A small coalition of business leaders and Conservative Party members of parliament are calling for a tax cut for Britain’s tourism industry to undercut support for the UK Independence Party (UKIP) in Britain’s seaside towns.
The 87 MPs who support the Cut Tourism VAT campaign want to lower the rate of value added tax on tourism from the current 20% to just 5%. Supporters claim that even though the plan would initially hurt government tax revenues, it would eventually supply as much as 80,000 new jobs and an estimated £2.6 billion to the Treasury in the next 10 years.
At the same time, the group has suggested that the tax cut offers a route for the government to counteract a surge in support for UKIP in Britain’s tourist-centered seaside retreats. Graham Wason, chairman of the campaign, told the FT:
Dismissing tourism in coastal towns that rely on the industry is likely to lose the Conservatives more seats. Britain’s VAT rate on accommodation and attractions is one of the highest in the EU, putting British tourism at a serious competitive disadvantage.
The Conservative leadership may be forced to consider the plan, but here are the many reasons they should reject both the campaign’s analysis of the problem and its solution:
People who support UKIP don’t list tax as a major concern.
In fact, according to a YouGov poll in February self-declared UKIP supporters are less likely to rank tax as one of the most important issues facing the country than the population as a whole. Only 6% of UKIP respondents put tax as one of the top three issues facing the UK, compared to 10% of all respondents.
Instead, the survey suggests that the issues that appear to motivate UKIP supporters are immigration and asylum, the economy and Europe. This is somewhat unsurprising for a party that campaigns on promises to leave the European Union (EU) and take back powers over Britain’s borders.
Moreover, even if voters in Britain’s struggling seaside towns were minded to be brutally pragmatic they might be more concerned by the impact that leaving the EU could have on the tourism trade rather than what tax rate those visitors may have to pay. Here the Conservative Party’s pledge of an in/out referendum if they win a majority in the General Election next year would hardly be reassuring.
What it strongly suggests is that a tax cut is unlikely to sway large sections of the electorate in areas where UKIP has been gaining ground.
Promising a VAT cut for a particular industry in order to buy votes could backfire badly.
Even if the giveaway did work in fending off the UKIP threat, the government would be giving up tax revenue just as it attempts to undergo “one of the biggest deficit reduction programmes seen in any advanced economy since World War II.“
The latest figures from the Office for National Statistics suggest that reducing VAT to 5% for all catering services provided by restaurants, pubs, cafes and canteens would cost the Exchequer between £9 billion and £10 billion a year. Cutting VAT to 5% for accommodation would cost the Exchequer an estimated £2 billion a year.
Gauke said that the government had concluded, contrary to the Cut Tourism VAT campaign claims, that “a VAT cut would not produce sufficient economic growth to outweigh the revenue shortfall.” That is, it would amount to an unfunded giveaway that is highly unlikely to add to growth (at least for the period 2015-2020 in which the government is attempting to close Britain’s budget deficit).
Rather than galvanizing support, such a move could anger traditional Tory voters who tend to be hostile to such examples of state largesse.
It muddies the waters of the tax cut debate.
Those who support tax cuts as they believe higher taxes have a negative effect on economic growth could find their position substantially weakened by opportunistic giveaways that are, at best, likely to have a marginal impact.
There may well be a case for reducing VAT in the UK. The flat tax hits the poorest hardest as companies pass on the cost to customers by raising prices.
The fear is that selectively cutting it in certain sectors for political gain could undermine the broader debate over regressive indirect taxation in the country.
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