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You'd pay less than 5 per cent VAT when buying a greyhound but 9 per cent when getting their hair cut.. Shutterstock
Taxing matters

Why do we pay more VAT on hairdressing than we do on greyhounds?

In the run-up to Budget 2015, Dr Daragh McGreal looks at the various arguments around lowering the rate of VAT.

THERE ARE 59 days to the Budget with much debate still to take place between now and 14 October on what the government should spend and cutback on. 

But in the second in a series of articles Dr Daragh McGreal, an economic advisor to the independent TD Stephen Donnelly, drills down into the issue of Value Added Tax, which most of us know as VAT, and whether there is scope for cuts or changes to the way it is levied… 

ANYONE WHO HAS watched Only Fools and Horses remembers ‘no income tax, no VAT’ from the jingle.

The boys belonged to a grey area of the economy outside the prying eyes of Her Majesty’s Revenue & Customs and were loved for their wheeler dealing. But when you’re not dealing with the Del Boys of this world, VAT is unavoidable.

In Ireland, consumers pay VAT on most goods and services, apart from food and some other exceptions, and its purpose is to raise revenue. At the height of the boom in 2007, we took in €14.5bn through VAT, but this had fallen to €9.7bn by 2011. The recession had hit our wallets and we hadn’t started spending again.

Because of the big budget deficit, the government needed to raise revenue and to show the Troika that Ireland was serious about its deficit. So in early 2012 it changed the standard VAT rate from 21 per cent to 23 per cent.

This change made the rate one of the highest in the world and was the tenth rate change since 2000. As consumers, we face fluctuating rates more often than consumers in any other EU state. This makes consumption more dependent on government decisions and out of the hands of the consumer.

Increasing and decreasing rates can lead to greater or less tax intake, but it is a fine balancing act. Increased revenue can accrue if consumers really need the goods or are prepared to pay more.

When the rate changed in 2012, VAT intake increased from €9.7bn to €10.2bn because people were more prepared to buy the goods than they were put off by the increase in VAT by 2 per cent.

Economists call this inelastic demand.

But who is most affected by inelastic demand?

TASC says that 98 per cent of the taxes paid by the poorest are taken up by taxes such as VAT and excise duties. This is in spite of in-built structures aimed at protecting lower income groups: no VAT is paid on food, as people need to eat; no VAT is paid on children’s clothes, as children need to be clothed; and no VAT is paid on medicines, as people need to be cured.

These goods are ‘zero-rated’ to lighten the load for the less well off. But as the ESRI says that the most recent change to the VAT rate increased spending by the poorest by 1 per cent and by the richest by 0.4 per cent, the system is still weighted in favour of the well-off.

VAT in Ireland is also unusual because of the high number of reduced rates or exemptions. This sets us apart from other EU states. VAT on hairdressing services is charged at 9 per cent, VAT on works of art is charged at 13.5 per cent, and VAT on the supply of greyhounds is charged at 4.8 per cent. This makes the system haphazard and unpredictable.

So how could the Government make VAT fairer and clearer?

The first option could be to reduce the rate again. TASC says the rate could fall to 22 per cent this year, at a cost of €350m, and to 21 per cent in 2016. This would bring Ireland more in line with other EU countries and would ease the financial strain on poorer people.

On the other hand, it would cost the state money at a time when it needs to save, and it wouldn’t address the holes in the system.

The second option could be to increase some of the reduced rates to the standard rate. This would mean more money for the state and could be done progressively. With this stability, the standard rate could be reduced in time.

Alternatively, the state could apply a uniform rate to all goods and service and provide a tax rebate to low income households. VAT would be the same on all products but the poorest would be able to reclaim a portion of the amount they pay.

This would be progressive and would make the system more coherent. But such a system would require greater administration and would need time to be implemented, neither of which solves the immediate budget deficit.

Over the past decade, VAT has accounted for about 30 per cent of total tax intake, despite the messiness of the system and the frequency with which our governments have tinkered with rates. The system could be made more stable.

Dr Daragh Mc Greal is an economist and human rights consultant currently working with Stephen Donnelly TD on Budget 2015 and other policies.

Poll: What would you be in favour of the Government doing? Do we… 

Poll Results:

reduce the standard rate to 22 per cent? (633)
Introduce a single rate with a rebate for low-incomes? (247)
Increase reduced rates? (168)
leave VAT as it is? (124)

The floor is yours. Let us know what you think in the comments… 

Read: There are just 66 days until the next Budget so let’s talk about how much we should cut

Read:  “Less cutbacks, less tax increases” needed for Budget 2015 — Noonan

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