Towards a Luxury Goods Tax

Replacing VAT with a Luxury Goods Tax would be popular, progressive and part of a move towards decommodification of basic consumption goods.

VAT or Value-Added Tax is one of the most regressive taxes levied on working-class people in the UK. It is an indirect tax levied on consumption, which means it takes no account of income, wealth or ability to pay, and is levied on most goods and services at the same rate payable on the most expensive luxury items. The few exceptions include some working-class consumption goods (essential foodstuffs, lower rates for energy) but also financial and real estate services and sales, reflecting a) the tacit admission that taxing workers further would simply push up the welfare bill and b) an extreme class bias towards property owners in our taxation system. A peculiar and reactionary sense of what constitutes a need persists with VAT being charged on essential sanitary products, albeit at a reduced rate.

I submit that the basic principles of taxation for an incoming Labour government ought to be that taxation is direct, progressive and moves in a direction consistent with the gradual decommodification of basic consumption goods; this last principle incorporates the longer-term socialist aim of increasing the bargaining power of workers relative to employers. VAT fulfils none of these criteria, and in fact evinces a strong class bias in the opposite direction.

Between 1940 and 1973, the main consumption tax in the UK, the Purchase Tax, had a class bias in favour of workers, not owners. It was levied only on luxury goods, at a rate of just over 33%. The stated goal of this tax, which originated in war-time, was to reduce the wastage of raw materials and redirect resources into the war economy. In 1973 the Purchase Tax was replaced by VAT, then levied at 8%; this represented a massive shift in the burden of indirect taxation from wealthy individuals to ordinary workers and the poor. VAT now stands at 20%, effectively cancelling out the gains to low-wage workers from the tax-free threshold on income tax. Primary responsibility for raising rates of VAT rests with Conservative governments, but Labour governments have consistently failed to reduce, much less abolish it.

Labour’s 2017 manifesto For the Many, Not the Few, while generally progressive in its taxation proposals, contains scant mention of VAT. As part of Labour’s general commitment not to increase taxes on the bottom 80% of wage-earners, the manifesto promises not to raise VAT. The manifesto also pledges to abolish the exemption on private school fees, which is a welcome and progressive measure. But Labour should go much further. Rather than simply promising not to raise taxes on the majority, a socialist Labour government should try, where possible, to reduce taxation on workers, funded by increases on owners.

I therefore submit that Labour’s next manifesto should include a pledge to abolish VAT and replace it with a Luxury Goods Tax. I take the name of this new tax from Paul Cockshott’s recent policy proposals for an incoming Labour government. The definition of what constitutes a luxury good would of course be partially subjective, but should be based on reasonable principles such as a product’s cost, brand status, marketing and available data on the demographics of its consumption. Regardless of which products are designated as luxuries, the principle should be observed that all basic products of working-class consumption are free from VAT. Any exemptions would have to be consistent with a Labour government’s broader industrial strategy (for example, a modest tax on goods containing plastics to boost competitors in the green economy).

The primary benefit of such a policy is obvious: reduction in the cost of consumption for workers and the poor and an increase in the cost of luxury consumption for the rich. The massive inequalities of income created by capitalism ensure that production is rarely geared towards social needs. A luxury goods tax would help counter this by decreasing demand for luxury goods and increasing it for ordinary consumption goods. A diversion of investment towards basic consumption goods would follow. This would amount to a decrease in labour exploitation, as workers would be spending less time and energy producing goods for the rich, and more on goods for their own consumption. Cockshott also points out that if a Labour government were to selectively target the Luxury Goods Tax on imports, this would have a beneficial effect on the UK’s trade deficit. This further connects the policy to Labour’s broader industrial strategy, since the reduction of the trade deficit is crucial to the long-term success of the proposed shift from reliance on financial services to industrial exports.

Rhetorically, the policy should not be a difficult sell; replacing VAT with a Luxury Goods Tax is effectively a massive working-class tax cut. It would redistribute income downwards while challenging Labour’s reputation as the party of high taxation. But here we should note two possible barriers to the proposal. The first is that such a policy would not be cost-neutral. VAT currently accounts for around 18% of government revenue. Even a highly punitive tax on luxury goods be unlikely to cover all of this. Replacement of VAT with a Luxury Goods Tax would therefore have to implemented in concert with other direct, progressive taxation measures aimed at decommodification and compatibility with Labour’s industrial strategy (this would also mean a beneficial reduction in the share of government revenues coming from indirect taxation). The policy could be implemented gradually, with consecutive annual decreases on VAT and rises in the Luxury Goods Tax over the period of one or more Labour governments.

The second possible barrier to a Luxury Goods Tax is that the levying of VAT, at a minimum rate of 15% (with no maximum), is a requirement of EU membership. Under current arrangements, individual EU countries have little to no flexibility in choosing which types of goods and services can be exempted or ‘zero rated’ (the ‘tampon tax’ is an example of this inflexibility). Whether the policy can be implemented in full is therefore dependent on whether the UK leaves the EU and the nature of the deal struck. Labour’s messaging on this policy would need to be tailored to the timing of a general election. If a general election is fought after the UK leaves, the policy can be argued for straightforwardly. If a general election is fought prior to the UK leaving, the policy will need to be included in Labour’s manifesto as a prospective policy, ultimately dependent on a successful exit. In such a scenario, Labour will be offering its own negotiating position as preferable in securing a deal with the EU. Labour could attract significant support by arguing that it would negotiate for the nearest thing to the abolition of VAT possible. Whatever the outcome of those negotiations, Labour would be offering the electorate a concrete, materially effective prize for allowing it to negotiate Brexit.


Daniel Gerke (@drgerke1)

Dan Gerke is a Labour and Momentum member and has written on Labour politics for Planet: The Welsh Internationalist and Red Pepper. He is also a PhD in English Literature and publishes on the British New Left, Western Marxism and realism.