Quote of the day - tax incidence ain't what you think it is...

From John Cochrane's blog:

The top two things our politicians say they want to encourage are jobs and home ownership. Jobs are perhaps the most highly taxed economic activity in the economy, and by this calculation houses come in a close second

So, for all that we want jobs and homes, the tax system makes those jobs and homes more expensive. Cochrane also points out that the incidence of wealth taxes depends on the interest rate - where the level of tax equals the interest rate (or yield or whatever measure of return to property investment you're using) it's effective rate is 100%.

So it makes more sense to tax the returns rather than the sum invested (or indeed its actual, estimated or putative value) and, life being what it is, this is what we do most of the time. Now this might all seem a bit obscure but, if people respond to incentives (like the economists say) then it is the actual incidence of a tax that matters not the rate or the person who writes the cheque.

And, since I'm here and talking about taxes on property, let's talk about business rates. Any, even passing, conversation about business (and especially retail) ends up with a discussion about business rates. Just about everybody says that the tax is to varying degrees unfair, not flexible, and impeding investments. The problem is that every proposal for reform (like this one from Centre for Cities) amounts to tinkering rather than a change to the way in which businesses are taxed.

And we should remember that businesses want to pay less tax because they simply represent a cost to the business with the result that they either reduce returns (see above for why this matters), lower wages or raise prices. As Cochrane pointed out - we want jobs, business and a thriving high street but, at the same time, don't realise that the tax system reduces the incentive for people to do the things that make these investments happen.


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This year's stupidest policy proposal (in a crowded market)

It's annoying enough when a conservative policy response is to call for a new tax, even more annoying when it's as stupid as this one:

THE Chancellor is being urged to slap a 3 per cent sales tax on internet giants to help Britain’s ailing high streets.

Influential Tories are calling on Philip Hammond to fast-track a tax on the likes of Amazon, eBay and Google to “level the playing field” with UK business.

Tory rising star Neil O’Brien MP claims the move could raise as much as £500million a year. He told The Sun this money could be used to slash sky-high business rates blamed for pushing shops to the wall.

Let's get something clear here. What these 'influential Tories' are proposing is a tax that will make things we buy more expensive so we can reduce a tax on retail landlords:

In the medium to longer term, changes in rates paid appear to be reflected in corresponding adjustments in rental values. This relationship appears to be stronger for the retail sector than the office sector. However, there appears to be a significant relationship between the centrally set uniform business rate multiplier and rental values for the office sector.

Whether we should have a better way of taxing retail landlords is a different question to whether we should make consumers pay more for goods so we can reduce the apparent tax on retailers (and business in general). And that is exactly what the proposal from these 'influential Tories' will do - Amazon and eBay aren't going to absorb the new tax, it'll go straight on the cost of goods. Worse still, all those independent retailers who rely, in part, on sales through eBay, Amazon or Etzy will be the ones who take the biggest hit.

The high street is not struggling because of business rates, it's struggling because consumers have decided they rather like being able to order on-line and have it delivered to the door or the post office in the village. All dropping business rates would achieve is a delay in this decline - at the cost of higher inflation, consumer spending shifted from buying goods and services to paying a tax, and a sharp brake applied to one of the fastest growing parts of our economy. Stupid or what?

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Postcode lotteries (or why England is the most centralised large country in the world)

I don't know about you, but the term 'postcode lottery' makes my blood boil. We hear it all the time with its implication that everything should be the same everywhere or else things aren't fair. I get emails lobbying me to propose changes (usually expensive changes) because "it's a postcode lottery".

Here's a typical example:

'Our extensive new report highlights the bizarre situation where charity shops from the same chain, delivering exactly the same services and performing in exactly the same way, can get a completely different package of support in terms of rate relief and waste disposal charges simply because they are located on different sides of an authority boundary,’ said Robin Osterley, the chief executive of the Charity Retail Association.

Yes folks, these charities aren't getting the same deal from every local council because different councils exercise their discretion differently on business rates and waste collections. And therefore something should be done (by implication to make everywhere the same, to remove Council discretion).

There's a reason for much of this - national media and politics. I remember Anne Widdecombe explaining how, regardless of devolution, the national media expected a minister to appear on TV to explain why something or other was a postcode lottery (or failing, or underfunded, or inefficient). So long as this is the case, national government will tell local government what it has to do and how to do it while probably not providing 100% of the necessary resources.

I guess this explains comedian Geoff Norcott's observation (following his appearance on Question Time) that the politicians on the panel end up answering incredibly minor concerns ('dog poo in the paddling pool') that would be better addressed to the Parish Council.

