IFS Zooms In: The Economy How to fix VAT
Nov 4, 2025
In this insightful discussion, tax policy expert Stuart Adam shares his expertise on the complexities of the UK's VAT system, exposing bizarre distinctions like the differing tax treatment of chocolate-covered and plain shortbread. He and co-host Ben Zarenko dive into the reasons economists favor VAT, while addressing its inefficiencies and regressivity misconceptions. The two explore the challenges of zero rates, exemptions, and how VAT reform could create a fairer tax landscape. Stuart emphasizes the need for broadening the VAT base to enhance efficiency and fairness.
AI Snips
Chapters
Transcript
Episode notes
Why Economists Like VAT
- VAT, when done properly, taxes only final consumption and avoids distorting savings, investment and production choices.
- That neutrality explains why economists favor VAT as a backbone consumption tax.
How VAT Avoids Taxing Business Inputs
- VAT lets businesses reclaim VAT on inputs so only final sales to households face the tax, preventing cascading taxes across production.
- The system collects VAT in stages but ultimately taxes only the final value added consumed by households.
Exemptions Break The VAT Chain
- Exemptions remove firms from the VAT chain so they cannot reclaim input VAT, breaking neutrality and distorting production choices.
- That distortion makes exempt sectors inefficiently favour in-house provision over outsourced, VAT-charged services.