Economic Supplement 7

Reducing VAT

The purpose of an economy is to organise work upon the potencies of nature so that goods and services may stream forth to supply man’s needs.
When there is a deal of investment going on then there is a division of resources so that some are going, not directly to produce goods and services for households (for government and people), but to provide equipment for future production or education for future services.
G.D.P., Gross Domestic Product, is a familiar term but it lumps together current output for consumption and output sold to raise productivity in the future, concrete investment. So GDP is equal to output for consumption plus output for concrete investment. If investment is high people will be consuming less. Nevertheless it will be experienced as a boom time. People are employed. Prices are high, but everyone can afford something.
In a so called slump time, since investment has fallen away, output for consumption could increase. The trouble is that at current prices, only so much output can be afforded. With unemployment rising, the welfare state is likely to get into debt preventing dire poverty.
If the government reduces VAT then it may hope that prices may fall, more will be purchased as so what it loses in VAT it may recoup by less payments for unemployment benefit. For as more ‘output for consumption’ is sold so more people will be needed to work to make these things.
It could not be done overnight, but I would like VAT to be reduced to zero and corporation tax likewise. The task of business is to produce goods and services as cheaply as possible.
It is true that, if government requires 45% of the total output for consumption then income tax will need to be, on average, 45% of income, but the need for taxation is at the heart of politics and it is a good thing if the quantities can be seen clearly. ‘No taxation without representation’ is an ancient principle.
Apart from war, there are two ways of avoiding slump. The first is a widespread fall, not in inflation but in actual prices for consumers. The other is major new investment. I guess, actually, we need major new investment in energy provision. If the electricity goes off nothing in this house works and I hade best go to bed and perhaps expire. I gather there is energy in Iceland in the way of thermal activity. If the government assisted private investment in this area I think it would be promoting the common good and considerably easing the slump.