The Guardian reports that Swedish government is to tackle ‘throwaway culture’ by cutting VAT on fixing everything from bicycles to washing machines, with Swedes possibly also going to be able to claim back from income tax half of the labour cost on repairs, while a reader’s commentary argues that VAT costs and says ‘The question that has to be asked is whether this tax is affordable?!
The proposals will be go to parliament in the budget proposals, and if voted through in December will become law from 1 January 2017.
The Guardian writes:
The Swedish government is introducing tax breaks on repairs to everything from bicycles to washing machines so it will no longer make sense to throw out old or broken items and buy new ones.
Sweden’s ruling Social Democrat and Green party coalition is set to submit proposals to parliament on Tuesday to slash the VAT rate on repairs to bicycles, clothes and shoes from 25% to 12%.
It will also submit a proposal that would allow people to claim back from income tax half of the labour cost on repairs to appliances such as fridges, ovens, dishwashers and washing machines.
‘We believe that this could substantially lower the cost and so make it more rational economic behaviour to repair your goods,’ said Per Bolund, Sweden’s minister for financial markets and consumer affairs and one of six Green party cabinet members.
Bolund has been a key figure in driving through the new incentives. He estimates that the VAT cut will reduce the cost of a repair worth 400 SEK (£36) by about 50 SEK, enough to stimulate the repair industry in Sweden.
The ‘Physiocrat’ commentary on the Guardian’s website news page writes:
They would probably do better to get rid of VAT altogether. It raises very little and may even result in a loss. How could this be?
FRAUD LOSSES
In the UK, for every five pounds of VAT revenue received, one pound is lost due to
*Payments in cash
* Fraudulent claims for refund of inputs
* Carousel fraud
The UK VAT gap is estimated at £13.1 billion in 2013-14 (11.1 %).
ECONOMIC LOSSES
COMPLIANCE AND ADMINISTRATION COSTS
* 4.7% of the yield in the UK
DEADWEIGHT LOSSES
This is economic activity which does not take place because of the tax. Any figure must be conjectural. What counts here is supply/demand price elasticity. A deadweight loss of 1% of GDP is £15 billion. The reduction of VAT from 25% to 12% in the Swedish restaurant sector led to an 11,300 additional full-time jobs.
COST OF VAT TO THE GOVERNMENT
CHURNING LOSSES
This is the cost of VAT to the government itself, for example payments to pensioners and recipients of welfare benefits – child benefit, incapacity benefit, unemployment benefit, etc. At least 7% of this is being paid out in VAT, ie £14 billion.
In addition there is the component of VAT which is paid by public sector employees out of post-tax income, another £9 billion. Thus, total churning losses are £23 billion.
DOWNSTREAM TAX LOSSES
VAT results in the abstraction of revenue from other taxable sources eg incomes, profits, rental values (UBR valuations). A 10% loss of the total of income tax, national insurance, corporation tax and the UBR is £33 billion.
It would take serious work to put more precise figures on all these losses but it has to be concluded that the net yield from VAT is at best, not more than 60% of the nominal value and could be resulting in an overall cost both to the government and the UK economy.
The question that has to be asked is whether this tax is affordable?
