The UK’s property taxes expose the failings of the political class

It seems a fair and reasonable contention that if we are ruled by the ignorant then we are going to be ruled badly. An acquaintance with reality would seem to be a useful attribute for anyone making the rules by which others must live.

This is not a left or right issue, since surely even the most determined planner would agree that the whole system works better when the brightest and best-informed people are those doing the planning.

The question then becomes: do we end up with the best informed as our rulers? The answer, unfortunately, is we do not. The planning delusion, therefore, moves on from the socialist calculation problem to something that simply does not work under any circumstances.

Since we find ourselves subject to rule at the hands of the ignorant, our rulers should be allowed as little control as possible over what we may do. Laissez-faire is justified not on moral or efficiency grounds but through the lack of knowledge of the planners.

This is borne out visibly through the continuing discussion over business rates – that is, property tax on commercial sites. Internet retailing is now some 20 per cent of the UK market, with nearly 20 per cent of the retail property estate sitting empty.

Since there is a significant tax upon retail property, according to the current logic, we should seek to ease that tax burden in order to boost physical retailing.

We even have a Commons select committee report on this point – a report which fails at the first hurdle. It does not grasp the most basic point about business rates. It fails to realise that the incidence of tax is upon the landlords, not the tenants – so everything said after that slack jaw ignorance fails.

Tax incidence is something about which anyone wishing to reform the tax system must know their stuff. Since rugby is a ball game, we must first assume the existence of a ball. Otherwise, no progress can be made.

The technical point that must be understood is that the person handing over the cheque is not necessarily the person bearing the economic burden of the tax.

The pub sends its VAT to the Treasury, as the brewer sends their beer duty, but it is us sipping away who really pay the tax. Our employer hands over the PAYE but it is our pay cheque that is affected by its existence.

Equally, business rates are taken from the landlord, not the tenant. This is well known. The intuition is that there is a certain value to a certain location. A scarcity value to a place with high footfall. That is what a potential tenant is willing to pay and that’s that.

The fact that the price is split between the taxman and the landlord makes no difference to how much the tenant will pay. So, whether we do or do not split it, the total amount paid will be the same.

On the other side of the equation, the amount of tax paid by the landlord is directly related to the amount of tax we charge them. It makes little difference who is handing over the cheque. The incidence of business rates is upon landlords, in reduced rents, not upon tenants.

We even have proof of this. When enterprise zones were granted rates exemptions, rents inside them promptly rose. Various other papers demonstrate this point comprehensively.

Yet the committee report insists that rates are that burden on tenants and that if we changed the system of taxation, we would alleviate that burden. Quite simply, this is not true. Such a statement can only be the result of purblind ignorance.

Of course, as is the way with British politics, things only get worse. One of the proposed solutions is that we should have a land value tax, instead of business rates. Proponents of this course of action aver that this would shift the incidence of the tax to the landlords.

No, it would not, because that is where the incidence already is. Plus, business rates are already very similar to a land value tax (although not exactly, as they are on the building as well as the land itself).

The argument in favour of having people make the rules for us is that they know more than we do, so they will be able to make wiser decisions. However, upon closer examination, we find a vast array of examples of mind-boggling stupidity, driven by an ignorance of simple realities. Clearly, we are not being ruled well.

Yes, we do need to have a government. We therefore also need a taxation system to pay for said government. But given the skull-crushing dimness of those who would rule, we are best off asking them to do the bare minimum.

It’s in all of our interests not to ask them to take on any complicated tasks, like walking and chewing gum at the same time. Or, as we saw a few years back, to outwit a bacon sandwich.

Written by Tim Worstall

Tim Worstall is a Senior Fellow of the Adam Smith Institute and author of The No Breakfast Fallacy.
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