Taxing time for pubs
Planned increases in beer duty are likely to accelerate the pace of pub closures and lost jobs as we head into 2010. This is a good two minute BBC news video on the implications for smaller independent pubs of the recent hike in beer duty.
UK broadband in the slow lane
The relatively slow speed of the average broadband connections for most UK businesses and households will act as a contsraint on future competitiveness and growth. This report from BBC news finds that a study of the global state of broadband has put the UK 25th out of 66 countries in terms of the quality and reach of its networks. Rory Cellan Jones follows up the report with his own observations
“Britain has done well in the first broadband wave, using a pretty efficient copper network and DSL technology to get homes across most of the country connected. But other countries are moving forward more rapidly to build next generation networks using cable and fibre-optics.”
Investment in broadband can have significant demand and supply-side effects - the real consequences of under-investment will become more painful and obvious as time goes on - but who should pay for the extra capital spending needed? Will the new broadband tax make any noticeable difference?
Obama treads a difficult path with Chinese tyre tariffs
One aspect of the global trade recession in 2008-09 has been the resurgence of protectionist tendencies as countries have lined up to introduce fresh barriers to trade in goods and services. The pressures for import protectionism in the form of tariffs, quotas and other barriers is largely driven by politics and there is a new example to dissect with the news that the US government is to raise the import tariff on low-grade Chinese tyres following a petition filed by the United Steelworkers trade union, which represents workers at many US tyre factories. Chinese exporters will be subject to 35% import tariffs (taking effect on September 26th) which will decline to 30% in the second year and 25% in the third.
read more...»Government legislation week
In time for the start of term, there is lots of legislation coming into force this week. There’s the third rise in petrol duty in nine months, starting today, with the return of VAT to 17.5% at the end of year to come – is this the price of going green, or the price of a budget deficit?
read more...»Economics Snapshot - The Impact of Tax and Benefits on Inequality
Progressive income tax and cash welfare benefits help to reduce the gap between the richest and poorest households in the UK. In 2007/08, original income (before taxes and benefits) of the top fifth of households in the UK was £72,600. This is approximately 16 times as great as the figure of £4,700 for the bottom fifth. After taking account of all taxes and benefits, the top fifth had an average final income of £52,400 per year compared with £14,300 for the bottom fifth of households, a ratio of four to one.
The latest figures for the impact of tax and benefits on the UK income distribution reveal the importance of cash benefits such as Income Support, Pension Credit, Child Benefit, Incapacity Benefit and Retirement Pension as a means of redistribution. play a major role in reducing income inequality. Of the total amount of cash benefits received, the bottom two quintile groups together receive 57 per cent. Cash benefits represent around 58 per cent of gross income for the bottom quintile group and 36 per cent for the second quintile group, falling to 2 per cent for the top fifth of households.
Direct taxation, with the exception of Council tax and Northern Ireland rates, is progressive; that is households at the lower end of the income distribution pay smaller proportion of their income in direct tax compared with higher income households. As a proportion of their gross incomes, households in the bottom quintile group pay an average of 11 per cent in direct taxes compared with 25 per cent for those in the top quintile group.
In contrast indirect taxes are found to have a regressive effect on the final distribution of income. Overall the latest figures from the ONS find that income inequality in the UK in 2007-08 was little changed from the year before. This BBC news article provides more background.
Air passenger duty - a tax too far?
Airlines and trades unions representing those employed in the aviation industry are lobbying the British government for a rethink about the proposed increases in air passenger duty (APD).
The duty is currently £10 for short-haul flights and £40 for longer journeys, costs which airlines pass on to passengers. Under the government’s plans, the tax will rise to £85 for Australia and £60 to the US by November next year. The revised APD will be based on four bands set at intervals of 2,000 miles from London. This BBC news article provides a useful background on some of the key economic and social arguments relating to the duty and the views of different stakeholders.
read more...»Two VAT Stories - Sports Goods and Restaurants
Changing the rate of value added tax (VAT applied to a product should bring about a change in the retail price of a good or service to the consumer. The current rate of VAT in the UK is 15% following a temporary cut from 17.5% in November 2008. Today the Public Health Commission has started to lobby for a reduction in VAT to the min rate allowed under EU law - 5% - for products such as sports equipment. The justification is that lower prices will increase the affordability of leisure products and help encourage more people to follow a healthy life style. As always a reduction in an ad valorem tax will have a great impact on the price of more expensive equipment - for example the £1000+ cost of a concept 2 rower compared to an entry level tennis racket. The arguments are raised in this BBC news article.
