Evan Vitale Consulting: Lowering Business Rates Will Benefit Landlords, Not Retail Businesses

Friday, December 5, 2014

Lowering Business Rates Will Benefit Landlords, Not Retail Businesses – Forbes

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I’ve long been very puzzled by the campaign against business rates in the UK. Given that they’re a very close approximation to a land value tax they are a good tax. Sure, no one actually likes paying a tax but there’s going to have to be some tax and a tax on the value that society provides to a particular piece of land is a better idea than just about any other method of raising revenue. Still we could understand if there was a campaign against those who do pay a tax to have that burden lifted from them. It’s just that that’s not quite what seems to be happening. It’s retail businesses that are campaigning against business rates. But they’re not the people who carry the economic burden of that tax. It’s landlords that do so why isn’t it the landlords complaining about the tax?

This confusion seems to be widespread as well:

George Osborne is to offer the high street a lifeline in its battle against online retailers as he pledges to overhaul business rates.

The Chancellor will use his Autumn Statement to announce a review into the structure of business rates, which experts have warned are “crippling small firms” and preventing growth.

Any changes to the 400-year-old business rates system raise the prospect of prices in the shops falling as firms face less punishing charges.

He will tell voters that Britain must “stay the course” and continue the economic recovery.

Rising rates have been blamed in part for the decline of high street shopping in towns and cities as traders struggle to compete against online retailers.

No, rates are not the cause of the high streets emptying out nor would prices in the shops fall if they were lowered. Those claims come from not understanding who actually pays the tax and thus who would benefit from a reduction.

To explain: business rates are a tax upon the rental value of retail and commercial property. They are nominally paid by the lessees of such property. So, you and I decide to open a shop selling Halloween costumes for hamsters and in the three weeks we’re likely to be able to stay in business we will be responsible for paying that tax, sending in the cheque. So it certainly appears that we’re paying that tax. But we’re not, not really. The price of that lease on that shop is determined by what everyone else is willing to pay for it. Imagine that’s £100,000 a year. In the absence of business rates the rent will be £100,000 a year, as that’s what people are willing to pay. With business rates the total cost of that lease will still be £100,000 a year. Because that’s still what people are willing to pay to have a shop in that location. It’s just that that £100,000 is now divided into a lower rent that the landlord can charge plus those business rates. the rent being lower by whatever the rates bill is.

What the presence of business rates does do is reduce what the landlord can charge in rent. Effectively thus, rates are paid by the landlord. He gets less rent than he would do in the absence of rates.

So, if we change or lower rates we don’t then make things cheaper for shops. All that happens is that rents rise to cover the reduction in rates. So, this won’t help small businesses, won’t reduce prices in shops and also won’t increase growth. Rates don’t even change the balance between online and bricks and mortar retailers: for in the absence of rates the bricks and mortar guys would just be paying higher location based rents.

So it’s rather difficult to understand why there is this campaign against business rates. Unless, of course, it’s really being run by a secret cabal of landlords who want to be able to increase their rents. And while I’m a terribly cynical person I don’t think that I am actually quite that cynical. Essentially on the grounds that I tend to think that landlords as a group aren’t bright enough to pull it off.

My latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.

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