My modest proposal - for when, by acclaim, you make me God Emperor for a week - is that we should ban the term 'postcode lottery' because it is helping destroy flexibility, creativity and innovation by local councils. Not that councils are all that good at this stuff (although we are massively better at it that national government) but, if councils have more discretion, people would be a lot closer to the people - elected people - making decisions about their lives.

And while we're about this business (and I'm still God Emperor) I would stop MPs having huge well-funded constituency offices full of people that go around doing things that really should be done by local councillors - and, yes, I'd devolve the benefits system, immigration administration and much else too. Frankly, we elect MPs to go down to London because we've got better things to do with our lives and, anyway, can't all fit into that fancy faux-gothic pile they've got to work in. And when those MPs have all got there, maybe they can stop fussing about postcode lotteries and let local councils get on with their job of running local services.

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The "Tesco Tax" is just a levy on food prices

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Up in Scotland, as part of the SNP's mission of nannying fussbucketry and to raise a few quid, they have dreamed up something that has been dubbed; The Tesco Tax:

The Scottish Spending Review 2011, published yesterday, says that the business rates paid by large retailers who sell tobacco and alcohol products will be increased by a supplement from 1 April 2012.

It said: "The estimated income raised from this supplement will contribute to the decisive shift in the spending review to preventative spend measures to be taken forward by local authorities and their partners in NHS and Scottish government."

Apparently this will raise £110 million over three years - which is really going to solve Scotland's financial problems! Along with minimum pricing, this represents another unwarranted, judgemental attack on the lifestyle preferences of ordinary Scots. And, worse still, it's a tax that wont just be paid by the drunken Rab C Nesbits but by teetotal, god-fearing Presbyterians as well.

By raising the cost of doing business you raise the prices that that business charges - the tax won't be paid by Tesco but by Tesco's customers. All of them not just those who smoke and drink.

That wasn't what Mr Swinney planned I'm sure!

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Before commenting on local government finance it helps to understand its basics

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Lord Palmerston once said of the Schleiswig-Holstein question:

"Only three people have ever really understood the Schleswig-Holstein business—the Prince Consort, who is dead—a German professor, who has gone mad—and I, who have forgotten all about it."

So it is with the financing of English local government where, as we all find out some tine, a little knowledge is dangerous as it leads to great ideas that are really rather silly.

Town halls should be allowed to retain between 40 and 60 per cent of business rates generated in their areas, a new report urges.

Research by think-tank the Centre for Cities claims that the measure would give local authorities a much-needed incentive to say ‘yes’ to the development needed to drive economic growth.

You see, at the moment, business rates are collected locally but aggregated centrally into a single pot (the National Non-Domestic Rates fund - NNDR). These funds are then reallocated to local councils as part of 'formula funding' - distributed according to an estimation of 'need' (don't ask, really. Don't ask) rather than on the basis of how much is raised in the particular locality.


So for every winner under such a scheme there is an equivalent loser. And it's no good saying that it will provide an incentive for "cities to develop their business base". Economic growth just doesn't work like that - it really doesn't. The activities of local councils - and the relatively small amounts (relative to the economy that is) involved in business rates - have little or no impact on business innovation, location or start-up.


And bear in mind that local councils spend that NNDR on ordinary everyday stuff like emptying bins, sweeping streets, looking after the frail elderly and protecting children (OK, they also waste a load on paying union officials, having massive climate change units and having a press office that seems to have more staff than the local rag has journalists). The NNDR isn't directed exclusively to promoting business - indeed it couldn't be since it represents roughly two-thirds of the 'formula grant' (£20bn out of about £30bn).


And since, prior to the invention of the Poll Tax, business rates were collected and spent locally (without equalisation) we know that the proposal would not:

"...fundamentally alter the way that local government in England is financed, incentivising local authorities to be far more pro-growth and pro-development". 

We know that because the reason in was centralised was because local councils used the rate as a soft way of raising money. Business didn't have a vote so business rates were raised while domestic rates were kept low (except in places like Lambeth where both rates went through the roof leading to an exodus of wealth and business from the borough).

The Centre for Cities haven't come up with a jolly whizzo scheme at all, merely a different way of distributing resources that are already being spent by local councils.

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Enterprise Zones - what a good idea, let's have them everywhere

Now don't get me wrong, I really think that the Leeds City Region Local Enterprise Partnership should choose Bradford City Centre for its Enterprise Zone. However, I would also like to say again that if we believe that lower taxes and relaxed regulation encourages growth and regeneration then we should be applying this everywhere - even in picturesque market towns like Richmond (pictured above).

