Tax and Fiscal Policy

For our high streets, there will be no “return to normal” any time soon


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Economists have always had a soft spot for Henry George, the 19th century American author of Progress and Poverty, who argued for what we now call a ‘single tax’ on land value.

They recognise that the income accruing to owners of land – rent – is a scarcity payment which does not correspond to payment for effort. It can in principle be taxed without distorting economic activity – unlike, say, income. High marginal rates of income tax can discourage people from working and lead to less output being produced. By contrast, a tax which focuses on rental value reduces the income of landowners but does not deter production. ‘Single taxers’ tend to argue that a land value tax (LVT) could replace all other taxes.

The Liberal Democrats don’t go this far, but they have argued it could replace business rates. There is some sense in this. OK, shops, offices, bars and restaurants do impose some costs on the rest of us which ought to be reflected in the prices of their goods and services. Collection of waste is one which could in principle be fully privatised although others such as lighting, street cleaning and policing are likely to remain local or national government responsibilities. But businesses should face charges for these services based on the real costs their activities impose on the community, not, as at present, on the notional rental value of the property they occupy (with various complicating and distorting exceptions of course, like far too many taxes).

Economists argue that business rates are ‘really’ paid by owners of property freeholds anyway. If a business is to be profitable, given its production costs and the willingness of consumers to pay for its services, there is a maximum amount it can afford to pay for using a site. If part of that cost is paid to the government in rates, less can be paid in rent.

This leads economists to be lukewarm towards the pleas of up-against-it shopkeepers and restaurant owners to reduce business rates. They advise governments that measures like this only offer short-term relief as rents would rise in the medium term and businesses would be no better off. Taxes would have to rise somewhere else to compensate, and these taxes would likely be more damaging than the rates they replaced.

You cannot fault the logic, but it does assume that the economy is in some sort of equilibrium, where nothing else changes when a reduction in business rates occurs.

Today, however, we are in a very strange new world. Equilibrium, if you accept that notion, has irreversibly shifted. Our high streets, already greatly threatened, now face wipeout. Whenever lockdown is lifted, we will see that most high street businesses are economically unviable under conditions of social distancing, which I expect to continue – whether backed by law or not – for years.

Footfall in shops will be far lower than before lockdown, and anyway people have got used to buying many more things online. As for bars, restaurants and the wider hospitality industry, some calculations suggest that social distancing could reduce the safe capacity of venues by as much as three-quarters.

Adding to the sector’s woes, survey data suggest that people are going to be far less willing to eat out, or go to pubs, or attend the cinema than they have been in the past. We are not easily going to return to what we have come to consider normal ways of spending leisure time and socialising.

Businesses will be collapsing on an unprecedented scale, and unemployment will rise sharply unless the Job Retention Scheme continues indefinitely – a pointless policy if there are never going to be jobs to return to in many service sectors.

In these circumstances scrapping or at least dramatically reducing business rates may allow some outfits a breathing space to restructure and rethink their business models. Those whose tenancies are due for renewal would surely find that landlords are in no position to raise rents to offset the cuts in business rates in line with economists’ theoretically-based predictions: their property’s value has fallen dramatically and will not recover for the foreseeable future.

Apart from extending life support to current occupiers of high street space, scrapping rates may reduce local authority incentives to oppose repurposing of high street premises, something for which I have argued elsewhere.

If I am right in assuming that little of the old high street can survive, urban space must not lie idle but be converted for new types of business or housing.

I have every faith that allowing the free market to function will eventually restore a prosperous economy, but this is probably going to take years. In looking for ways to speed our recovery, we should not ignore the role of business rates. This has been recognised to some extent by the government: the Chancellor has granted a ‘business rates holiday’ for this year. But perhaps he should go further and scrap the current business rates system completely. The Liberal Democrat proposals – involving a commercial landowner levy based on the value of land only, regardless of the buildings erected on it – offer one alternative. There are others.

 

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.


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