Across the Channel the cost of eating out will fall as a result of a cut in VAT by the French government. Value-added tax (VAT) has been reduced from 19.6% to 5.5%, in an attempt to increase consumer spending and create thousands of jobs.
On a different matter I didn’t realise until last week that VAT is applied to razor blades - one reason (but not the main one) behind the scandalously high prices that the likes of Gillette and Wilkinson Sword charge for their cartridges.
One and Five keeps Bingo alive
An increase in the tax on the profits of bingo companies was the subject of a demonstration in London today. The new tax will be 22% up from the previous level of 15% and campaigners argue that this will lead bingo companies to raise admission prices or perhaps cut prize money on offer. The bingo industry has already come under pressure from the smoking ban and changes in gambling laws which have limited the types of fruit machines allowed on their premises. For hundreds of thousands of elderly people bingo is a regular pastime, indeed it is part of the social fabric of many less affluent areas. But the demand for bingo halls has declined over the years - an example perhaps of a service which has a negative income elasticity of demand. The Bingo Association is fighting to have the tax hike reversed but unless there is a change of government, they are unlikely to strike lucky.
The tax rise does seem inequitable especially as bookmakers, the football pools and casinos pay a gross profits tax of 15 per cent - surely bingo is at the softer end of the gambling industry?
Passing the burden - Sainsbury’s and their suppliers
AS micro students grappling with their revision on government intervention will come across the issue of who ends up paying for an indirect tax. The conventional view is that a supplier faced with an excise duty or other tax can consider passing it on by raising the final price to the consumer. Price elasticity of demand and supply come into play in deciding who eventually bears the burden of an indirect tax.
Here is a slight twist. Sainsbury’s has written an email to their suppliers of alcholic refreshment more or less insisting that they aborb the recent hike in duty announced in Darling’s budget. According to a report in the Daily Telegraph:
“Duty – April 2009” sent to its beer and cider suppliers prior to the Budget, J Sainsbury said that it would be “replacing” any lines on June 1 “that we cannot maintain margin on” following the announcement of an increase.”
In effect - they are telling them to aborb the tax or risk being delisted by the supermarket. Given Sainsbury’s monopsony power it is clear where the balance of influence lies in the relationship. Is Sainsbury’s decision asymmetric? Did they pass on the 2,5% decrease in VAT to their drinks department customers last Autumn?
Q&A: Which indirect taxes give the government to most revenue?
Which indirect taxes give the government to most revenue?
For the UK government value added tax provides the biggest source of revenue. In November 2008, VAT was cut from 17.5% to 15% on a temporary basis in a move by the government designed to stimulate consumer spending – the decision was said to be worth around £12 billion of lost tax revenue for the UK Treasury.
There are many other indirect taxes and our chart below highlights six of them. As you can see the flow of tax revenue from indirect taxes on tobacco provides a very important source of money for the UK government. Together these six indirect taxes add nearly £20 billion annually into the government’s coffers.
In a recession where consumer spending is falling and where there is a chance of a period of persistent price deflation, the UK government will see a fall in revenue from indirect taxes.
More revision notes on indirect taxes can be found here
USA triples the tax on cigarettes
I will resist the temptation to roll out the usual cigarette puns .... smokers fuming over tax rise etc etc ...but the news that the Federal tax on puffing away has risen so much remains of interest to economists….
The US government has introduced a huge rise in the tax on cigarettes - reported here by the BBC. For a 10-pack carton, the tax leapt to 10.06 dollars from 3.90 dollars.
