Boris: Twat

From today's LondonPaper:Wrong. The UK has run experiments with reducing Business Rates (for example, exemptions for vacant buildings, or blanket exemptions for 'deprived' areas), and all that happened was that rents or property values adjusted upwards. The simplest and best way to fix this unintended consequence of Business Rates is to scrap the element that relates to the value of the building - whether occupied or vacant - and just tax the bare site value.

All site owners have a notional or actual interest cost relating to the capital value of the site. A tax on the site value would depress the notional cost by the amount of the tax; in some cases actual costs would go up, in some cases they would go down, but as economic decisions are based on notional rather than actual costs, a tax on site values would not impede rational decision making. In other words, each site owner would develop his site to the fullest extent.

The other, even more fundamental point, is that Business Rates are levied and collected locally, but pooled nationally and then redistributed. As a local politician, Boris can make London a more attractive place for businesses - by sorting out things within his remit like transport and policing; if Business Rates (or Site Value Rating) could be collected and spent locally, then there'd be a much better incentive for him to do his job properly, and there would be an automatic cost-benefit analysis to all his decisions.

Here endeth.

"Squeezed business struggles to pay rates"

You'd expect slightly more incisive commentary from the FT, which is supposed to be the economically clued up paper, but here goes:

Companies hit by the economic downturn are struggling to pay their business rates on time, adding to evidence of the economic squeeze on business. More than half of councils surveyed by the Local Government Association said companies were experiencing difficulties. The association estimates that business receipts [sic] – which councils collect and send to central government for redistribution – have fallen by more than £1bn ($1.6bn) in the year to April, representing about 6 per cent of takings. They are expected to deteriorate even further in the coming year.

Again, this is easily fixed.

1. Business Rates should be replaced with Site Value Rating, which does not distinguish between undeveloped sites, vacant or derelict buildings or well maintained and fully occupied ones (so as not to discourage owners from maximising the return on their sites).

2. SVR should be collected directly from the landlord, not the occupant. The landlord will in most cases increase his rent to cover the extra cost, but this does not change the total occupancy cost to the tenant. As SVR will only ever be a fraction of the rental income (Business Rates averages out at 30% to 40% of rental income, for example), there is no question of the landlord being unable to pay.

3. Of course, owners of undeveloped sites or vacant derelict buildings will have no current income, but this will be reflected in a much lower cost/value of the land element when the site or building is acquired, giving a lower up-front fixed interest costs, leaving the purchaser with more funds to develop the site.

4. In the very short term, this will not necesarily help the tenant of course, because he still has to cover the increased rent. So he will just have to negotiate a reduction; faced with more competition from other landlords and potential landlords, a fixed SVR bill and a lower tax rate on the actual buildings, there will be more incentive to develop and keep up occupancy rates, and more competition between landlords, so the chances are, the tenant will find it easier to negotiate a reduction in difficult times.

5. A further tweak is this. Business rates, "which councils collect and send to central government for redistribution", should be collected locally and spent locally. How else is a council supposed to be forced to operate any sort of sensible cost-benefit analysis?

That's that fixed. Next.

Er ... and that's a bad thing because?

From today's FT letters:

So far as business premises are concerned, [The Chancellor] should have reinstated empty rate relief to its previous level so developers can invest in much needed new schemes rather than spending money to maintain properties they struggle to find tenants for – or worse still, demolishing newly built and usable premises simply because a tenant cannot be found immediately.

Robert McNally, Chair, Property and Construction Committee, London Chamber of Commerce and Industry, London EC4

Wot?

They have money to spend on new schemes (for whom they presumably can find tenants) but will demolish these if no new tenant can be found immediately? And they have money for building and demolishing new schemes but none to prevent existing properties falling in to disrepair? Does the bank waive the interest when a property is standing empty? Similarly, a landowner makes a windfall gain when planning permission is granted (however long ago), is it not fair for the council to claw a bit of that uplift back in tax, whether the landowner can be bothered to actually fulfil his side of the bargain? Is he not aware how badly derelict buildings (or indeed eternal building sites) impact on surrounding properties?

