Well, yes, obviously

“In the short run, the changes are likely to benefit people who rent property, because they have rent contracts, and you cannot increase rents overnight,” she says.

“But in the long run, we can expect a lot of that [change] to be capitalised into the value of the underlying properties.”

The incidence of business rates is upon landlords. So, cut them and the landlords benefit.

34 thoughts on “Well, yes, obviously”

  1. Unfortunately it isn’t obvious to most is it Tim. The Tax Justice Network still thinks it “gave you a kicking” over the incidence of CT.

  2. Will the reduction apply to empty property? At the moment it’s possible for start-ups to get short-term rents for peanuts, because the landlord doesn’t want to be left with the rates bill. Cut business rates and you might get more empty properties.

  3. ‘Mr Osborne funded the policy by capping debt interest payments, used by larger firms to cut their corporation tax bills, to 30pc of earnings.’

    So companies can’t pay interest dept if it exceeds 30pc of earnings? Or is it only deductible up to 30pc of earnings?

    ‘used by larger firms to cut their corporation tax bills’

    Used by EVERY company to reduce their taxes. Cos costs are deducted from revenue to get profit.

    Is this going to reduce ‘larger firm’ borrowing, if they can’t deduct costs?

    And what’s this ‘larger firm’ crap? Every company deducts costs from profit. If you say ‘larger,’ do the people think, “Oh, well, that’s okay. Kicking them in the nuts is okay.” Is this Telegraph wankery?

  4. People who rent will likely have an increase in rent next year due to the change in how mortgage interest is treated. Increased tax payments by landlords – where will the tax incidence fall?

  5. Martin Davies,

    On residential rents the extra tax raised comes directly from tenants’ pockets – where else could it come from? Landlords might lose out a bit in the short term, while the market adjusts to the new circumstances; but in the long term it’s always the tenant who pays.

    The net effect of the residential lettings tax changes will be more landlords quitting the business and fewer new entrants: according to the law of supply & demand this means rents will rise.

  6. It’s always the end user who pays in the, um, end. Because they are the source of the revenues from which taxes are paid. So all this discussion of incidence is a bit disingenuous, I think.

    It’s like fizzy drinks. You can’t tax “the corporations” for putting sugar in drinks; you will always end up taxing the consumers for wanting sugary drinks.

    The same surely applies to rents. Regardless of Ricardo.

  7. “The incidence of business rates is upon landlords”

    Err… no. The business rates on my shop are paid by the occupiers of my shop, my tenants, not by me. Business rates are a tax on the *business* that occupies a property, not the owner of a property.

  8. Ian B, Tax incidence isn’t a question of where the money comes from, but who ends up worse off as a consequence of the tax. In the case of business rates, it is predominantly the landlord who ends up worse off.

    Andrew M, to answer your first question, it could also come from the landlords’ pockets.

  9. Ian B, I’m not really sure what you’re on about, but my instinct is to say no, as the key factor is supply and demand, not corn.

  10. It’s the Ricardian idea that you can tax rentiers without it affecting rents. That is, that rents are not subject to supply and demand but objectively calculable from the productivity of the land. In corn.

  11. Ian B: “It’s the Ricardian idea that you can tax rentiers without it affecting rents”

    That is true.

    “That is, that rents are not subject to supply and demand”

    The first part is true precisely because rents are subject to supply and demand, not because they aren’t.

    “but objectively calculable from the productivity of the land. In corn.”

    That isn’t true, but I suspect that is a misrepresentation on your part, rather than being a legitimate reflection of anybody else’s position.

  12. Given that @jgh seems to think that if you give planning permission for 200 houses instead of 100 the price of each house should halve, we can safely say that he (or she) doesn’t have a very secure grasp of economics, as further evidenced by the post above about the incidence of business rates.

  13. Paul, that was the basis of Ricardo’s theory of rents. The rent on land is difference between its production and that of a “marginal plot” (one which has no surplus).

    If a marginal plot produces one unit of corn, enough for the tenant to just subsist upon, and your plot produces three units, your rent is two units of corn. Corn being “any food”.

    Hence Ricardo’s conclusion that rentiers inescapably get all the surplus in society, and nobody else can ever hope to prosper above subsistence.

  14. @Jim I don’t say it should halve, I say that classical supply & demand economics say it should halve, observation says that it doesn’t, and based on that observation, planning policy should not be based on the assumption that it does.

  15. And the incidence of business rates is on the business’s customers – where else does a business get its income from with which to pay its outgoings?

  16. I’ve just decided to not waste time clarifying comments in response to snippy, non-specific replies.

  17. And the incidence of business rates is on the business’s customers – where else

    Well, if it has little pricing power (say, selling a product that is not immediately required and is also available on Amazon), it may meet increased outgoings by putting pressure on employee’s wages, or on owner / shareholder returns. Wage pressure could be seen as requiring more hours without an increase, direct pay cuts or reductions in benefits or working conditions. The reduced return to capital should be fairly obvious.

  18. So, jgh, you think that if business rates increase, the costs will be passed directly to customers, with no impact to anybody else. I think your understanding of supply and demand is a little flawed.

  19. Andrew M: “The net effect of the residential lettings tax changes will be more landlords quitting the business and fewer new entrants: according to the law of supply & demand this means rents will rise.”

    That only addresses the supply side. If fewer premises are available to rent, then presumably, more will be owner occupied, which will mean fewer people looking to rent, which will mean reduced demand. If both supply and demand fall, then, in the absence of more information, you can’t predict what will happen to prices.

