Wednesday, 25 September 2013

Indian Bicycle Marketing

The Red and Blue Armies have declared Phoney War and as their battleground have chosen a storm in a teacup over very minor tweaks to two of our relatively less bad taxes. (They steer well clear of even mentioning the worst ones, 20% VAT on gross profits; 25.8% National Insurance on wages; and income-based withdrawal of benefits of around two-thirds of all wages up to a median income.)

Take it away, Matthew Sinclair of The TaxCollectors' Alliance...

ED MILIBAND made two big new pledges in his speech yesterday: lower business rates for small businesses, paid for by higher corporation tax on larger firms; and a freeze in energy prices for 20 months from the date of the next election.(1)

Economic reality would quickly bite for any government that tried to introduce either policy. There is nothing wrong with cutting business rates.(2) Lower rates would be a relief for many – particularly small firms and retailers. They often effectively pay half as much again on top of rent.(3)

But higher corporation tax rates for larger firms would not raise government revenue, except maybe in the short term. Just as firms in competitive markets cannot increase profits by charging higher prices, governments cannot just hike taxes and expect more revenue in return. Higher corporation tax will drive away investment and mean fewer jobs, lower wages and – in short order – less revenue for the state.(4)

1) This is indeed a stupid idea, seeing as it is UK government policy to push up consumer prices with all sorts of bizarre green taxes and rules, many of which Mr Ed himself introduced himself a few years ago. Let's get rid of those first, think seriously about nuclear power, fracking, improving competition and so on and see what happens.

2) There is everything wrong with cutting Business Rates across the board. This only makes sense in very run down areas where the rates are in excess of the site-only rental value.

3) That's the whole point, you wanker. Business Rates are - officially - supposed to be 46% or 47% of the rent payable to the landlord. So if some are paying "half as much again" then that is not far off and within a reasonable margin of error anyway.

More to the point, it is a circular calculation and the tenant does not actually pay a penny in the long run - if he knows that a place has a total rental value of £14,600 then he works backward and decides that a fair rent is £10,000 because there will be £4,600 rates on top. So really, the rates are only 31% or 32%.

4) Oh do fuck off, Mr Sinclair. All Labour have suggested is pegging corporation tax at 21% for large businesses instead of reducing it to 20% a couple of years in the future (i.e. the current mainstream rate is 23% and the Lib-Cons have proposed reducing it in 1% steps all the way down to 20%, which certainly has the merit of simplicity).

If the Tories really thought that 21% is so terrible, why have they set the rate at 23% for the current year?

I am a devout believer in the Laffer Curve, and if corporation tax were the only tax, whether it is 20% or 21% is completely irrelevant, they are both on the upward slope of the Laffer Curve, the deadweight costs of such a low tax are negligible (1% of GDP?).

The effect he refers to only kicks in if taxes are above 60% or whatever the revenue-maximising rate is and are reduced to below 40% or something where there is a noticable reduction in deadweight costs.

But of course, corporation tax is not the only tax, and is a relatively minor tax in the grander scheme of things, it raises one-third as much as VAT and one-third as much as National Insurance, why not have a think about those first?


Lola said...

Bit nettled are you Mr W eh?

Mark Wadsworth said...

L, not "nettled" as such, the issues being debated are neither here nor there, it's like the Red Wing basing its whole 2015 General Election campaign on the policy that they will reduce the speed limit on motorways to 69 mph and the Blue Wing saying they will increase it to 71 mph, and just ignoring everything else which is going on.

Has Red Ed said that he will shut down Help To Sell, for example? (I dunno, perhaps he has).

So what troubles me is that "they" want us to get all het up about very, very minor issues of only marginal interest to anybody.

ageing man said...

but it all comes down to this..... close your eyes...then try and imagine Ed being Prime Minister...think really really hard..... squeeze your eyes tighter..... not working ? it didn't work for me sod the policies.... Ed the knob won't be PM so it looks like we are stuck with Dave the Wanker...

