THERE are supporters of the poor who seem to be under the impression that this income group would benefit from reductions to the VAT rate (for example, see a letter entitled ‘The average Guyanese is affected by VAT’ published in Stabroek News on Sunday April 15) . These advocates are not acting in the best interest of their ‘constituents’. The reduction of any tax rate results in losers and winners. The taxing authority…
loses revenues and the taxpaying entities gain additional spending power. What should be of importance to the policymakers committed to using government transfer payments to create a fairer society is the impact of any tax change on different economic groups. For example, the proposal to increase the income tax threshold from $40,000 to $50,000 monthly would increase disposable income to income-earners, decrease employers future wage bills from a reduction in pressure for wage increases, and enhance the country’s competitiveness for its exports. The impact on all classes of income from this proposal are the same in absolute terms, but benefits the lower income earners more in relative terms, i.e., as a percentage of their incomes.  These are desirable outcomes for policymakers.

Now let’s consider the impact on income classes from a proposal to reduce VAT. Lower-income earners contribute a smaller portion of their incomes to VAT in both absolute and relative terms, due to zero-rating on essential items and the linear nature of the VAT/consumption curve after consumption of the zero-rated items.  The nature of VAT extracts more from those with larger consumptions, i.e., the wealthy and much less from those with severe disposable income constraints, low-income earners.
A reduction in the rate of such a tax would therefore provide the greatest benefit to those whose contributions are the highest, higher-income earners. This is the same impact the ‘Bush Tax Cuts’ in the U.S. had on its income sectors and which is the subject of much discussion in that country. So those who are advocating on behalf of the poor for a reduction in VAT are unwittingly helping the wealthy, in much the same way that the Republicans in the U.S. purposely advocate for this income group under the guise of a reduction for all taxpayers.
A preferred approach to help the poor is to support an increase in the VAT rate and use the consequential tax revenues to increase subsidies to lower-income groups through government transfer payments.

Although supporters of the wealthy have the right to make proposals that benefit their income group, such as the reduction of the VAT rate, the poor should not be a party to such sponsorship but should instead concentrate on measures that maximise their benefits.