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Abu Dhabi, UAEThursday 20 September 2018

Feeling squeezed by VAT could actually make us happier

According to one study, paying taxes ignites our sense of moral obligation and leaves us feeling satisfied

Illustration by Gary Clement
Illustration by Gary Clement

The big squeeze - that’s what this year is.

The cost of living has gone up and judging by water cooler conversations, everyone is concerned. This is backed by the findings of a survey out a few days ago.

The takeaway: 45 per cent of those who took part in it say they’re worried about being able to afford life after VAT. More than half, 52 per cent, reported they are worried, but confident they can still afford life. That leaves just 4 per cent that do not have a VAT-related care. OK, so the sample size is small – only 200 people took part – but I think it’s a pretty good representation of thoughts around post VAT spendability.

The interesting thing for me isn’t so much the exact amount being imposed as value added tax – rather, the establishing of a new normal.

That’s because our aversion to taking on something new - a first - is greater than our aversion to imposing change on something that’s already been established.

What I mean is this: taking on a tax that we never had to deal with to date has more of an impact on us than if the tax had already been established, but the amount changed (upwards most likely).

Imposing something for the first time comes with other costs too – financial ones, not just for us consumers, but for business too. Unfortunately, it appears some are choosing to increase costs by more than the 5 per cent announced.

You can complain about this with complaints already been lodged with the Department of Economic Development about "dishonest application of VAT".

The reasons businesses do this vary. Some want to pass on the cost of setting up internal compliance systems, others in reaction to the fear of having less money, and then there are those that see it as an opportunity to make more money.

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Read more from Nima Abu Wardeh:

Supporting the refugee cause is more than just about money

More attention needed to link between financial woes and mental health

When marriage goes wrong, it's mothers who suffer most

Time to put those late-night online shopping sprees on ice

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If you don't know by now, VAT stands for value added tax. This is how the EU describes it:

* a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

* a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.

Yes, it is borne by us consumers, but business is also affected. Some firms stockpiled in preparation – as highlighted by Emirates NBD’s quarterly Purchase Managers' Index. It reported that the UAE’s non-oil sector ended the year with the sharpest pace of growth in almost three years – as businesses ordered in things that would cost more come January 1.

Did you do this - stockpile things that you thought would go up in price?

It’s what happened at the end of September ahead of the ‘sin tax’ being implemented on unhealthy products like tobacco and fizzy, sugary drinks. They went up by 50 per cent in October. It had the effect of clearing out cigarette shelves, but experts say it will do little, if anything, to change consumer habits.

Remember, how much VAT will end up costing you depends on how much money you spend. Only you control what you spend on, and how much. This is assuming you have disposable income. The problem with VAT is that it is regressive - the poorest will spend the biggest proportion of their income on VAT.

Assuming your entire income doesn’t go on survival, instead of wringing your hands in worry – why not clean up your outgoings?

Now for some good news: it seems that paying tax triggers brain activity in areas where rewards are processed.

This is the conclusion of various studies, including one in 2007 by economists William Harbaugh and Daniel Burghart and psychologist Ulrich Mayr. It centred around participants giving money to charity – in forced and voluntary situations that could mirror participants paying tax. This is what the authors stated:

“The fact that mandatory transfers to a charity elicit activity in reward-related areas suggests that even mandatory taxation can produce satisfaction for taxpayers.”

Better still, our tax-moral (ie propensity to pay up rather than evading it) is associated with our happiness level. This is based on many studies by economists and psychologists.

One of the most comprehensive is that of Marina Drus, a data scientist at the United Nations who, in 2016 analysed data from something called the World Values Survey – she looked across 74 nations over 17 years. Her findings concur with those of a dozen other studied I know of and concluded that paying taxes does not have to be painful and aversive. In fact paying taxes, under certain conditions, can improve individual and national levels of well-being.

Having said that, it could be that we’re seeing correlation, not causation (ie not that paying tax makes us happy. Rather that happy, sharing, caring people are OK paying tax).

An Italian study, conducted in 2011, by economists Diego Lubian and Luca Zarri concluded:

“Our results suggest that people pay taxes also because they like it: due to a sense of moral obligation, they feel intrinsically motivated to do it and this generates positive hedonic effects.”

One thing to note though, these studies centre around paying income tax. Ah.... I think I’ll keep that one to myself.

Nima Abu Wardeh is a broadcast journalist, columnist and blogger. Share her journey on finding-nima.com

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