What a ridiculous proposition. The VAT rate would need to be massively increased to accommodate for the loss of income tax, which would then hit the poorest disproportionately hard.
Not as ridiculous as you would perhaps originally conclude.
Now all of what you earn is yours. Everything. Do with it as you please (save/ spend). Yes VAT will have to increase, quite drastically actually. People often ask the wrong question when it comes to tax, 'what do they pay in' what you should be asking is a balance of 'what do i put in and what do i get out'. Majority of UK public spending is on income transfers from the Government to people in need. Already nearly half of the UK population gets more back from the government than it pays in. Progressive public spending can eliminate any regressive affects a new tax system MIGHT bring in. Give higher tax credits / benefits per say. This will also enable the Government to make already existing taxes more progressive, such as NI, to refelct peoples ability to pay.
But lets go onto the other benefits that get overlooked when people scream 'IT'S NOT FAIR' ! Firstly, people have the ability to save more from choosing whether to consume now or later. Income from saving will no longer be taxed so returns will be higher. Secondly, investment should increase, funded by the increased savings. Thirdly, people are likely to work more, as the marginal tax rate is zero, so all extra income is their own. Fourthly, the tax base would be widened as consumption taxes capture spending funded by people’s wealth (which is untaxed) as well as by their income. Finally, collecting VAT tax is a hell of a lot cheaper than collecting income tax. More savings there.
It would be possible to go one step further and remove income tax from business. That would mean abolishing corporation tax. Dropping this would make the UK ultra competitive on a global scale. If a businesses had no tax to pay on earned profits, production costs would fall, as would the cost of capital. Most importantly, the incentive to export would be very strong, as the consumption tax is only paid on goods consumed in this country.
Bascially double the consumption (VAT) rate to 40%. Abolish income and coporation tax. We will overall collect more in taxes. Can give more to the poorer people in society. Also with most tax if not all tax coming from consumption it also opens up lots of new policy options for governments wanting to influence demand for goods and services.
In order to do this though. We would have to come out of the EU... or be EU's science project.
