Tax and Fiscal Policy

Flat earth economics and the ‘Tesco tax’

In the last week or two there have been calls for taxes on large supermarkets such as Tesco. Twenty local authorities have asked the government for formal powers to tax retailers and such taxes already exist in Scotland and Northern Ireland. Let us be absolutely clear what such a tax implies – it is a form of municipal protectionism. It will damage the residents of the cities that impose it and, if all cities impose such a tax, it will have exactly the same effect as widespread tariffs imposed by nations against each other. Economists are unified against protectionism for a reason – it kills wealth creation and damages the poor.

The tax has been proposed because, apparently, when people buy products from supermarkets, less of the money circulates within the city and more is spent outside by the supermarket than when the people buy products from small shops.

Let us illustrate this by considering two towns – Hull and Carlisle. Hull is surrounded by pig farming areas and Carlisle by sheep farming areas. Both areas have a strong natural relative advantage in rearing the respective animals. Assume that, in both Hull and Carlisle, small shops buy lamb and pork from local areas because of the cost of sourcing on a non-local basis, and also assume that large shops in both towns buy pork from East Yorkshire and lamb from the Lake District. For the purposes of illustration, let’s say that an acre of land in East Yorkshire can husband 200 pigs or 100 sheep and, in the Lake District, 90 sheep can be reared on an acre or 50 pigs. In other words, East Yorkshire has a strong comparative advantage in pigs and the Lake District in sheep – though East Yorkshire is better at producing both.

If there is a Tesco established in both Carlisle and Hull, it does both areas a great favour by sourcing lamb and pork from the cheapest place. An acre under pasture in both places, with the pigs being reared in East Yorkshire and the sheep in the Lake District will yield the two shops 200 pigs and 90 sheep to share between the residents of Hull and Carlisle.

Now, let us assume that the modern-day protectionists come along and impose a tax on Tesco, purely on the ground that it is not buying local produce and let us assume that such a tax does, indeed, lead to the Tesco being replaced by local butchers who buy everything locally because the expense of setting up a national buying network is too great. From each acre of Lake District land we are now able to obtain 45 sheep and 25 pigs (or other combination as appropriate) and, from each acre of East Yorkshire land, the Hull butchers will obtain 100 pigs and 50 sheep. The total production of pigs has fallen by 75 although 5 more sheep are produced. It is impossible for the 5 sheep to be worth more than the 75 pigs given the rate at which pigs and sheep can be exchanged for each other in the production process.[1] There is a huge potential welfare loss here.

Of course, things will not work out exactly as suggested in this stylised example, but the effect will be the same. The council in Derby (one of the towns that wants the tax) will tax Tesco because it spends money on produce from Oxford (another of the towns that wants the tax) and vice versa. A classic tariff on goods going from Oxford to Derby and in the other direction would reduce trade and force people to produce things they were less efficient at producing. This proposal is slightly different because the tax will not vary with the actual amount of goods imported by Tesco from Oxford to Derby – it is merely levied because supermarkets tend to import goods from where they can be produced most efficiently. As such, the effect will be different from that of a tariff but detrimental in similar ways. The tax will raise the cost of operation for large shops and thus make it less likely that large and efficient shops that use large and efficient distribution networks will establish themselves. If the tax reduces the number of large shops, it will not help the local economy – it will simply lead the local economy to produce things less efficiently.

If the tax does not reduce the number of large shops, it simply redistributes money from shoppers in large shops to the local authority.

These proposals are essentially based on the economic reasoning of the early eighteenth century. It is assumed that it is better if we all buy locally rather than buy things from where we prefer to buy after taking into account the explicit costs and the subjective benefit of buying from a local trader. If we are all forced to buy locally (or taxed into such a decision), it reduces specialisation and trade. Instead of working as an academic, I should really be growing turnips for my own personal consumption whilst turnip farmers teach their children actuarial mathematics at home. In other words, we should all go back to a subsistence economy.

When people teach creationism in schools (or if people were to try to teach that the earth is flat) they are publicly ridiculed. However, the very same chattering classes who do the ridiculing wish to enshrine flat-earth economics into public policy.

[1] The welfare loss can be illustrated by assuming that, in East Yorkshire, 110 pigs and 45 sheep are produced. The total production of pigs has fallen by 65 and the total production of sheep is now the same.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

4 thoughts on “Flat earth economics and the ‘Tesco tax’”

  1. Posted 01/08/2014 at 13:27 | Permalink

    The other argument which is often made is that “Mom and Pop” shops mean that the profits stay ‘within the community’, rather than going to some ‘souless corporation’.

    This myth also needs dispelling, as once you factor in the lower supply and running costs (due to their greater bargaining power), and greater reliance on medium-low paid employees (typically from the local area), as opposed to owners whose profits need to be re-invested or end up being eaten up by costs, there is a good argument that the total amount taken home by local residents is actually higher per square foot than it would have been if used by an ‘independent’ retailer.

  2. Posted 01/08/2014 at 15:05 | Permalink

    When people teach creationism in schools (or if people were to try to teach that the earth is flat) they are publicly ridiculed. However, the very same chattering classes who do the ridiculing wish to enshrine flat-earth economics into public policy.

    I’ve been asking why this is for 20 years. I think this persists because “conservatives” and even “libertarians” fail to understand these basic economic concepts. They cave to crony protectionism every time it affects their own backyards.

  3. Posted 01/08/2014 at 15:41 | Permalink

    @Dominic – also, there is nothing especially good about the profits staying within the community. If I did not own a mom and pop store, I might have savings in the bank or shares in a pension fund. I then get the profits from activities that go on in other communities just as other communities get the profits from activities that go on in mine. We can simply carry on shrinking the definition of the community and ensure that all profits go to the household and that all money is spent by the household on the production of the household – essentially we can do this by returning to the lifestyle of the middle ages.

  4. Posted 04/08/2014 at 08:40 | Permalink

    Dear Professor Booth

    It is interesting to see that the tax already exists in the poorer areas of the Kingdom. Are parts of England afraid of being left ahead?

    If localism really catches on, producing local bananas, mangoes and paw-paws would be quite a challenge. Pursued to the bitter end, the transport infrastructure would fall apart and we could look forward to a return to pre-canal era localised famines. Now that is ‘localism’.

    My local town held an Independents Day* to promote its smaller shops. Around the same time a survey of shoppers showed about 70% would like to see more ‘big name’ stores in the town. We must be too prosperous here.


    * Saturday 5th July. I dare say it will fall on the 4th if they keep it up.

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