Business rates and tax incidence

It is helpful to know the incidence of different taxes. We should identify the wallet or purse that it comes from because very often this is not the one that people think it is, or the one that the legislators intended it to fall upon.

For example, since corporations are not people, they don’t pay Corporation Tax. Its incidence is on the workers, who do not receive pay increases when the money goes in tax, on the shareholders, whose shares lower in value because the tax reduces profits, and on the customers, who pay higher prices as the firm increases them to make up for the money taken by the taxman. Numerous studies have shown that the biggest losers are the employees, with estimates showing that 60 percent of Corporation Tax is paid by them.

Most people think that they pay National Insurance and that there is an employer contribution. In reality the so-called employer contribution is a wage cost, and comes out of the wage pool that would otherwise be available for wage increases. Its incidence is on the employees.

Some people argue for business rates to be frozen or lowered, thinking this will help businesses, but in fact landlords are the beneficiaries when this is done because it allows them to put up the rents. Rents and business rates are inversely proportional. Rising rates make for lower or frozen rents, and rate decreases enable landlords to increase rents.

Knowing the incidence of the tax leads to a policy initiative that could direct help to businesses rather than landlords. Business rates could be frozen or reduced for 3 years, but only for businesses whose landlords agree to a rent freeze for 3 years. The rates would not be frozen or cut unless landlords signed up for this. The effect would be to direct the benefit to the businesses, and help them as they struggle with increased costs elsewhere.

At a time when the UK needs to boost growth by having its businesses prosper, this is a policy that could help them to do that.