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Sugar Good, Water Bad: Irelands very strange VAT system

If we we’re starting the VAT system from scratch would we designate wax candles as liable to zero percent VAT, while infection-reducing condoms are taxed at 13.5%? Yogurt at 0%, but frozen yogurt at 23%? Would we design so complex a system that we needed to write a whole leaflet explaining the tax treatment of dances? Our VAT system is an absolute mess, and probably harmful in terms of encouraging unhealthy behaviour and discouraging good behaviour.

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The state received just over 10 billion in VAT last year. Its our second biggest tax after income tax. But there seems to be no internal logic in how the VAT system works. You can see that it was initially designed with the best of intentions by zero-rating most food and drink that we’re regarded as necessities and therefore unfair to tax, while luxuries would be taxed at the higher rates.

The problem seems to be that anything new is regarded as a luxury, and once designated initially as a luxury then that’s how it stays no matter how society subsequently evolves. Thus producing outcomes like the very strange idea that a book produced by cutting down a tree is not liable to VAT, while an electronic book attracts 23% tax.

Presumably this also explained why zero-rated VAT products sold through a vending machine have to be taxed at 13.5%. Selling through a vending machine is regarded as a service, and at their introduction would have been regarded as the height of luxurious technology. What an odd idea. So, that 1.50 2-litre bottle of milk from the supermarket would have to be charged at 1.70 from a vending machine because you’ve had the added super-dooper technological assistance of a spring pushing your milk container out to a delivery slot. Sweets sold through a vending machine are charged at the highest rate, the same as all sweets sold, so there’s no health argument to be made here.

This general mess seems to be caused by the very high level of meddling in the VAT system by politicians. Even just the frequency of rate changes is well above the EU norm. Check out page 24 of this EU documentto confirm that we are miles ahead of our EU brethren in terms of VAT changes. All of the exemptions and special rules just serve to make the system even more complicated and poorly constructed. Nobody is paying attention to overall coherence because the application of VAT is just so complex.

An even bigger problem is that the VAT system encourages some bad behaviours while discouraging good behaviours.

The major bad behaviour encouraged is in food consumption. Take sugar for example; sugar has essentially no health benefits, and excessive consumption causes diabetes.Theres nothing wrong with something enjoyable having no health benefits, but surely it’s not a valid product for 0% VAT when there are very definite societal healthcare costs?

The general problem is that apart from a few exceptions, such as for prepared hot food and sweets, all food is indiscriminately taxed at zero percent, at a time when the country is experiencing a severe obesity epidemic. We know that certain foods are more likely to be causing this obesity than others (particularly simple carbohydrates), yet we make these foods as cheap as the healthy food options.

On the flip side we actively discourage healthy behaviours. Both a bottle of water and a bottle of Coca-Cola are taxed the same at 23%. I’d guess there was some strange logic at the beginning that bottled water was an outrageous way to spend money when you had free water by turning on the tap, but why on earth would anyone want to discourage people drinking water? (especially as most of the water is bottled in Ireland creating local employment, unlike 0% taxed coffee which is all imported). The argument about discouraging the use of plastic bottles doesn’t make sense as plastic is highly recyclable if we have an effective recycling policy.

Even more perversely we charge VAT on gym membership and going to the swimming pool. Actually this VAT was even extended to public providers of these services on January 1st 2013.Presumably gyms we’re initially viewed as a luxury hence their tax rate (sure, who needs a gym when we have fields to run around in).

We could easily rectify this without cost to the state and in a way that would encourage behaviours that reduce future healthcare costs. The solution: keep the overall envelope of planned VAT receipts the same, but switch some tax bands within the VAT system. Taxing sugar in order to bringing the tax on healthy products and services like gyms, drinking water, and condoms to zero seems like the ultimate no-brainer as it would be a news story about effective evidence-based tax policy to encourage people to be healthier by making a whole range of products and services cheaper.

A bigger need though is to examine the entire VAT system and establish clear rules for applying VAT rates based on whether the outcomes caused by the products or services are (a) a necessity or a luxury, and (b) likely to increase or decrease future state expenditure. Thus, the tax is applied on the outcome caused, not on the actual product or service.

In the meantime, we can continue to guzzle down excessive low cost salt and butter, but do be conscious that the availability of the eventually necessary defibrillator will be restricted due to the government charging 23% VATon this luxurious extravagance.

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Posted in Computer Post Date 12/21/2014


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