The government seems set on there only being a few and, as bureaucrats love, has set about a competitive selection process setting place against place, building up political resentment and offering an advantage to one poor place over another poor place.

The Government proposed an open competition for areas who want to bid to host one of the ten remaining Enterprise Zone spots to ensure the best possible applications come forward for these unique growth opportunities.

Local enterprise partnerships, which bring together local businesses and local councils, are expected to nominate specific sites that offer the best opportunity for growth. Applicants will have to show their prospective zone has genuine potential to create the new business and jobs they need, with positive benefits across the wider economic area.

We return again to area-baseds approaches to regeneration - narrowly helpful but politically devisive. What we really need is those benefits - simpler planning rules, lower business rates and investment in super-fast braodband to apply everywhere rather than just to a few chosen places.

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Free parking and lower rates - now that might help town centres!

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New Start Magazine report on the increasing problem of a declining independent retail sector noting that:

“Vacancies have continued to increase over the last two quarters and overall shop vacancy has nearly doubled in England and Wales since the end of 2008. More than 12% of shops were empty across Great Britain between July and December last year”

Partly this reflects the impact of a very severe recession on the sector. It is not surprising that retailers struggle and especially independent retailers with low margins and little scope to reduce staffing or argue with the landlord about rent levels. The concern we should all have – a concern expressed in the Clone Towns reports – is that regardless of the cycle of growth and recession, the traditional high street is in decline. Indeed, it is already the case that many secondary centres are barely sustained by a convenience store, a building society branch and a couple of hairdressers.

It seems reasonable therefore to discuss the role of purpose of town centres and why their retail role is declining. A while ago I wrote that:

“Main Street is not simply a place of commerce – a shopping centre. Nor is it (as if in some Soviet dream) just a place for formal events and celebrations. It is a place of engagement and co-operation between merchants, consumers and “ancillary actors”. It is alive.

The driver to the success of Main Street isn’t the shop – although to hear us talk about town centres you would think that – it is the relationship we have with that place and the space it provides for the events and activities of our lives. In Bradford, when Pakistan win at cricket, hundred of fans head for the local centres. Not to shop but to share their happiness at victory.

Yet we distrust such a use for the spaces of our town centres. Many of us grumble about public drinking, about young people gathering together, about hen parties and stag dos. And we certainly dislike political campaigns and religious promotion (unless of course it’s an official and state-sanctioned occasion) – to the point of complaining about these activities.”

Simply talking about shopping misses the point – shops are there because the customers are there not the other way round. In suggesting ways forward, I argued that rather than controls, what town centres needed was programming, animation. But there is a further, practical issue illustrated by this:

“Free on-street car parking spaces in Bradford city centre look set to be scrapped.

The news was immediately condemned by traders as a further body blow in their fight to attract custom.

Only last week a study revealed that the city centre has the second highest proportion of vacant shops in the country.”

So the customer has to pay to go shopping in the town centre – something they don’t have to do out-of-town. Whether at the supermarket, in the retail park or at regional centres like Meadowhall and Trafford Park, we get to park for free. Despite this, local councils – urged on by central government – continue to promote extensions to on street parking charges, congestion charging and even the exclusion of cars from centres. Is it any surprise we go elsewhere?

But it’s worse. For all its rhetoric on supporting town centres. For all the planning policy discussions on hierarchies and sequential tests, out-of-town retailers have a significant financial advantage – the property taxes they pay are half or less than those of the town centre retailer. Our tax regime supports supermarkets. By way of illustration look at one small town – Uttoxeter:

“Town centre traders' business rates are nearly double that of Tesco – despite pulling in only half the supermarket giant's turnover.

The Post & Times revealed last week that the out-of-town chain store takes 50p of every pound spent in Uttoxeter.

But Government figures show the company's business rates are 46 per cent less than the combined total paid by shopkeepers in the centre.

Tesco forks out £386,000 each year for its Town Meadows Way site, while the 145 shopkeepers in The Maltings shopping precinct, High Street, Carter Street and Market Place stump up £714,000.”

So while we are right to look – as I suggested – at town centres as:

"1. places of performance – planned or otherwise
2. centres of culture not temples to shopping
3. a locus for excitement and discovery rather than the workaday
4. as venues for communal celebration, sharing and festivity"

…we also need to look at providing easier access including free parking and at removing the enormous tax advantage we are giving to out-of-town retailers. It would be a simple matter to drop business rates in designated town centres by 90% - and the impact would be immediate and beneficial. And local councils can remove parking charges on-street and drop car park charges straightaway - again to immediate benefit (and probably political advantage too!).

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