Why VAT should be scrapped.

Here's an amusing  question to ask your friends "Why are financial services zero rated for Value-Added Tax?"

Reply : "Because they don't add any value to the economy".

Actually, the whole VAT system is, in my opinion, completely stupid and it would be much better to replace the whole thing with a single Flat Rate financial Transaction Tax.  As I have argued recently, since VAT in the UK only raised about £67 billion, and since visible Financial Transactions are around £1000 billion, it would only need a tax of about 0.0067% to allow VAT to be scrapped.

Various people (including my son Jonathan) have argued that this number is illusory because transactions will collapse as soon as any FTT is introduced - even at such a low rate. I have two ways to answer this.

First, FTTs can be varied to compensate any drop in transaction volume. Thus, even if transactions dropped by a catastrophic 90%, you would still only need to charge about 0.06% to abolish VAT.

But a second argument comes from a close look at the numbers in Table 8 of the B.I.S. figures for 2010. Here it is again.

It shows that last year in the UK, there were over £65 trillion in credit transfers, £948 billion in Direct Debits, £455 billion in Credit Card Payments, and £1,095 billion of Cheque payments. This makes a total of £67.5 trillion of "non-bank" transactions.

These are clearly transactions in the real economy. It's people paying for things with cheques, credit cards and direct debits. It's company's making payments for buying raw materials, paying electricity bills, transport costs etc etc. In other words, they are payments that will almost certainly be paid even if there is an FTT.

Note that the total value is £67 trillion - exactly 1000 times more than the revenue generated by VAT. In other words, it is clear that an 0.1% FTT would allow VAT to be abolished, even if we only take into account these real transactions. Any additional income coming from the several hundred trillion in transactions going through LCH.Clearnet Ltd could be used to do the extras - like paying off the national debt, paying salaries to public sector workers etc.

But there are other pressing reasons to get rid of VAT. The BBC Today program this morning had a report about the fact that Luxembourg is reducing VAT on ebook purchases to 3%. This will be a total disaster for bookstores elsewhere in Europe, because there is absolutely nothing to stop people buying their ebooks from a website in Luxembourg.

And for years, dealers like Amazon have been able to provide books and CDs with no VAT by using warehouses in the Channel Islands - undercutting any high street book and CD stores. Ever wondered why there are virtually no such shops left? It's all because of the stupid VAT system, and could be instantly solved by replacing VAT with an FTT half of which is paid in the country of the buyer, and half in the country of the supplier. Simple.