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.