I'm not an economist just a bemused techy, so my understanding of how VAT works in practice is, shall we say, a generous guess, but I always thought that all the VAT is collected into one large pot, together with other government income, and then later on is split up into departmental budgets: some for health, some for defence, some for education, some to pay the interest on loans, and so on (meat in, sausage out). According to the IFS currently 4.4% of tax income ends up going on schools. So unless Labour change the sizes of the funding slices for each sector then only 4.4% of that £1.6 billion would end up in schools' pockets, no? Or is HMRC able to track where each penny of VAT income goes so the chancellor can ensure that all the VAT from private school fees all goes to schools?
Your first observation is correct. Taxes aren't "hypothecated" - that is to say, it all goes in a big pot and is then spent as the Government sees fit.
Therefore the "funding slices" can be changed.
That leads us to the important question: is this a good tax? There is no reason (in fact, it's peculiar) to say "I'm taxing education to pay for education". Economists should instead consider (assuming it's desirable to spend £1.6bn on education) what is the optimal way to go about it. And no economist would recommend an unprecedented tax on a positive externality with uncertain revenue potential.
I'm not an economist just a bemused techy, so my understanding of how VAT works in practice is, shall we say, a generous guess, but I always thought that all the VAT is collected into one large pot, together with other government income, and then later on is split up into departmental budgets: some for health, some for defence, some for education, some to pay the interest on loans, and so on (meat in, sausage out). According to the IFS currently 4.4% of tax income ends up going on schools. So unless Labour change the sizes of the funding slices for each sector then only 4.4% of that £1.6 billion would end up in schools' pockets, no? Or is HMRC able to track where each penny of VAT income goes so the chancellor can ensure that all the VAT from private school fees all goes to schools?
Hi Neil, thanks for your comment.
Your first observation is correct. Taxes aren't "hypothecated" - that is to say, it all goes in a big pot and is then spent as the Government sees fit.
Therefore the "funding slices" can be changed.
That leads us to the important question: is this a good tax? There is no reason (in fact, it's peculiar) to say "I'm taxing education to pay for education". Economists should instead consider (assuming it's desirable to spend £1.6bn on education) what is the optimal way to go about it. And no economist would recommend an unprecedented tax on a positive externality with uncertain revenue potential.