Friday, 30 December 2016

"Jeremy Warner nearly gets it"

Emailed in independently by Lola and Mombers (who suggested the post title), more wailing about Business Rates in The Telegraph:

This is obviously very welcome news, but it is small thanks to a Government which seems to be doing its level best to make the costs and complexity of doing business in Britain ever more burdensome.

The latest example of such wrong-headedness is in changes to the business rates system, due to come into effect next April. For some businesses, they mean an immediate increase in the tax on their properties of 42 per cent, with still worse to come in future years. Particularly badly hit will be smaller traders in London and the South East. Many face an eventual doubling or worse in their rates bill.

A significant number will be broken by the increases, and in despair close up shop (1). Others will find ways of passing the extra costs on to their customers (2), or alternatively demand rent reductions from landlords (3). Still more will simply take the hit to profits and invest less (4).

The first outcome is pure speculation, the shop is there and somebody will always want to use it.

The second is nonsense, we know for a fact that the total rent and rates bill does not affect output prices, because retail prices are the same whether you shop in a high rent/rates area or a low rent/rates area.

As it happens, UK retail sales are in the order of £400 billion a year and the total increase in UK retailers business rates bills is going to be about £500 million a year, i.e. one-eigth of a percent of  turnover, with many retailers outside London and the South East enjoying rates reductions.

The third is the most likely outcome for commercial tenants, although there will be a nasty transition period between the rates increase and the next rent review, which is one of the flaws of making the tenant not the owner legally liable for the business rates.

The last suggested outcome is nonsense, whatever the rent plus rates bill, a good investment is a good investment, and if there are good investment opportunities available, people will avail themselves. You could even argue that a higher rates bill for owner-occupier businesses will give them the kick up the arse they need to increase profits.

All this is in stark contrast to what he wrote a few years ago:

As it happens, there are some quite strong economic arguments for taxing land and housing more than they are already. Again, many thanks to The Mirrlees Review for drawing my attention to what Winston Churchill, who was from a big land owning family himself, had to say on the matter as early as 1909…

Taxing land value, in other words, is the equivalent of taxing an economic rent – it does not discourage any socially desirable form of wealth creation. Moreover, in a world where both income and capital are increasingly mobile, there are obvious advantages in taxing the physical; it is less easily avoided.
So in an ideal world, you might indeed want to tax land more, while reducing income and other forms of capital taxes to compensate.


Rich Tee said...

(1) may be speculation, but I don't agree that it won't happen.

If a trader can't run a business so that it gives them a reasonable standard of living, they will simply close it and move to a more lucrative location (or a more lucrative occupation). This could happen en masses when taxes rise like this.

Even if there is demand for something it doesn't necessarily mean there will be supply, if an entrepreneur can't deliver the good/service at a price that the local market will stand and achieve a reasonable standard of living from the proceeds.

Mark Wadsworth said...

RT, yes, a few will throw in the towel, but what happens to the empty shop?

"they will simply close it and move to a more lucrative location"

Where the rent and rates are even higher?

"This could happen en masse when taxes rise like this."

What, you mean some businesses will trade up (to try and make more money) and others will trade down (to reduce their rent and rates bills)?

Rich Tee said...

"what happens to the empty shop?"

It will just remain empty. Happens all the time. Plenty of high streets with empty shop units. Lots of media articles about that.

Bayard said...

"Plenty of high streets with empty shop units"

AFAIK, that is because the landlord is relieved of the responsibility of paying business rates until the shop is let again. So the most tax efficient use of a retail premises is to have it empty, or have a charity shop in it.

mombers said...

A very simple test of whether high business rates affect consumers, labour or business is to look at prices, wages or profits at high rates locations. Prices for any transportable good like anything you can buy in a supermarket, clothing store, department store, etc is identical to what you'll pay in Scunthorpe. Wages are higher in London, not lower. Profits are good enough to keep going else Oxford Street would be all closed shops. Location monopolies like restaurants, pubs and barbers are more expensive in high rates areas but people have very good alternatives in making their own meals, drinking a tin in the park, getting a haircut near home rather than near the office, etc. so there's a choice involved in paying a location premium

mombers said...

@MW, it is insane that having an empty shop, office or factory exempts it from rates. If it was similarly exempt from fire brigade protection or free eviction of squatters/prosecution of vandals, I imagine the premises insurance would rise to much more than rates...