  20. Whilst one would concede your point, Paul, in practice jgh isn’t far off for real world.
    There tend to be two types of businesses. Those with healthy margins who are able to screw their customers. So they just screw them some more. And those with tight margins. Who haven’t any slack, so have to pass on to the customers or go out of business. Whereupon they lose customers &go out of business

  21. Bloke in Spain, your argument had some problems on both cases.

    In the first case, if a business has capacity to screw its customers, why wouldn’t they be doing it already?

    In the second case, if the business can’t pass the cost on and can’t absorb it, the impact of the tax has to fall on the landlord. The landlord has a clear choice – restrict rents, or force the business to the wall. If the landlord chooses the second option, and the landlord is unable to rent the property out to a new tenant, the landlord has clearly made a bad choice. On the other hand, if the landlord were able to rent the property out, it would be an economically superior outcome, as it would by implication be occupied be a more productive business than was there before. However, that outcome requires that the landlord was previously charging a rent materially less than the market would bear, which I don’t think is likely in many cases.

  22. “Paul, that was the basis of Ricardo’s theory of rents. The rent on land is difference between its production and that of a “marginal plot” (one which has no surplus).”

    Are you talking about the Law of Rent?

    “The Law of Rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital.”

    “Marginal” doesn’t mean “no surplus” or “bare subsistence”, it means the best a farmer can get without having to pay rent – e.g. by bringing uncultivated land into production. The point is that the rentier can’t charge more than this, because otherwise it would pay better for farmers to go elsewhere.

    Wikipedia also says: “Ricardian rent should not be confused with contract rent, which is the “actual payments tenants make for use of the properties of others.” (Barlow 1986). Rather, the Law of Rent refers to the economic return that land should accrue for its use in production.”

    Isn’t Tim talking about contract rent?

    If I understand what you’re saying, I think the point is that by taxing all land uniformly, you raise the costs of both rented and marginal land equally, so renters cannot escape the high costs by moving elsewhere. They would still have to pay the tax even if they moved.

    However, that only works if there are no rent-free alternatives to renting. In the case of business premises, the most obvious alternative is to own your own premises. It has certain disadvantages of its own, so there’s a trade-off to be struck between renting or owning.

    If renting becomes cheaper, because of a reduction in taxes, the balance of advantage shifts, and more businesses will want to rent, raising demand, and allowing rentiers to raise rents until the demand falls again to match supply.

    As Wikipedia puts it: “In contrast to Malthus’s hypothesis of overpopulation, Ricardo explains mass poverty using deductive logic by noting that when there is no rent-free land, subsistence becomes the effective margin of production. Landlords will not charge more than this amount because it would entail no production at all, and thus no rent.”

    I guess this is what you were referring to? But it only applies when there’s no alternative to renting.

  23. @jgh

    A rational landlord rents his shop out for the market price.

    A rational shopkeeper pays the market price to rent his shop. However, for the shopkeeper that price includes his rates. There is an amount he’s willing and able to pay for his premises, and he doesn’t care whether it’s going to the landlord or the council.

    If the rates change, the amount he has available to spend on his premises does not.. hence the return to the landlord, over time, will adjust.

    If the shopkeeper could afford to pay more, then the landlord would already be charging it. If the shopkeepers customers could afford to pay more, then the shopkeeper would already be charging it.

    Do you really think all this works on a ‘cost plus’ basis?

    Imagine you own two shops. They’re identical… Across the road from each other, but in two different areas for business rates purposes. One pays £100 per year in rates, and is let out to a successful shopkeeper who makes £1m a year from his fine widget store. The other shop pays £1000 a year rates, and is let out to an unsuccessful shopkeeper who’s inferior widget store only allows him enough surplus to subsist.

    What’s the difference in rent between the two shops?

  24. So Much For Subtlety

    Eddie Jones could hardly have asked for a better start to his English coaching job.

    If not the coach, I wonder what could have made for such a difference from the team last year?

  25. @Paul
    The number of voids in the UK’s commercial property would tend to indicate the latter

  26. NIV-

    The farmers Ricardo was considering couldn’t (in practice) “go elsewhere”, he was studying the tenant farmer model of his time. The marginal plot was that plot which was just productive enough to feed a tenant farmer, at subsistence.

    Ricardo admitted that he had trouble defining precisely what amount of production counts as subsistence without surplus, it being somewhat a matter of convention but that nonetheless was his theory.

  27. As to the general point about incidence, to throw Paul’s logic back, if the tenant can force the landlord to lower his rent, why hasn’t he done so already?

    “I was happy to pay over the odds till my costs went up, now I’m not”.

    If the tenant could find an equivalent property at a lower price, why didn’t he already move there? Sure, he can find an inferior property at a lower price, but then he’s paying the tax by moving to lower quality premises (which may be due to facilities, or location, etc, any of which are going to affect his income negatively, the same as passing on the cost to the customer).

    See the problem?

  28. @Bloke in Spain

    If that indicates that there is already a tendency for landlords to set rents higher than the market will bear and thereby end up getting no rent at all, it does quite effectively put paid to the notion that any increased cost of renting can be passed on to the tenant with no impact on the landlord.

  29. @Ian B
    You seem obsessed about Ricardo’s theories about agricultural land, but today agricultural land is valued comparatively cheaply.So leave out the corn(y) jokes. There is no denying Ricardo’s relevance to today: that land rent captures profits. Tax land values and rents go down (as Martin Wolf more or less said after the Budget though he was talking about house prices/rents which are so huge nobody can see them any more).

  30. Jgh

    “I say that classical supply & demand economics say it should halve”

    Why do you think it does? Even if you used a very simple, GCSE-level model with straight lines for supply and demand, that’s not the effect that you’d get. Try it.

    Moreover, you are presumably aware that (neo)classical economics has a concept of elasticity, and that response to changes must depend on elasticity?

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