Killer Arguments Against LVT, Not (310)

Prompted by Jerry J, I did a bit more digging and have updated the relevant article over at KAALVTN.

"Retailers will push up prices"

a) Again, no need to speculate on the impact of land value taxes on prices. There is plenty of evidence - you just need to use common sense - that rents and taxes on rents have absolutely no impact at all on retail prices.

b) We all know perfectly well that most stuff you buy in shops costs pretty much the same wherever you are in the country. Prices are the same in a Primark in a retail park at the edge of a low-income town as they are in Primark on Oxford Street, London. Research backs this up, wherever you shop in the UK, prices for similar goods are within a range of +/- one percent.

c) Q: But we also know that rent and rates for shops in the best locations are much, much higher than for shops in less favourable locations? So why is this so if retail prices are the same in all shops?
A: It's do do with volume. If a retailer has a net mark up of £1 on something and can sell 1,000 a week from Location A, but can only sell 100 a week from Location B, then by and large, the rent for a shop at Location A will be nearly £1,000 a week and the rent for the shop at Location B will be less than £100.

Observed facts, simple logic. Prices are fixed and volumes drive rents. Taxes on rents do not increase the total rent which a tenant will pay. If the tax on the shop at Location A is £800, then the rent net of taxes will fall to less than £200.

d) We can also drag actual hard facts and figures into this. The British Property Federation's Property Data Report 2013, two-thirds of UK businesses trade from rented premises. So two-thirds of UK businesses are already paying in full for the value of land they occupy! It is just that they are paying a small part to the government and most of it to private tax/rent collectors. Further, retailers occupy about one-third of all commercial premises by value.

e) Business Rates are about 40% of rents net of Business Rates and raise £28 bn a year, so the net rents payable to landlords are about £70 billion, and the total rental value is about £98 billion, if we knock one-fifth off that for safety and assume that the site premium element of commercial rents is half the total rental value (for residential it's about two-thirds), the LVT payable on commercial premises would be £40 billion.

f) Further, it is definitely the case that taxes like VAT, PAYE push up prices and reduce wages. So if high retail prices are your concern, then shifting from taxing output to taxing land rents is a good idea, is it not?

UK retail sales were £311 billion, some of that is VAT-exempt, but the total VAT payable by retailers is about £45 bn, to which we can add £5 bn Employer's NIC (retail wages are quite low) and £10 bn Business Rates (one-third of £28 bn) = £60 billion.

So if we shifted from VAT/Business Rates to LVT-only, the LVT bill on retail premises would be £13 bn (one-third of £40 bn, from (e)), the total tax on retailers/owners of retail premises would fall by three-quarters; the tax bill for the one-third of retailers which are owner-occupiers would also fall by three-quarters. Quite how much of the LVT would end up being "passed on" to tenants in higher rents (to soak up their much higher margins) need not concern us here.

It is quite simply the case that there would be some combination of more output, fewer empty shops, more businesses, more employment, lower prices, higher profits. All of those are Good Things.

g) The matter is a bit more subtle with goods and services consumed at or near point of use, like pubs, restaurants, cinemas, where prices are higher in high rent areas. But again, any tax on the rents would not increase prices, it would merely reduce the rent which the landlord collects net of tax.