Wednesday, 17 July 2013

Homey In Chief making an idiot of himself by misquoting Adam Smith, yet again

Emailed in by Lola and Mombers, Allister Heath in The Telegraph:

An online sales tax would hit the poorest shoppers hardest

As so often is the case, it was Adam Smith who got it right, even though he was writing in 1776, long before anybody could possibly have imagined the rise of the digital economy...

The world might have changed dramatically in the intervening years but human nature and economic forces have not and big businesses still regularly call on the government to make their lives easier by passing laws designed to crush uppity upstarts. 
In the most egregious case of this behaviour for a long time, several leading retailers are calling for a new online sales tax to be slapped on those of us with the temerity to buy our shopping online; the rationale, boringly, is to "ensure a level playing field"...

All good stuff so far, but now he goes completely off piste...

What is most absurd about this whole saga is that retailers who advocate an online sales tax are fighting the wrong battle. While all corporate taxes eventually need to be reformed, there is nothing amiss with the way UK-based online giants such as Ocado or Asos are taxed – yet there is a major problem with how Tesco or John Lewis are being clobbered by Britain's unfair and antiquated business rates.

This is an onerous tax on commercial property which most members of the public are blissfully unaware of and which is accelerating the demise of the high street. The retailers' strategy is all wrong: had they focused on highlighting this and called for lower taxes on stores, they could have put themselves on the side of the consumer, to whom most taxes are largely passed on to anyway...

Because business rates are unrelated to profits, turnover or performance, they are the dumbest of all possible taxes, hurting struggling firms the hardest and pushing many into bankruptcy. Jessops and Comet were still shelling out even as the administrators were being called in.


And what did Adam Smith actually say about tax ..?

Bearing all these things in mind, there are two types of taxation which obtain Smith's recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).

On the subject of luxury consumables, he is adamant about the definition of 'luxury' and of 'necessary.' By his definition, a 'necessary' may vary from place to place and from time to time... Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: "Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed ... Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution."

More deserving of praise is the tax on ground-rents: "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them."

Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: "To subject every private family to the odious visits and examination of the tax-gatherers ... would be altogether inconsistent with liberty."

The harshest condemnation of all, however, was for taxes upon labour: "In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable commodities."


Business Rates are of course the closest thing the UK has to a tax on the "ordinary rent of land" - they are paid out of the profits which would otherwise be appropriated by the landlord*.

Business Rates do not cost productive businesses (or the productive part of an owner-occupier business) one penny - they are not "passed on" to the tenant, and the business does not "pass on" one penny of it to the customer either. (For sure, Jessops and Comet were still being asked to pay Business Rates until the bitter end, but what finished them off was their landlords' refusal to drop the rents, rightly or wrongly).

We know this for a fact because the retail price of goods not consumed at point of use are much the same everywhere in the UK, even though Business Rates vary enormously, being next to nothing on a run down High Street and hundreds of pounds per square yard in prime shopping districts. Prices paid for goods and services consumed at point of use vary much more widely, so the gap between prices in London and other regions is much more marked, but that is the cause of high rents/Business Rates and not the result of them.

* Unfortunately, Business Rates are a second-best kind of Land Value Tax because they assessed on the total rental value including improvements rather than just the "site premium", but by and large and except in marginal cases, it comes to the same thing.

13 comments:

Chrometum said...

"We know this for a fact because the retail price of goods not consumed at point of use are much the same everywhere in the UK**... Prices paid for goods and services consumed at point of use vary much more widely, so the gap between prices in London and other regions is much more marked"

Is this the reason or is it that prices vary widely for goods where firms compete based upon offering a better quality product/good/service (restaurants, bars, theatres, football clubs) and prices are pretty much the same where firms are competing based upon price (supermarkets, fast food restaurants etc)?

Mark Wadsworth said...

Chr, nope, that has little or nothing to do with it. I'm talking about REGIONAL variations.

It's about embedded rents.

The price for entirely homogeneous stuff (beer, coffee, cinema tickets, Burger King) is higher in high wage areas.

Burger King in London is competing with the same old local chippy or McDonalds as the Burger King in Blaenau Gwent. But wages are higher in London, so BK prices are higher.

Chrometum said...

Mark, fast food restaurants was a brain fart but you've ignored the other examples I gave.

I'm not disputing embedded rents or that high wages play a part. I'm disputing your consumed on site reasoning. Saying that surely it's quality or price that are the determining factors.

Chrometum said...

Burger King isn't competing with those establishments based on price though. It's competing based upon the quality/attractiveness of its offering. Whopper or Big Mac etc.

Mark Wadsworth said...

Chr, are you seriously saying that all goods and services consumed at point of use in London are higher quality than elsewhere?

That a Travelodge in London is better than one in Leeds? That a Burger King in London is better than one in Newcastle? That an Odeon in London is better than one in Macclesfield?

It is quite simply and observably the case that in London BK is a tad more expensive than elsewhere, a hotel room is much more expensive than elsewhere, a pint of bog standard lager is a more expensive than elsewhere - there is even a large difference between the price of a pint in central London, inner London and outer London.

The same with coffees, anything else despite there being no measurable difference in quality between London and elsewhere.

