It has been suggested that the Government’s VAT rate cut of 2.5% will be insufficient to kick-start the economy. Unfortunately the EU rules stipulate that the minimum rate for VAT is 15% in member countries (the maximum is 25%).
The Question: What is the economic argument for a minimum rate of VAT of 15%?
What is the purpose?
I believe the European Union have a minimum rate of VAT because they are seeking to harmonise tax rates. In theory the European Union is a single market. This involves not just the abscence of tariff barriers but the removal of all obstacles to trade and the free movement of goods and services.
For example, suppose the UK had a VAT rate of 7.5% this might encourage French / Belgians to buy electronic goods in the UK and get cheaper prices. It is like British people travelling to France to buy alcohol and cigarettes.
Different tax rates mean that the EU is not a perfect economic union. However, it has been difficult for the EU to get countries to harmonise tax rates. I believe a while back, the EU, wanted to increase the minimum rate of VAT to 17.5%, if they had done this, Gordon Brown would not have been able to cut VAT.
However, rather than cut VAT, he could have cut income tax.
2 comments ↓
Thank you very much for taking the time to answer.
It seems strange that all the pieces I have read on the rate cut, that take the time to mention the minimum rate of 15%, never explain quite why it’s there.
Surely there should be a healthy debate about its usefulness, especially when it arguably impinges on a member nation’s ability to adequately respond to a crisis.
Once again, many thanks.
It might also be relevant that the institutions of the EU receive about 20 billion euros a year from VAT collected by the member states. It’s possible that the 15% minimum is, in part, a hangover from the days when the EU was funded mostly by such VAT-based “own resources”.
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