The "Tesco Tax"

In Newsnet Scotland yesterday there was an article about what has been dubbed the "Tesco Tax" ... a proposal that very large businesses should pay tax at a greater rate.

The tax in question is the poundage on non-domestic rates, something which we in Wales usually call the multiplier. And it appears that a lot of fuss is being made over a difference of only 0.7%. I don't what to concentrate on the detail of that proposal, but instead want to look at the broader issue of how we tax businesses.


I think it is very broadly accepted that personal taxation should not be at a flat rate. We expect those with greater incomes not simply to pay tax on it at a flat rate, but that the rate of tax they pay should progressively increase. In the UK we achieve this with different tax bands that kick in at different thresholds. Those with low taxable income pay nothing, we then used to have a starter band at 10p in the pound, a basic rate, a higher rate, and now a top rate. In the not too distant past (ignoring special circumstances such as war) the very top rate of tax was 83% in 1974, and unearned income was subject to a further surcharge. 750,000 people paid this top rate in 1974.

Now of course we can argue about whether such levels of tax are fair or not. It is a political question, and indeed cannot be taken in isolation from the rest of the basket of taxes. But across all parties we accept that it is not sufficient to simply charge a flat rate of income tax.


The question I want to ask is why we shouldn't do the same with business taxes. Why shouldn't a company that makes very large profits be charged tax on them at a higher rate than companies that make more average profits?

As it happens, Islwyn Ffowc Elis alluded to this in Wythnos yng Nghymru Fydd, a novel in which he gave a couple of different visions of a future Wales. In one of these he said that the taxation regime was such that it was usually easy and profitable to set up a small business, but taxation increased with the second business and increased again so as to make it almost impossible for people to own three. Of course in a novel there's no need to be too precise about the details, and I doubt that the scale of what he proposed is realistic, but I have to say I can see some major advantages in making adjustments to the way we tax businesses.

If we look at our High Streets, they are dominated by shops and banks that have virtually identical premises on every other High Street on this island. If we look beyond the High Street, we see huge out of town developments that have killed off the High Streets of many towns.

Now of course it's good that we already give help to small businesses, but we do very little to distinguish between the middle ground, the large, and the very large. This allows (and probably encourages) big companies to grow bigger, often by predatory means, leaving us with only a handful of large players who then need to be regulated and in fact become very difficult to regulate effectively. I believe that there is room to use the way we tax businesses to progressively tax company profits so as to encourage small businesses to grow, but discourage large businesses from becoming too dominant.

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siorsyn said...

I fail to see why you fail to see the benefits of land tax. For example, Tesco owns huge land banks. It could not own these if the tax on their ownership was so onerous as to make it uneconomic. What if, like Islwyn, tax increased not with each business started, but with each piece of land owned. Tesco's land would have to be released for more economically efficient use, including to its competitors.

You have to remember as well that when income tax was introduced it included income now referred to as capital gains eg from land and shares. In the US, the whole idea of this was to capture the profit from economic rent, because most of the highest earners earned their money from real estate and stock market speculation. Sound familiar?

Also, businesses ARE taxed progressively to a certain degree, because income tax, ultimately, is a payroll tax and falls on the business, not the individual, under PAYE.

Absolutely, highest earners should pay more, as a percentage, but without land tax and monetary reform, they are the ones who will also gain most from the unearned increment in land values, which currently largely offset the tax on their incomes.

MH said...

I don't "fail to see" the value of land tax, if you mean LVT, Siorsyn. It would be useful in certain circumstances, particularly with underused brownfield sites. But it would be counterproductive in other circumstances, because it would encourage over-development.

To illustrate that, all you need to do is substitute "a farmer's land" for "Tesco's land" in your comment. LVT would tend to encourage the development of every bit of greenfield land, or every building plot in a historical town or village, which someone could make a profit from developing or redeveloping.

I would also say that PAYE is most definitely not a tax on businesses, it is simply the most convenient and effective way of making sure people pay the income tax (and NI) they owe.

As for paying tax on the unearned increment in land values, I agree that people should be taxed on this. But LVT is not the only way of doing it. It could force proverbial little old ladies out of their homes simply as a result of the rise in land values around them increasing the value of the land on which their house is built. Capital gains tax at the point of sale is one way of doing it, or it could be paid at death.

siorsyn said...

First of all, let us not forget that LVT is not proposed as the answer to all our issues. It would not exist in a vacuum where there were no other rules, regulations, or even other taxes.

Income tax IS a tax on production, this is very very basic economics. An employee will want £x in his pocket net of tax. For the employer the cost is £x + tax = more than £x. It is a tax on production. Not complex.

Ah, the little old lady is wheeled out again. Why SHOULD she stay in her mansion? Seriously? Why? And if retaining the current tax laws that reduce millions to poverty, increase the wealth gap, make our economy uncompetitive and inefficient is preferable to asking a tiny number of people to downsize in their old age, perhaps we could compromise by rolling the tax up to be paid from the estate on death. Not that I would support such a move.

I think you have misunderstood the mechanics of lvt. Why do you think farmers would just build on their land? And, erm, isn't that happening now? What about the million empty properties that would be bought into economic use? LVT would not lead to overdevelopment, rather it would lead to a significant reduction in urban sprawl.

You are concentrating on minutiae and missing the bigger picture. You can't apply lvt in some areas and not others. It is not just a means of raising revenue but a means of transforming the economy. We still have landlords in this country. They're called banks, and we are in the mess we are in because they allocate their capital into the economy as debt secured against land to capture economic rent. Until this problem is dealt with we will have land based booms and busts. We also need monetary reform, but monetary reform alone would still leave the economic rent available to be privatised.

As for council tax, this is just not an efficient way. Why would you want to use a less efficient means of collecting tax? CGT is transactional (avoid the tax by avoiding the transaction), and you are again not understanding the economics behind lvt. CGT also captures improvements. LVT is based on the unimproved value of land.

LVT could fund the capital expenditure projects that are now being shelved because the Assembly has not received the money; LVT would mean that homes are affordable for young people; LVT would mean the removable of Rachmanesque landlords and amateur landlords by taxing the public wealth they're speculating on; LVT would make our labour force competitive and our exports competitive; lvt would take large swathes of the population out of income tax, council tax, VAT, or whatever tax we choose should be offset; lvt would mean that the UKUncut protests would be unnecessary because no individual or corporation can take their piece of land and move it to the Cayman islands,so the cost of assessing and collecting it could be reduced, and the avoidance eliminated; lvt would mean people did not speculate on the property market which would give huge liquidity to be invested in wealth creating activities and businesses rather than wealth draining land debt.

I think you should not see LVT, and assess LVT, as another tax. It is rather an economic philosophy. I would urge you as well, when considering what you perceive as its drawbacks to put them on a piece of paper next to the drawbacks inherent in our current system. I disagree with you on a number of these drawbacks but I don't deny there would be hurdles to overcome. My belief is that they are worth overcoming and pale into insignificance next to the unholy mess that is our current tax system.

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