(Very posh restaurants and theatres are a separate case because they probably are of higher "quality" in London so are irrelevant for these purposes.)

Chrometum said...

No Mark you've misunderstood me, I'm not talking about the difference in quality between two Travelodges or BKs.

What I am saying is that the goods/services that are more expensive in London than elsewhere are so because they are the types of good/services where quality/attractiveness matters more than price. And therefore when this is the case the difference in price of these goods/services between different locations can in the main be explained by wages/rents.

Mark Wadsworth said...

Chr, that's a long way round of explaining it and misses the important bit.

The simple answer is, there are price differentials for "goods and services consumed at point of use" because there is less pressure of competition - customers cannot shop around so much.

You might argue that with "goods and services consumed at point of use" there is more competition on quality or that quality is more important, and you might even be correct, but that is pretty irrelevant.

I mean, I can drink beer in Central London for outrageous £4/pint, or in outer London for more reasonable £3/pint or out in the sticks for sensible £2.50/pint.

It's exactly the same beer in every pub, and my enjoyment thereof is the same wherever, but if I'm in central London and fancy a pint, I'm not going to pop out to Essex to drink it.

Chrometum said...

But Mark a pub doesn't just sell alcohol, it sells the whole experience. A pub in central London is going to have a completely different ambiance to one out in Essex. After all there are people that won't set foot in a Wetherspoons. Also if the pub was a dump would you pay £4 a pint?

"The simple answer is, there are price differentials for "goods and services consumed at point of use" because there is less pressure of competition - customers cannot shop around so much."

But there is competition. A meal at a restaurant vs. going to the theatre or even just going without. The decision is surely qualitative.

Mark Wadsworth said...

Chr, look, I'm talking about more or less identical "nice" boozers.

Of course there is competition between restaurants and theatres. There is also competition between clothing and cameras, but the price of clothing and cameras is the same everywhere so that is at best irrelevant.

But, please note:

a) there is competition between them in Leeds as there is in London

b) please accept that I am talking about REGIONAL price differences of things which are measurably of IDENTICAL quality everywhere. And I look for the one factor which dictates whether there is a price difference, and that is simply that they only exist for "goods and services consumed at point of use".

It is a simple statement based on observable facts and for which there is a simple explanation.

c) This probably excludes things like posh restaurants and theatres, which are unigue to London and for which no price comparison can be established. I have made that clear once and and am now repeating it.

It's like, we know what the cost of a ski-ing holiday is in Switzerland, but you can't compare that with the cost of a ski-ing holiday in The Netherlands.

d) Similarly, the cost of a coffee or sandwich on a train is f-ing outrageous and they are crap quality, but you pay that higher price because there simply is not competition (assuming you forgot to bring your own).

Your comments about "quality" being more important for some things might or might not be correct*, I'm not disputing or debating that.

* Surely, people care about the quality of the clothes or cameras they buy as well? So how come no price difference?

Morgan Charles said...

Also nowadays, everyone is competing with, or indeed selling via, the internet which tends to level out the prices of things not consumed at the point of sale even more. Very few people are going to pay more for clothes, say, in London, than they can get them for in a few days from a shop in Wales via the internet, unless they are the sort of person who likes shopping in pricey boutiques.

Chrometum said...

Of course there is competition between restaurants and theatres. There is also competition between clothing and cameras, but the price of clothing and cameras is the same everywhere so that is at best irrelevant.

For the most part clothing and camera sellers are competing based upon offering the best quality for the best price though...

Surely, people care about the quality of the clothes or cameras they buy as well? So how come no price difference?

Yes quality at cheap prices. Not really the same for a restaurant or bar is it.

Having said that aren't many high end clothing brands only available in London?

b) I understand what you are talking about Mark. I am just suggesting that the regional price difference only exists for goods/services where consumers choose them for primarily qualitative reasons.

d) But there is competition (e.g. shops in the station), you didn't make use of it when you had the chance.

Mark Wadsworth said...

Chr: "I am just suggesting that the regional price difference only exists for goods/services where consumers choose them for primarily qualitative reasons"

My problem is that I'm not sure there is such a thing, whatever you buy is a trade off between price, convenience, quality etc, and this applies no more to restaurants than clothing.

OK, some restaurants or theatres have snob value, I'll give you that, so maybe people are more likely to willingly overpay for these things, and maybe these things are more concentrated in London, maybe maybe, but the reason they are concentrated in London is because there are more high spenders in London, which gets us back to my explanation.

But pubs or Burger Kings or Travelodges or whatever are the same all over the country, they are still more expensive in central London, with a noticeable price decline as you head out of town.

Mark Wadsworth said...

Chr, it is possible that I buggered up my own arguments by saying "goods and services consumed at point of use" that should of course say "goods and services consumed at place of purchase".

MC, yes, that's another good example, but the price levelling applies to things which don't have to be consumed at point of purchase, so clothing, books and CDs level out.

Overall, it is also said that insurance got a bit cheaper when price comparison sites came in - but this has not eroded the different premiums which insurers charge for riskier and safer postcodes.

And of course internet estate agency has done precisely f- all in levelling out house prices across the country.