Financial Times: Letter: It is VAT and NI that have direct, negative impact

From Mr Mark Wadsworth.

Sir, I am puzzled as to why Corin Taylor (Letters, August 29) and John Redwood ("Government defends business tax regime", August 29) focus so much on reducing corporation tax. I agree that it slows the rate at which businesses can grow, but at 30 per cent it is the lowest rate of the Group of Seven advanced industrialised countries, and as it is only levied on net profits, it does not drive companies out of business.

On the other hand, UK plc pays two-and-a-half times as much in value added tax and employer's national insurance as it does in corporation tax.

VAT does not just increase the price paid by the customer; it also reduces the net price received by the producer. Thus low-margin producers are forced out of business and output is reduced quite significantly. NI adds to the cost of labour; so it reduces net wages and employment levels. Thus VAT and NI have a direct, measurable, negative impact on the economy.

Imagine that corporation tax were replaced by a fiscally neutral tax of 5 per cent of turnover tax, with no deduction for expenses. Those businesses with high profit margins would pay far less than now, but those with a profit margin of 5 per cent or less would go to the wall. This would damage the UK economy and tax receipts would fall. Similarly, VAT could be replaced at minimal overall impact with a turnover tax of just under 15 per cent (£17.50 divided by £117.50) and the system of reclaiming input VAT could be sidestepped by simply exempting business-to-business supplies. This would surely cause three times as many businesses to go to the wall as replacing corporation tax with a flat turnover tax of 5 per cent.

Thus, while I share Mr Taylor's and Mr Redwood's enthusiasm for deregulation and cutting the tax burden overall, it strikes me that they are starting at completely the wrong end when it comes to detailed suggestions. The taxes we should reduce first are VAT and NI.

Mark Wadsworth,

London E11 4QX