The truth is we now have the politicians we deserve, and alas the level of taxation we don't. Can that situation really honestly change ? Not in what's left of my life I don't think so.

Mark Wadsworth said...

AM, I can imagine Red Ed as Prime Minister, why not? And his government would manage to be even worse than the Lib-Cons, continuing the fine tradition of each UK government being a bit shitter than the one before it (except for John Major's lot who are a shining beacon of hope, if judged with hindsight).

ageing man said...

why not ? because the focus is always about him [specifically] rather than his ability to govern. Look at his speech yesterday. The day before the media were ready to maul him, but his speech was seemingly delivered well and so ears pricked up, this morning, he dithered and blathered on Radio 4 so now their back to mauling him.... and his vision for a 2015 LabLib Government will wither on the vine as all his yesterday promises get ripped to shred.... So between now and the next election it will be the same scrutiny of his abilities every time.... I did just try thinking harder and squeezing my eyes even harder still.... but nope... all I saw was wallace saying cracking cheese gromit !

Pablo said...

MW: "John Major's lot who are a shining beacon of hope"

Eh?! - perhaps you could expand on this.

Mark Wadsworth said...

P, houses were cheap, unemployment was falling, crime was falling, pubs could stay open all day, shops could open on Sunday, he didn't bail out banks (like Barings), they didn't constantly tinker with interest rates or the tax system, they started phasing out MIRAS, he didn't get involved in any stupid foreign wars (he inherited Kuwait invasion from Thatcher, is all), mildly Eurosceptic.

Plus he had the nerve to resign as leader of the Tory party even while PM. And of course there was the cones hotline, which I think tips the balance in his favour.

Bayard said...

Is Mr Sinclair lying, or is he deluded? I'd like to think the former, but I'm afraid it's the latter.

Mark, there's no point in getting worked up. AFAICS, the powers that be have got things just as they like them, thank you very much, and they wouldn't want the pols wanting to change any of the essentials, which leaves them only the more irrelevant bits to argue about.

Lola said...

MW. I am glad you said that about Major. I always thought he was under-rated and that he lost out to a combination of vulnerabilities in his cabinet and epically skillful deceit and news manipulation by Blair / Brown.(really Mandlesohn/Cambell/McBride etc)

Ben Jamin' said...


Very interesting what you've said about BR picking up about a third of the total rental value.

On residential properties, the site value represents about 2/3 the total value.

Even assuming this ratio is roughly the same for business(although I'd guess higher), that would mean a third of site values are still getting swallowed up by landlords.

So, does this mean your 200bn extra LVT revenues figure is slightly on the low side, if BR was reformed as well?

How much does it cost to buy land for commercial development? If BR was a 100% LVT it would be zero or near about. I've got a feeling it isn't.

Is there any difference between residential and commercial land prices in central London for example?

Mark Wadsworth said...

BJ, yes, having done the calculations forwards and backwards, we can assume that BR picks up, in total, "about half" the total site only rental value.

Problem is, it picks up more than site only value in tatty areas, probably the right amount in normal sort of areas and only a small fraction in expensive areas.

There is a huge difference between comm and resi valuesin London - you can make handsome windfall gains by buying a comm building with large BR bill and getting it re-zoned as residential, with modest Council Tax bills instead.

Ben Jamin' said...

@ Aha! So we might be able to tack another 20bn or so onto your estimate? Not to be sniffed at.

Mark Wadsworth said...

BJ, yes, but that's a slightly different topic.

"Wealth creation" in this country bears three-quarters of all taxes, businesses are hideously overtaxed if you include VAT, PAYE, corp tax and Business Rates etc in totality (I see no reason to distinguish between taxes borne by employer and employee, they are all part of the business).

But commercial premises are only one-eighth of all developed land by area (perhaps a bit more or a bit less in terms of value, who knows), so under a full on LVT-only system, one-eighth of revenues would come from revamped Business Rates (which might well be two or three times as much as current BR).

Overall, even we imagine that BR are borne by "businesses", the overall tax burden on "businesses" would fall by three-quarters (or whatever the maths is).