Mark Wadsworth said...

RT, I refer you to Bayard's comment. As I said, tow of the few actual design flaws with business rates is that the occupant has to pay them, and that there are discounts for vacant and charity shops.

M, exactly, prices are fixed, volumes vary between good and bad locations, hence rents and rates vary between good and bad locations. Also, good suggestion re lifting of state protection for non-payers. We could apply that more widely to LVT in general, after all, if you don't pay your VAT, PAYE, corporation tax etc, HMRC will shut down your business.

Bayard said...

M, these days the term "outlaw" has a romantic, Wild West image to it, but in mediaeval times it meant someone from whom the protection of the law had been withdrawn, i.e. it was no longer a crime to rob or kill them.

James Higham said...

Key is in the last two lines - whilst reducing. Incentive to do that?

Dinero said...

Generally speaking do charity shops pay full rent

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Lola said...

D. Anecdotal evidence. In my town the traders I know get very annoyed with charity shops that both compete with them and pay less total accommodation costs. One shopkeeper of my acquaintance - an owner occupier - told me that she was offered a higher than average rent by a Charity wanting access to her excellent location. In other words the reduction in business rates enjoyed by the Charity was being passed straight to the landlord.

Lola said...

MW will probably know this, but here's the link to the bit of the which deal with BR relief:

Bayard said...

"In other words the reduction in business rates enjoyed by the Charity was being passed straight to the landlord."

Of course. The only question is whether this is by design (Business rate relief for charity shops was introduced purely so that landlords could let what would otherwise be an overpriced location) or accident (well-meaning bureaucrats genuinely thought that charity shops would pay the same rent as other tenants and be able to pass on the saving in overheads to their Good Cause).

Of course, this is another problem that would be largely solved if business rates were made the landowner's resposibility, but that would mean TPTB admitting that business rates were a tax and not a user charge, as they like to pretend.

Mark Wadsworth said...

B: "that would mean TPTB admitting that business rates were a tax and not a user charge, as they like to pretend."

Is LVT a tax or is it a user charge? To my mind it is a much closer to a user charge. VAT and so on are clearly taxes, not a user charge. Whether the landowner or tenant pays it, it is still a user charge/service charge, like the landlord paying for insurance or repairs to a building.

Bayard said...

By "user charge" I mean that it is pretended that BR is a payment for the services that the local authority provides. Those services are provided to the occupier of the building, not the landowner, who may well live in a totally different LA. Thus the "user charge" argument is used to justify levying the tax on the tenant, not the landlord.

Derek said...

That is basically identical to my argument for why minimum wage legislation doesn't cause unemployment in many cases. Instead it causes cuts in commercial rents. It only causes unemployment where commercial rents are too low to cut or where most firms own their own premises, mortgage-free. Hence why minimum wage levels should be set on a local basis, not a national basis.

Mark Wadsworth said...

B, a user charge is a user charge, whoever pays it.

Under some leases, the landlord pays for repairs to the building, under other leases, the tenant pays for repairs to the building. With landlord repairing leases, the rent is a bit higher than with tenant repairing leases. Repairs are a charge for services rendered.

Why is it any different with a user charge like LVT or BR? For administrative convenience it is far better if landowner pays it, but really it doesn't matter that much.

D, fair point about local minimum wage.

But it can still cause unemployment.

Employment is a variable cost, rent/rates (however high or low) are a fixed cost.

The profit maximising price-quantity level is determined by variable costs, not fixed costs.

So a business that pays not rent (owner-occupier) has the same profit maximising price-quanitity level as one that pays full rent.

A higher minimum wage increases costs (for many businesses esp. retail and hospitality) which means that businesses will shift to slightly higher prices and slightly lower quantities to maximise profits, and lower quantities = less employment.

DBC Reed said...

Higher minimum wages increase the amount of ready money people have to spend: they augment aggregate demand. Panicking Gideon Osborne intro'd his after he found everything he did to pander to private sector business led to no wage increases and therefore no economic uptick. Meanwhile in another part of the jungle, prep school economists are sticking to their mantra of cutting wages and staffing levels as the only way to make money when taking over public services free of charge in privatisation fiddles .Strikes ensue.