The ConDems tell us that they want taxation to be fairer. It is widely assumed that they will increase VAT, perhaps to 20%. But the Office for National Statistics has reported that VAT as a percentage of disposable income is paid disproportionately by people on lower incomes. The ONS explains that "those in higher income groups tend to channel a larger proportion of their income into savings and mortgage payments, which do not attract indirect taxes".
I suggest that instead of a VAT increase, the government should introduce a tax on mortgage interest payments (more precisely, i suggest a tax on all personal secured loan interest) at the same rate of VAT. This would have the following advantages:
- it would compensate for the regressive nature of VAT
- it would tend to suppress the sort of house price bubble Vince Cable warned about in a Commons question in 2003 (this question has been cited to support the false claim that he "predicted the crisis").
- it would raise relatively little money now, with interest rates so low, but increasing amounts as the economy recovers and interest rates rise. So it would give the markets confidence that the deficit will be reduced, without imperilling the uk's fragile economic recovery.
- the tax would be paid by mortgage borrowers currently enjoying a windfall gain from the extraordinarily low interest rates brought in to boost the economy.
It would be easy enough to collect, simply by making secured loans, including mortgages, unenforceable unless they are registered with HMRC.