The government is consulting on a proposal for an online sales tax. The rationale for this idea is that high street shops are currently disadvantaged compared with online retailers because they pay much higher business rates. An online sales tax could be used to reduce business rates and ‘rebalance the tax system’ in the words of the Treasury’s consultation document.

The Treasury is seeking advice on such questions as which products and services could be targeted, whether such a tax should be flat rate or per delivery, or based on revenue. But does this all make any sense?

The decline of the traditional high street has long concerned policy-makers. Thirty years ago, the rise of out-of-town shopping centres was seen as the problem. Today it is the rapid growth of online retailing, which accelerated during the Covid lockdowns.

Buying products online has taken off in the UK to a greater extent than in many other countries. It’s convenient and safe, and offers a far wider range of goods and services. Its growing importance is not down to ‘unfair’ competition. Online retailers may pay lower business rates in proportion to the space they occupy, but they have other expenses which conventional retailers don’t, such as sophisticated computing systems, 24/7 staffing of warehouses and complex delivery networks (with VAT already being charged on most deliveries, incidentally).

It is clear from the Treasury document that an online sales tax would require a completely new administrative system for government tax collection, and substantial data collection and other compliance costs for businesses. There are all sorts of boundary questions, for instance over click-and-collect sales, orders placed by phone or email, goods which are delivered over national frontiers, and even takeaway food deliveries. There are of course also potential opportunities for fraud, as the Treasury document notes.

Depending on the coverage of the tax, a 2% levy on online sales could be expected to bring in £1-£2 billion per year, which means it could only lead to a small reduction in business rates, currently bringing in about £25 billion.

Given the extent of competition in today’s retailing sector, the costs of the online sales tax (and the administration costs incurred by businesses) would be passed on to consumers, who have arguably received quite enough hits in terms of higher prices recently.

A minor point is that the Treasury is clear that the tax would have to be UK-wide – but as business rates are devolved, the proceeds of the tax could only be used to reduce rates in England, while the rest of the revenue would go to the devolved administrations as block grants which could be used for any purpose they chose. So Scottish, Welsh and Northern Ireland’s high streets might receive no benefit.

But there are more fundamental issues. Reductions in business rates will not permanently improve the prospects of high street retailers which rent their premises. In the short run, lower rates offer some relief. But in the long run rents will rise as the ability of retailers to pay is enhanced. Economic theory and empirical evidence show that the incidence of business rates falls on property owners: conversely they, rather than most high street retailers, would be the ultimate beneficiaries of rates reductions.

Another point is that there is no simple dichotomy between high street and online retailers. Increasingly businesses with a traditional base in the high street are branching out into online sales, while some online specialists are taking high street premises to give them greater visibility. This raises the prospect of many firms paying a new tax to reduce an old one, with no net gain but with added administrative costs.

It has been suggested that online sales below a threshold (perhaps £1 million) should be exempt from the tax, given the administrative hassles involved. But such a threshold would probably bring about a ‘cliff edge’ effect, where smaller businesses are deterred from expanding because of the extra costs involved, both in paying the tax and setting up the systems necessary to do so. It would also raise problems with business models based on franchising, where an individual franchisee might fall below the payment threshold, even though the total franchise has many millions of customers.

An online sales tax would send out a signal that innovations which benefit consumers, as online retailing clearly has done, are somehow suspect and problematic. It would be complicated and expensive to administer, would  raise a relatively trivial amount of money, and would do little to help ailing high street businesses.

There may indeed be a real problem with run-down high streets, with boarded up premises and a proliferation of dreary charity shops. But government can’t restore shopping habits which have changed. It can, however make it much easier than it is at the moment to repurpose high street buildings.

This may involve reducing planning restrictions to allow retail space being turned into housing, craft workshops, gyms and other uses rather than being left vacant. Central government and local authorities might usefully relocate key services to former retail space. If footfall can be increased by such measures, some old-style retailing might yet survive. But taxing newer ways of conducting business cannot be the answer.