12 July 2018

To solve the cost of living crisis, we must rethink business taxes


Many shops on the high street are struggling to make a profit and business rates are widely identified as one of the main causes of this slump.

On Monday, Paul Johnson, the head of the Institute for Fiscal Studies, joined the debate. In a column for The Times, he rightly pointed out that that there are many problems with the current system, including the infrequency of revaluations and the fact that business rates are not applied to agricultural businesses.

According to Johnson, abolishing business rates would not solve the high street’s problems, because any cut will simply lead to higher rents. Johnson asserts that this is basic economics. An increase in taxes leads to a decrease in rents and vice-versa.

He is right. And his logic should be extended to other economic issues.

Consider, for example, wages. When thinking of hiring someone, businesses take into account the combined cost of wages and taxes. An increase in taxes such as employers’ national insurance contributions leads to lower wages. Lowering taxes such as employers’ national insurance contributions means that wages can rise.

There is a great deal of evidence which demonstrates that employers’ national insurance contributions is effectively a tax on workers that results in lower incomes. A study looking at the US equivalent of employers’ national insurance contributions found results “consistent with the hypothesis that 100 per cent of the tax is borne by labor”.

In Chile, the equivalent of employers’ national insurance contributions was cut significantly and quickly. One study looking at the impact concluded that “the incidence of payroll taxation is fully on wages”.

The fact that this tax burden is passed onto employees in the form of lower taxes makes perfect sense. Although a business might want to pay its employees more, the fact that they have to pay employers’ national insurance contributions means that paying them higher wages is a less attractive proposition due to the tax having to be paid. As such, this tax burden is passed on to workers in the form of lower wages.

Britain’s cost of living crisis is, in part, caused by the many direct and indirect taxes levied on households such as income tax, VAT, employee national insurance contributions, and duty on fuel, cigarettes, and alcohol. This burden is made even worse by a tax which is supposedly levied on their employer.

This really should not come as any surprise. Businesses don’t pay taxes, people do. Your TV (if you own one) does not pay the licence fee, in the same way that it is not your house that pays stamp duty.

Different taxes aimed at corporations are invariably paid for by different groups of people. They are paid for by the owners of the businesses who make less profit, shareholders who see lower returns from their investments, and the public in the form of higher prices. However, the burden falls mainly on workers in the form of lower wages. This has been true in different times and in countries around the world. Taxes aimed at businesses, whether that is a payroll tax such as employers’ national insurance contributions, or corporation tax, place the burden on workers.

There is a cost of living crisis in the UK, and taxes which purport to target businesses hit the workers the hardest. Therefore, there needs to a be a fundamental rethink of taxes aimed at business. Both corporation tax and employers’ national insurance contributions should be lowered.

We should expect this to result in an increase in wages for workers. For example, a study looking at the effects of a fall in payroll taxes in Colombia would increase wage rates by just under five per cent.

If the government is serious about solving the cost of living crisis then it needs to rethink its approach to levying taxes aimed at business. Cutting employers’ national insurance contributions would be a good place to start. Economic common sense and experience mean we can be fairly certain that the result would be higher wages and a better standard of living.

Ben Ramanauskas is a Policy Analyst at The Taxpayers' Alliance