Ofgem economist David Osmon – writing in a personal capacity – argues that one of the solutions to the UK energy crunch is to introduce a system of progressive VAT rates to replace the current five percent flat rate.
Osmon suggests removing VAT altogether for standing charges, keeping the current five percent rate for consumption up to average levels but raising it to 20 percent for above average usage. If this were implemented, it would result in a two percent fall in energy consumption, an average £7.00 reduction on bills, and an additional £1.1bn tax revenue to the Treasury.
“The beauty of progressive VAT lies in its simplicity. You gain all these benefits by just altering slightly the prices that consumers face. It’s also likely to be more widely accepted than most taxes because it enables people to choose how much tax to pay. It progressively taxes what they decide is their disposable income and those who aren’t price sensitive pay more.”
While the proposal may deter excess consumption, it is unlikely to go down well with UK businesses, which are already warning that excess energy charges are undermining profitability. Nevertheless, Osmon’s proposal puts energy rationing on the table. At some point in the near future, we will need to decide whether access to energy is a right or a privilege… either way, we need to be clear about who is going to pay for it.