It is a good example of how large scale increases in indirect taxes are needed to have a significant impact on demand and the timing of the tax hike is also interesting - is it better to raise taxes during an economic slump when household budgets are under great strain? Does this give people just the right incentive when they might be considering cutting back or stopping altogether? Note too that the article mentions how the extra tax revenue will be used - to pay for health care for uninsured children - an example of ‘earmarked’ or hypothecated taxation at work. Always assuming of course that the tax jump does lead to more revenue coming in.
Keep in mind that this is a federal tax and that individual states can (and do) levy their own supplementary duties on packets or cartons of cigarettes. With the combined city, state and recently raised federal tax, smokers in New York City pay about $10 per pack - $4 higher than in many southern states and a clear incentive for smuggling!
Higher taxes, health warnings, bans on smoking in public has reduced per capita consumption in the USA from almost 4,300 annually in 1965 to below 1,700 now but the market remains highly profitable.
Collapsing Crude and Prices at the Pumps
The price of crude oil has collapsed by more than a quarter this week – Brent crude is trading close to $40 a barrel less than a third of the level earlier on this autumn. Petrol and diesel prices have come down (there is an asymmetry of media coverage – we hear less of price declines and more of price rises) but, although the price of crude is now at a four year low, the price of diesel has decline only to a level seen at the start of 2008. In the United States where diesel and gasoline is taxed less heavily, the retail price of fuel responds much more quickly to world prices.
Menu Costs of Cutting VAT
The small cut in VAT is a staggeringly inept piece of policy-making from a government that has completely lost control of public finances and which is groping in the dark for ways to stabilise demand and confidence as the lagged effects of asset price deflation take hold.
Even the UK Treasury does not expect retailers to pass on all of the decrease in VAT from 17.5% to 15%. And why should they? Many have already started offering sizeable price discounts in a bid to shift excess stock - 10% off, 25% one-day sales, 4 for 3 offers. All of these are more significant that the marginal reduction in VAT. Many consumers who do not understand percentages may be perplexed when they find out that a £100 television which used to sell for £117.50 with VAT at 17.5% and which might now retail for £115 - involves a reduction of £.50 which is a fall of 2.13%.
And for thousands of smaller businesses across the UK the menu costs of changing price lists, menus and catalogues will be an additional burden at a time of commercial distress. This article from Management Today considers some of the difficulties.
Jason Gordon from Ernst and Young sums this up well in an article in today’s Telegraph:
“This is a non-trivial thing to implement. It’s not just the cost of printing the tickets, it’s the time and cost of employing a member of staff to change all the prices, when they could be putting stock on shelves. This is right in the middle of peak trading and most retailers have more important things to juggle.”
Don’‘t forget that the VAT cut will be reversed in 13 months time bringing a fresh set of price adjustment costs. For small traders who do not have access to fully-computerised business systems this is not a trivial issue.
We read today that the government considered raising VAT to 18.5% from 2011. The same menu cost arguments apply to small increases in VAT.
End tobacco smoking by 2025?
Could we end the smoking of tobacco in the Uk within a generation. On first glance it looks like one of those utterly grandiose targets that New Labour used to launch (and re-launch) such as abolishing Child Poverty by 2020. But this ultra-ambitious target comes from the Royal College of Physicians who argue that radical measures are needed to curb smoking. They argue that “The primary objective of regulation of smoked tobacco should be to make smoking and smoked tobacco products as unappealing, unattractive, unaffordable and unavailable as possible, as quickly as possible.”
The measures include:
Increase the tax on tobacco by 10% every year
License tobacco retailers and prohibit the sale of smoked tobacco in premises where children are admitted
Crack down on tobacco smuggling, and apply Class A drug penalties for tobacco smuggling and under-age sale
Encourage sale of low cost single day nicotine packs, available from any retail outlet
Permanently exempt medicinal nicotine from VAT
Provide free medicinal nicotine for all smokers on the NHS, not just those on a smoking cessation programme
What do you think?
Ending Tobacco Smoking in Britain is available here
Bitter blow for pubs as more opt to call last orders
It is a bitter blow for the licensed trade but 1.2 million fewer pints of beer are being drunk every day in Britain this year compared to last and over twenty pubs a week are calling last orders for the final time.
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