The First Interim Report on Value-Added Tax  released by the Davis Tax Committee for the Minister of Finance analyses zero-rating and VAT in isolation of the actual consumption patterns of working class households.  As a consequence, the negative impact on inequality of raising VAT levels has been suggested as being very small.  This understanding has given greater credence in the public domain to suggest that raising VAT will be less disruptive than increasing Personal Income Tax and Corporate Tax. This June 2015 statement analyses the Davis Report in the context of food price affordability.  The assumption is that the food baskets of low-income households are comprised primarily of zero-rated foods.    This assumption leads to the conclusion that the impact of raising VAT on foods for low-income households will be marginal. PACSA’s Monthly Food Price Barometer for June 2015 finds that low-income households spend proportionally more on foods subject to VAT than on zero-rated foods.  It further finds that as the overall affordability crisis facing households deepens; households are pushed into buying more foods which are subject to VAT.  These findings based on actual food consumption patterns of working class households, suggest that the negative impact on inequality by raising VAT as indicated in the report of the Davis Tax Committee may be underestimated. The exposure of low-income households to VAT on foodstuffs is greater than we imagined; this makes households more vulnerable to raising VAT rates.

Issued by PACSA