As the Land Value Taxers point out, it is stupid to tax buildings, it should only be the site value (or the market value of the planning permission, same thing) that should be taxed, but bloody hell, does that letter make the slightest bit of sense?

"Buildings razed to avoid taxes"

I covered this topic a while ago here, but it's always worth revisiting:

A Communities and Local Government spokesperson said that reforms to empty property relief were "aimed at ensuring a fairer balance between incentives to re-let property, and giving property owners a period of relief while they manage vacancies. This follows recommendations by independent experts to encourage the most efficient use of land..."

The Land Value Taxers have always said that if you want to "encourage the most efficient use of land" (i.e. build the biggest building possible) the best thing you can do is to tax the site value and ignore the value of buildings and improvements; if you tax buildings, so goes the theory, there'll be fewer buildings. Only it's not just theory is it? This is what actually happens. Or as Dearieme (no Land Value Taxer he!) said in the comments to my earlier post, "Have the stupid f***ers never heard of the Window Tax?".

And what's this crap about 'giving property owners a period of relief'? Do banks give commercial landlords a 'period of relief' if they can't find tenants? I think not. There may be some bizarre maths that says commercial landlords might be better off by knocking down buildings, but seeing as economics is about putting things to their optimum use, a tax system that encourages this is clearly fundamentally flawed.

Which leads the discussion on to vacant new-built but unsold residential property. It appears that there is an exemption (Class C) for 6 months after completion, so all the developer has to do is leave the new properties not-quite-finished, hopefully they won't be knocking them all down again.

Economic illiterates of the day (7)

While perusing the IFS site for the original press release on which this story was based, I stumbled across a fine piece of f***wittery entitled "Globalisation demands reform of UK corporation tax".

*Sigh* let's look at a few basic facts, first:

1. Globalisation is a good thing, it has been around since the globe was invented, whatever rules you invent, 'globalisation' (aka free markets) will adapt and work its way round them.

2. If you can choose from different countries where to set up a business, tax is not top of the list. Depending on the type of business, you ask: Does it have a stable legal system, rule of law, security, honest government officials? Then you look at costs - what are wages, rents and raw material prices? How good are transport links (for people or finished goods)? How reliable are banks, telephones, power supplies? If a country ticks all those boxes, only then do you worry about the tax system - and its not just the headline rates that matter, simplicity and stability is just as important. For example, corporation tax is higher in India and China than in most of Europe and they don't much adhere to the 'rule of law', but the wage differential is so huge, that doesn't matter much. Similarly, corporation tax is higher in the USA than in most of Europe, but their Sales Tax is much lower than European VAT (the worst tax of all).

3. Before we worry about 'encouraging FDI', let's worry about existing UK businesses. If the UK is an attractive place to do business, then we don't need to worry so much about FDI - there'll be plenty of UK businesses expanding here, rather than relocating abroad. If they locate manufacturing in the Far East, there's not much you can (or should) do to stop them. If you're worried about UK businesses relocating largely for tax reasons, then I've got a list of the main changes that would make the UK more attractive here.

4. There's one tax I missed off that list - and which the IFS press release doesn't even mention - Business Rates. Let's assume that we stripped out the buildings element from the valuations and harmonised the rates for occupied and unoccupied sites and allowed local councils to keep all the proceeds (rather than it being pooled nationally). Let's bung in Stamp Duty Land Tax and corporation tax on capital gains for good measure and rename it 'Site Value Rating'.

5. Now, there are plenty of things on a business' checklist (see point 2 above) that local councils can influence. Let's take for example Crossrail. Let's imagine that Bill Gates, in a moment of generosity, stumps up the £12 billion it will cost to build, and off we go. Who benefits? Will businesses benefit? Well, yes, of course, but by the same token, their rents (actual or notional) will go up. So who benefits most? People who own land and buildings around where the stations are, as they'll be able to charge higher rents (or sell their land for higher prices).

