VAT highly regressive
Perhaps brevity explains the questionable logic that Khun Kalabutr Komenkul employed in his Oct 8 letter, “A taxing concern”, in which he claimed that VAT is a proportional, or flat-rate tax. Whilst this is true regarding the incidence of the tax (ie on whom it is levied), its impact is highly regressive in nature, as those on lower incomes tend to spend all of their income and, therefore, the tax accounts for a much higher percentage of their total income — the classic definition of a regressive tax! People on higher incomes save a significant percentage of their income and so can avoid the impact of the expenditure tax more easily.
Furthermore, to argue that the resultant fall in aggregate consumption, following the price increases caused by the rise in VAT rates, will be compensated for by increased pre-tax consumption is a little far-fetched, unless people have large amounts of income and can afford to buy considerable quantities of goods that they will eventually consume over the course of the higher tax period.
The poor are unlikely to have the means to be able to afford such expenditure in advance of the tax increase, thereby exacerbating the regressive impact of the VAT increase. GMT