It's simpler than that

Lola left a comment on Vince Cable flushes reputation down toilet:

I long ago sussed Cable as a plonker - as I now think have the Libdems.

Question. Local market town... has thriving high street with plenty of good quality good value competing shops, plus moderate sized Co-op supermarket. Tesco want to build a superstore off the high street. This is blatant category killing, but that's OK as it's competition.

Anyway, suppose we had LVT. As Tesco's killed off the smaller businesses the shop values would plummet and LVT would reduce markedly as would the rents chargeable. At the same time the LVT on Tescos site would rocket. The effect of this would be to put up Tescos costs by a significant amount so that they'd have to increase their prices. At the same time the other effect would be to wildly reduce the major costs (rent and LVT) of the small shops enabling them to cut their prices.

LVT therefore levels the playing field between Tescos financial muscle and the local small businesses and benefits free markets and competition. Or have I missed something?

WFW added: "MW, Lola makes a good point, or have we both missed something?"

It's even simpler than that.

If, subject to local democratic control (ha!) Tesco are allowed to open a supermarket, that might or might not make life more difficult for other shops in the area. I have observed that what happens in real life is that greengrocers, butchers etc tend to close but then other businesses which don't compete with Tesco, but complement it (like cafés, dry cleaners, beauty salons, estate agents etc etc) open up, but let's go with L's scenario. Remember that commercial premises are already subject to something quite similar to Land Value Tax, namely Business Rates.

If (big IF) the other shops in the area become less desirable as business premises, then in a rational world local landlords would drop their rents to reflect the lower profits that shops can now make, and there would still be no vacant premises; Business Rates would fall as well, of course. This doesn't work as well as it should for various reasons:

1. Business Rates include the rental value of the building as well as the location (so Business Rates will never be £nil), unlike Land Value Tax, which would (ideally) be close to one hundred per cent of the location value and ignore the buildings value (so in some areas it might well be £nil). So under LVT, the owner of the building would be compensated in full if the location becomes less desirable through no fault of his own (the location rental value and his LVT bill go down £1 for £1).

2. Business Rates have all sorts of fiddly exemptions and discounts for vacant and derelict premises and undeveloped sites, so landlords are encouraged to leave premises vacant (or sites undeveloped) rather than to drop the rents and get the premises occupied. Under LVT there'd be no such exemptions, so landlords would be much more keen to get new tenants in. Don't forget that shops that stand vacant for long are a drag on the whole High Street, and once more than a certain number are vacant the whole High Street goes into a death spiral.

3. A cut in Business Rates is not much consolation to a shop-owner who is locked into high rents that cannot be negotiated downwards; or who bought the shop with a big mortgage before Tesco moved in. With LVT, there would be full relief is an area became less desirable, and it would depress property prices to their bricks and mortar rebuild costs, so the mortgage would be much smaller to start off with.

4. If LVT were levied on a per-square-yard basis, Tesco would be paying the same LVT on ten car parking spaces as a traditional Victorian single-fronted three storey shop building round the corner (quite different to Business Rates, of course), which would level up the playing field no end. It's up to the council to agree with Tesco whether people visiting other shops are allowed to use Tesco's car park.

As a footnote, we do not need to distinguish between "location rent" and "LVT", they are the same thing and cannot be added to each other or 'passed on' as higher prices to charged to customers. Rather the reverse is true - the location value depends on how suitable it is for running a business from, but prices for groceries are fairly fixed (they are pretty much the same across the UK, from the poorest to the poshest areas).

Similarly, the prices that Primark charges for an item of clothing is the same on Oxford Street, London as on High Street, Anytown (but as it can sell ten times as many items per square yard on Oxford Street, it pays ten times as much rent per square yard there as in Anytown).

So in fact, part of the prices that Tesco charge is being 'passed on' in the other direction to the landlord (which may well be Tesco itself, of course). It is this part of the cash-flow that LVT would capture. So the common notion that 'businesses struggle to pay the rent' is not actually true - what they are struggling to do is to generate as much profit as another business could by trading from that location - the landlord just plays them off one against the other (and he'd be stupid not to).