It's the economic ignorance that's so painful

We seem to be approaching an Online Sales Tax. The arguments in favour of which are based on an entire ignorance of the difference between business rates and such a sales tax. Rates are a tax upon landlords. Sales taxes are a tax upon consumers. Why would we want to switch our tax collections from landlords to consumers? This doesn’t work in any moral sense and it also doesn’t work in basic theory - we desire to tax where supply is most inelastic and therefore deadweights are lowest. There’s really nothing less elastic in supply than land.

But we seem to be getting there:

The companies’ intervention follows the close of a three-month consultation on the measure, which the Treasury has said could be used to overcome an “imbalance” between tax levied on retailers online and those in high streets, by funding business rates cuts.

The Treasury states that the consultation was “exploratory” and that it has not yet made a decision on whether to introduce an online sales tax (OST).

Even the basic consideration there is wrong. Rates are not upon retailers, nor is a sales tax.

That rates are a tax upon landlords is well established. We have pointed it out before here. This is something so well established that even Demos, of all people, manage to get it right:

The economic theory suggests that the burden of business rates and commercial rents on high street businesses is relatively fixed in the long run. This is because any cut in rates leads to an increase in demand for commercial space, as it becomes more attractive and affordable to retailers. In the long-term, this higher demand means that commercial landlords are able to charge higher prices for this commercial space - i.e. an increase in rents. As a result, the long-term effect of any cut in rates is negligible for tenants, as landlords raise rents in response to any reduction in the burden of business rates.

Crucially, the theory appears to be borne out in reality too. For example, Bond et al examined the impact of changes to business rates on 3000 commercial premises in the UK. This research found that: “increases in non-domestic rates put downward pressure on rents, whilst decreases in non-domestic rates put upward pressure on rents.” In other words, the cut in business rates led to higher demand for commercial premises, meaning that landlords raised the prices (i.e. rents) paid by tenants. The empirical evidence appears to match the theory.

So, who is it that doesn’t grasp this?

However, we will continue to consider the arguments for and against an Online Sales Tax which, if introduced, would raise revenue to fund business rates reductions.

That’s the Chancellor, in a Treasury publication. Who both clearly do not understand the above. Rates are a tax upon landlords, sales taxes are a tax upon consumers. Why would we wish to increase the taxation upon consumers in order to provide tax breaks for landlords?

In the absence of some grandly nefarious plan by landlords the only reason we can think of is that the people who are designing our tax system are ignorant of tax systems. Which is a profoundly painful thing to contemplate.