6. So why not do a proper cost-benefit analysis. Assuming an annual running cost (operating losses, interest payments and amortisation) of £1 billion, would the rental value of properties in the Crossrail 'catchment area' go up by more than £1 billion? If yes, it's worth building, if no then it isn't. If the potential increase in rental values seems low, then assume that planning permission will be more generous and re-run the exercise.

7. Let's assume that it is worth building, then as long as Site Value Rating (and Land Value Tax on residential land) collects the bulk of the increase in rental values, the project is self-financing! And if the extra proceeds exceed the cost, they can be used to reduce other, more damaging taxes (VAT and National Insurance).

8. Now, going back to a business thinking of setting up in the Crossrail catchment area. Has the area got good tranport links? Yes, obviously. Are the rents value for money? Well, they probably are, as they are market rents . How about taxes on production? Well, they've just been reduced and simplified (the landlord has to absorb the SVR - he can't charge more than market rent, can he?), so that makes the area more attractive as well. (and yes of course, gummint spending and the corresponding tax burden is far too high, but I'm trying to explain why Site Value Rating is the least-bad tax).

Trebles all round!

But, getting back to the IFS press release, it kicks off by saying "Corporation tax should be reformed or replaced by a higher VAT rate (offset by lower National Insurance contributions) to reduce disincentives to invest in the UK..."

*Bleurgh*

There are a couple of bright ideas, like harmonising tax rates between corporate and personal income, but this is cancelled out by the other dross, a lot of which is self-contradictory anyway.

PS, I did find the press release on the education funding story, but apart from giving a wonderful opportunity for the inevitable sarcastic remark, it wasn't particularly interesting.

"Ministers act against threat by developers to avoid new business rates"

This is what happens when you have a stupid tax (Business Rates) and an even more stupid loophole (exemptions for part-completed buildings).

This is of course easily fixed - replace Business Rates, VAT on constructions and renovation, corporation tax on capital gains and Stamp Duty Land Tax (and any other property-related taxes you can think of) with Site Value Rating, an annual charge of a fixed percentage of the site-only value of all non-residential land, regardless of whether they are undeveloped, part-developed, completed or derelict.

That'll encourage developers to get projects finished and let out. All things being equal, this will encourage development while keeping commercial rents low, thus boosting the economy overall.

Exactly the same principle applies to vacant residential properties. The current ham-fisted combination of confiscation and subsidies clearly achieves nothing.

Windfall gain for Scottish landlords!

Those idiots the SNP did it, in today's Budget, they "announced that, from April next year, business rates would be abolished for up to 120,000 small businesses and a further 30,000 companies would see rate cuts of between 25 per cent and 50 per cent".

Jesus H F***, have these people not heard of Ricardo's Law of Rent, which like all blinding insights seems totally obvious if you think about it for a few minutes?
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OK, you can choose here, follow the link and think for a few minutes, or just read on for a potted summary ...
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Under The Law of Rent, what will happen is:

The landlord will say "Great, under the old system, a small business who paid me £10,000 in rent was paying £4,000 in Business Rates, so his total bill was £14,000. That means he'll have £4,000 to spare in future, so at the next rent review I'll up the rent to £14,000".

Sure, some small businesses own their own premises, great, they've got a static £4,000 tax cut, but their marginal rate of tax has not changed, so unlike a reduction in VAT or income/corporation tax rates (which, even if not self-financing because of Laffer effects, would at least motivate the small business to work harder, expand, maybe take on extra staff) cutting Business Rates has no positive effect on economic activity.

Even worse, what happens if the shop next door becomes vacant and our small business wants to expand?

Let's say they own the first shop and want buy the second, they will not qualify as a small business any more, and will face additional tax of £8,000. And if they are renting the first shop and want to rent the second, then they will have to pay the higher rent of £14,000 (to be able to compete with another small business) as well as the extra £8,000 tax.