Notes on the Front

‘The Church’s teaching is clear: within the sacrament of marriage, the use of condoms as contraceptives as wrong, though there may be mitigating circumstances. Outside of marriage, the use of condoms encourages sexual activity, which is always gravely sinful. This decision (to cut the rate of VAT on condoms) sends the wrong signal to our young people as the promotion of condoms promotes promiscuity.’

Heeaavvvyyy. Bet you didn’t know the price of acting in a responsible way was to end up in a world of eternal hurt. But before Mr. Martin Long of the Catholic Communication Office despairs at the tide of promiscuity about to be unleashed on our streets, I would advice him to chill. Okay, so the Government has reduced the VAT on condoms, hoping to incentivise greater use. But if Irish business acts true to form, the price is unlikely to fall by much, if at all. Irish morals will be saved, Irish business will become even more profitable, and the Church can exhale a collective sigh of relief.

The Crisis Pregnancy Agency welcomed the news that the rate of VAT is being cut from 21% to 13.5%. They estimated that the price of 12 condoms will fall by 80 cents, while the price of a three-pack would drop by 26 cents. That would be a reasonable response if (a) VAT were a sales tax, (b) we operated in a perfect competitive market, (c) there were perfect knowledge symmetry (that is, consumers have as much knowledge of the pricing mechanisms as the producers and retailers) and (d) Irish business was predisposed towards passing on such savings to the consumer. But none of these things hold and therefore the agency might be as well to lower expectations.

That we suffer from high VAT levels is well known. We have one of the highest VAT rates in the EU (our 21% contrasts poorly with the UK’s 17.5%). It is the largest source of revenue to the State (more than income tax), comprising nearly a third of all revenue.

It is also well known that VAT is a regressive tax: low income households pay a higher percentage of their disposable income on VAT (and excise taxes) than higher income groups. So reducing VAT would no doubt be a good – it would reduce a regressive and sometimes opaque tax. It would, or should, reduce inflation by a ½% for each 1% cut in VAT. However, it would be necessary to find an alternative revenue stream for cutting VAT rates is an extremely expensive proposition. A reduction of 1% in the top rate of VAT would cost €440 million in the first year and even more in subsequent years.

But there’s another problem: if VAT were reduced, would the ‘tax savings’ be passed on to the consumer? The record in this regard doesn’t leave one optimistic. If VAT were a sales tax (that is, added on after your items were rung up on the cash register) then you could see the reduction. However, for most goods VAT is included in the price and therefore it is not obvious how much of the price is due to the tax. And here’s where our home-grown bourgeoisie get up to their ol’ tricks. Back in the early 1990s the top rate of VAT was 25%. According to the Department of Finance’s Tax Strategy Group:

‘The difficulty with anticipating the impact of a VAT cut is in determining whether the advantages of the reduction are passed in full to the consumer. The then Minister for Finance in his 1991 Budget speech when he reduced the VAT rate from 23 to 21 per cent was of the view that a reduction the previous year, from 25 to 23 per cent, had not been passed on in full.’

More recently, when inflation was climbing in 2000, the Minister for Finance reduced the top rate of tax by 1% (down to 20%). A subsequent Tax Strategy Group report stated:

‘Following the reduction in the standard rate a significant number of calls were made to the Department of Finance, complaining about the absence of VAT reductions in pubs, electrical stores, general stores, the national car test and cable TV bills.’

This reduction was accompanied by cuts in petrol duties. But so bad was the situation regarding VAT and excise duties that the Director of Consumer Affairs at the time complained to the media:

‘The government has been accused of having no plan of action to ensure that the 1 per cent cut in Vat is passed on to consumers. The Director of Consumer Affairs, Carmel Foley, said she had had no discussions with the Department of Finance on how to ensure that businesses were complying fully with the cuts in Vat and excise duty. There is already evidence of petrol stations having raised prices in response to the budget’s cut in excise duty by 2 pence a litre for unleaded petrol and 6 pence a litre for diesel.’

Cuts were made in indirect taxes and prices went up. Well, well. Why would that happen? The real question to ask is why prices should go down if VAT is cut. There is no enforcement in place, no monitoring, no naming-and-shaming of businesses that pocket the VAT cuts. This is all of a piece. During the Euro changeover, when prices rose, Forfas tried to discover the reasons. They identified one:

‘The final, and most ominous, explanation of unusual price increases in the early parts of this year (i.e. January to March) is the possibility that enterprises used the euro changeover to increase profits, to make additional profits, i.e. “euro profiteering”.’

Euro-profiteering, VAT profiteering – and we wonder why prices are high. The 2001 cut in VAT rates was so unsuccessful in reducing prices that, in the following budget, the Minister for Finance raised it back again to 21%. So what are the chances that the cut in VAT for condoms will get passed on to the consumer? Slim.

If, for instance, there is only one accessible outlet selling condoms in an area there is no competitive reason to reduce the price. Instead, the tax is cut and the outlet keeps the difference. What’s the consumer to do? Go drive or take the bus to another outlet a few miles away to hopefully save a few cents? The cost in travel would cancel that out.

Another issue is how ‘price aware’ consumers are or can be. Condom prices and mark-ups vary from outlet to outlet. It’s probably asking a bit too much for consumers to remember what the price was in a particular outlet, to calculate the reduction in VAT from 21% to 13.5% on a tax that is hidden in the overall cost of the product.

And are we to expect vending machine operators to travel about the country changing the price in accordance with the VAT cut?

It may be there will be a reduction but it is extremely unlikely that it will cover the full extent of the VAT cut. Businesses will stay be able to increase their profits while consumers get only the most marginal of benefit.

The fact is consumers are at an incredible disadvantage, and apart from blind faith in the theology of competitive markets, there is no mechanism that can ensure that such cuts are passed along. What does the Government suggest consumers do? ‘Be vigilant’. What rubbish. Imagine the following scenario:

You walk into a chemist to buy a packet of condoms. You just heard there was a cut of 7.5% in the rate of VAT. You try to remember what the price was three weeks ago when you were last in. You don’t remember so you ask the pharmacist for the price three weeks ago so that, in your words, ‘I can be sure you’re not gouging me by pocketing the VAT cut.’ That’ll get you far.

But let’s say you got a memory for these kind of things. You do remember the price. Now, you got to know the mark-up on the pack of condoms that the particular pharmacist employs. You have to ask him again (‘gouging’ and all that). But let’s say you do happen to know the mark-up for some weird reason that you can’t explain. Then, in your head you have to subtract the mark-up from the price and then add the VAT pre-cut. Then you take the current item, subtract the mark-up from the price and the VAT post-cut. Then you compare the prices to discover if there is a difference.

Yeah, right, be vigilant. Ultimately, consumers are reliant upon the goodwill of retailers to pass on the benefit of a VAT cut. That ‘goodwill’ has been tested in the past and found wanting.

In any event, as the Irish Family Planning Association has pointed out, condoms in Ireland will remain among the most expensive in Europe – with or without the VAT cut passed on. And that is the real problem. We have a business sector that uses every opportunity to raise its profit margins, and under cover of a VAT cut is an excellent opportunity.

So Mr. Long of the Catholic Communication Office should be somewhat relieved that he lives in a country with these kind of commercial practices. It means that condom prices will remain high, that few consumers will benefit from the VAT cut and, so, will not be incentivised to have safe and profligate sex. Our morals will remain intact.

And who do we have to thank? Irish businesses. God bless them, God bless them all.