15 February 2017

Why the Government is right to tax the high street


There was shock, horror and outrage today as it was revealed that business rates for Amazon will fall as those for high street retailers rise.

CVS, a company which specialises in estimating rents and rates, tells us that Amazon will pay £148,000 a year less in rates under the pending revaluation – even as high street independents see rises of up to 300 per cent.

The Times ups the stakes by claiming that some others will face 500 per cent rises, even as Asos and Boohoo pay the same as always, or a little less, because their warehouses are Oop North.

From every corner of Fleet Street, the cry rings out: something must be done. But should it?

For all the wailing about the death of the high street, or the threat to the City, the more jaundiced among us would like to point out that this effect is the entire point of the system. People who use less land, and less expensive land, should pay less tax than people who use more and more expensive.

Business rates are not perfect – no part of our taxation system is that, because all taxes introduce distortions into the economy. But as taxes go, rates are pretty good ones – because they introduce the fewest such distortions.

Ultimately, rates are a tax on land value. They have fewer distortions because people ain’t making more land: the supply is entirely inelastic and so cannot be reduced by taxing it.

So we’re starting out with a good thing: a tax which accords with a basic desire, namely gaining revenue without changing supply too much.

But there are two more aspects to such a system that need to be taken into account. The first is that more expensive land pays more in tax, less expensive less. This means that people economise on using expensive land – precisely what we want them to be doing.

The reason land on Oxford Street is expensive is because there’s not that much there and many people would like to be selling from it. The reason land in Burnley isn’t expensive is because fewer people desire to use it. That’s what the price system does: allocates things in short supply to those who can make best use of them.

And if rental costs, or business rates, push people to sell clothes from warehouses in Burnley rather than shops on Oxford Street, then it actually makes us better off, because the lower input costs tend to be passed on to the consumer.

The second vital point here is that the businesses which occupy such land aren’t in fact the people paying the economic costs. It’s the landlords – upon whom the burden of rates falls.

People will pay a certain price to occupy a specific piece of land. The occupier doesn’t care how that is split between rent and tax – but the landlord is intensely interested. For he or she also knows that people will only pay a certain amount to occupy that land. The more of that goes in tax, the less there is in rent to pay for that second Roller.

In other words, this isn’t a tax on lovely independent shops but on wicked rapacious landlords. And it’s also one which is about the least distortionary in our tax system – and which rewards people who use less expensive resources (that cheaper land) than those who use more expensive inputs. Because someone who sells out of a shed in Burnley or some other point beyond civilisation really should be paying less land tax than someone trying to flog stuff in the centre of London.

Ah, say some people, but what about the impact on the community? Or on the public services? The Telegraph tells us today that NHS hospitals, too, are up in arms about their rate rises.

But what this misses is the fact that when the NHS pays business rates, you are in effect shuffling money around between different government departments. The effect is to cut the NHS budget and increase that of local councils (who are set to retain 100 per cent of business rates by the end of this Parliament).

And this, too, is desirable. The MoD owns a lot of radio spectrum that we might want to use more productively for mobile phones. So we charge the MoD for the spectrum it retains – which again is purely a case of shuffling money between departments.

This paper-shuffling helps to concentrate minds at budget time as to whether the generals need quite so much radio spectrum, or whether they’d prefer another tank or two.

So it is with the NHS’s use of that scarce resource, land. I don’t think I actually would suggest that the country’s great children’s hospital should be in Worksop rather than Great Ormond St. But charging for the use of the more expensive land – again, in a theoretical, government-to-government sense – will indeed concentrate minds as to whether that is the correct decision or not. And the Chancellor can always, if required, shuffle the money back again.

It’s similarly easy to demolish the concerns about pubs closing – because it’s not the rates system that’s causing that at all. Drinking habits are changing, partly because it is no longer allowable to have a tab with a pint.

As pubs decline in profitability, so too do the rents associated with them – but the rates system uses the rent with the permitted use as the basis for charging the tax. We’re not converting empty pubs to houses and shops because of business rates, but because those alternative uses are more valued by the market in the first place.

In the weeks until the Budget, Philip Hammond will doubtless find himself under increasing pressure to announce some sort of compromise or climbdown on rates. He should resist. High street shops facing increased business rates bills while Amazon gets a tax break isn’t an error, a fault with the system, or even undesirable. It’s the entire point.

Tim Worstall is senior fellow at the Adam Smith Institute