for ideological reasons) and increasing the income for the better off (for reasons of greed).

Taxation on consumption sounds like a good thing, but when you tax universally consumed products and services, people at the bottom of the income ladder spend more of their income on these things than those who are better off, and end up paying proportionately more, but getting significantly less benefit from the state.

What’s more, if you put VAT on takeaway hot food (such as pasties), that is normally paid for with cash, then you can even tax people without bank accounts, such as the homeless.


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