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VAT Changes (Chain of Analysis)

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 21 Mar 2021

In this short revision video we build a chain of reasoning on this question. Explain how a fall in the rate of VAT might affect businesses and consumers.

Chains of Reasoning: A Fall in VAT

Key notes

  • VAT is an indirect tax on suppliers in a market. The standard rate of VAT in the UK is currently 20% although there are lower rates. A cut in VAT is an expansionary fiscal policy.
  • A fall in the standard rate of VAT to say 15% would effectively mean a fall in costs for many suppliers. They might choose to pass this on in reduced retail prices.
  • If prices of goods and services fall, then the real income of consumers will increase - people will have more discretionary income to spend and therefore AD will rise.
  • Some retailers might choose to take advantage of a lower % rate of VAT by keeping their prices constant and making higher profits.

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