Emeritus Professor of Economics, University of Strathclyde
VAT is not just a tax on consumption. It hampers and destroys wealth producing enterprises. Producers have to cover their costs otherwise they go out of business. VAT forces some of them out of business; the survivors were/are able to pass on the VAT to consumers, rich and poor alike. VAT is thus a regressive tax.
But, in line with the ATCOR principle (All Taxes Come Out of Rent) VAT, like all other taxes on wages and trade, depresses business and so depresses rent too. It is not just a matter of the Laffer Curve effect on revenues, but also of the deadweight effects on GDP.)
For this reason, the recorded size of AGR/LVT, in the national accounts, is a relatively very small proportion of GDP. This false accounting is compounded by the statisticians’ practice of conflating land with capital and hence recording business “profits” as a return on “capital investment”, whereas much of it is actually land rent.
Critics of ‘LVT’ commonly cite this as a reason why it is not possible to finance a modern state in which government spending is, say, 40% of GDP.
The reduction of taxes in favour of AGR/LVT will reveal the true size of actual rents. And not only that. It will also increase them. This makes possible not only a full and fair financing of the functions of state, but also increased economic activity. This yields, year on year, an even greater potential volume of rent available to the state, to spend on behalf of the community that creates it as the social surplus.