Saturday, September 13, 2008

Would a VAT tax holiday on electricity make cents!!!!

I see that EU Finance Ministers failed to agree measures to cut VAT on a range of services at a meeting today. Inflation and prices are rising across the EU and jobs and spending are under pressure, so obviously some members states see a VAT or sales tax cut as one way to cut prices and stimulate spending and job creation. As we know from the recent Lisbon Treaty debate any change would require unanimity.

VAT or Value Added Tax is a levy on goods and services, essentially a tax on consumer spending. The higher the net price of an item, and the higher the VAT rate, the greater the final purchase price. At almost €14.5 billion in 2007, VAT made up 31% of Exchequer tax revenue. Therefore VAT is an important source of Government revenue, which makes removing or reducing VAT much more difficult, particularly in the current economic environment. And of course changes to VAT rules may require EU approval further complicating any proposal to change rates. Before the last election the Greens proposed a cut in VAT instead of a cut in income tax, pointing out that in fact compared to income tax, VAT affects everyone. And as we know as electricity, gas and petrol prices increase so does the actual amount of VAT (and the amount the Government receives) we have to pay increase.
It's hard to know if an across the board cut in VAT rates would lead to lower prices. Charlie McCreevey cut the top VAT rate by 1% to 20% when Minister for Finance, but one year later reversed his decision on the basis that the savings had not been passed on. That's a big problem, how could the state and consumer know for sure that any cut is definitely passed onto the consumer. However there is one bill which the vast majority of households have to pay on which the VAT cost is clear and if it was cut or removed then there would be an immediate saving to all households. And that bill, the ESB bill of course, we all pay 13.5% VAT. Electricity prices have been soaring, rising by 18% just last August. This is going to affect many households over the coming months, people will have to forgo other essential items or cut back on lighting and heating. The Government did move to increase benefits for those in receipt of the Electricity Allowance which is good, but this only benefits those in receipt of this social welfare payment or about 358,000 households or 25% of the total. What about the many households who won't qualify but will really feel the strain of the higher cost of electricity? Those in employment don't qualify for this payment, so households where the main wage earner is on a low income get no support to meet these increased costs.

Fox News Analyst agrees with Gas Tax Proposal...must be good then!!

I think it would be worth exploring the possibility of a VAT tax holiday on electricity costs, basically a decision to reduce or abolish VAT for perhaps a year in the hope that electricity costs come down. This is akin to the gas tax holiday proposed in the US. The benefits of a VAT holiday is that it is a short term measure designed to ease the pain now, leaving the option open to Government to reintroduce VAT when hopefully the price of electricity comes down as global oil prices come down. This measure could save the average household about €100 annually. This is not as complicated as a general VAT reduction in that there is only one supplier (ESB) which is state owned and as I outlined the consumer would definitely see the benefit as the price of electricity is set and outlined clearly on every bill. What do you think?