Ah, so they don’t understand tax incidence then

Some of this Labour policy on business rates is quite good. Bringing back agricultural land into the system makes great sense for example. But this is just nonsense:

In another dramatic reform, Mr Grimsey says business rates, currently charged only on premises used for business purposes – for example, shops – should also be levied to the owners of such properties even if they have nothing to do with the business.

Mr Miliband must ‘consider levying a percentage of the tax on property owners and not just the occupying business,’ he confirms.

Where you claim you are levying the tax has pretty much nothing at all to do with who is really paying it. And business rates are already a tax on landlords: they come directly out of the rent they would receive if there were not business rates.

It’s just ignorance of reality there.

5 comments on “Ah, so they don’t understand tax incidence then

  1. I was wondering recently about the incidence of the costs of Final Salary Pension schemes (at least those in outfits exposed to markets). The first thought is that they are a form of pay so that both employee’s and employer’s contributions fall on the employee. But what about what might be called the cost of the guarantee aspect? I suppose anything that might lead to increased contributions in future might be said to fall on future employees?

    Anyway, if that’s where the incidence falls, why have firms been so keen to dump them? I suspect that the root problem is the short horizon, or general dimwittedness, of many employees: they don’t view the employers’ pension contributions as truly being their own but do complain about having to make the employees’ contribution. Or maybe it’s employers’ disappointment that such schemes don’t do a good job at recruitment and retention.

    Question: are these speculations rubbish?

  2. Moving the tax from tenants (businesses) to landlords is a sensible long-term goal. There tend to be fewer landlords than companies, so it means less paperwork. Landlords usually (though not always) have deeper pockets than their tenants, so are less likely to go bankrupt owing tax. And as Tim points out, it means clearing up the tax incidence.

    Obviously what we wouldn’t want is to raise the total tax any further. Also, the transition period would need to be managed carefully, with due attention to existing tenancy contracts.

  3. There are lots of long-term leases involved here, though, which may not have clauses allowing the rent to be increased to compensate for tax increases on the landlord.

    If you’re a landlord with a 20 or 25 year lease with a lockstep RPI+1 rent revision (not untypical for a recent lease agreement) then the incidence does fall on the landlord for the duration of that contract.

    Tax incidence is a long-term fact, but may not be so in the short term.

  4. When your lease comes up for renewal (as they do), your landlord and any competing landlords will pass on the increased cost, plus something for those whose costs are not being covered by someone already.
    So if landlord gets a £1,000 per shop increase in costs but cannot yet pass on the extra cost to all shops rented out, liable to add £1500 or so on to new lease to cover both this increased cost and other increased costs.

    Who pays an increased cost is down to the person setting price, does not have to be simply passed straight on to each customer. More can be passed to some, less to others.
    Bigger companies can have deeper pockets, does not mean they can any better afford to absorb a particular increased cost than a smaller company. They still have investors, return on investment wanted, bills to pay and empty properties to cover for.

  5. Dearieme

    in the main, employees pay for the shortfalls in DB/final salary shemes. However, since BA and BT and now the Post Office have been privatised, there are in the UK massive quasi public sector schemes that neither the companies nor the current massively (down-sized) employees can afford. BA and BT are like huge investment trusts with little telcos or airlines attached but without the income to pay the pension liabilities. They are hoping for govt to make up the shortfall. But “guarantees” have been hard to solidify.

    NB BT in 1991 had 200,000 employees in the UK. It now has about 80,000.

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