Andres Magnusson, the head of the Icelandic Confederation of Trade and Services, says that redundancies and recession would be the result of increasing Value Added Tax on certain goods and services, as recommended by the International Monetary Fund.
A report by the IMF recommends that Iceland change its VAT system to a single rate for all goods, which would mean significant tax increases on food and other reduced-rate goods. The change could bring an extra ISK 22 billion (USD 175.3 million) to the state coffers.
Magnusson criticises the plan harshly, saying it would hit households hard in the current economic climate. He also pointed to the Federation’s previous claims that increased alcohol tax would not increase government tax revenues from the sale of alcohol. This in fact turned out to be the case, with consumers instead buying cheaper brands, brewing their own wine and beer, or simply buying less alcohol, RUV reports.
He also warned that if the higher VAT is charged, shops may be forced to react to falling revenues by increasing profit margins, thereby pushing prices even higher.
The IMF recommendation comes after the Icelandic government asked the Fund to analyse the country’s tax system and find good ways to increase overall tax takings. The IMF report states that the Icelandic tax system is generally good, but that flat rate VAT and changes to the capital gains tax might be advisable. The government has not disclosed how likely or unlikely it is to follow the IMF’s recommendations.