by Olivia Hanks
I’m writing this because I’m unhappy about small businesses not paying tax.
Yes, you read that right.
We all know about the coffee chains and technology giants that are siphoning off society’s wealth and making no contribution; I’m talking about the small, local businesses that are the real lifeblood of every town’s economy.
It’s not their fault: it’s the law. George Osborne’s 2016 budget last Wednesday included the announcement that businesses with a rateable value (estimated market rent) of less than £15,000 will no longer pay business rates.
Unsurprisingly, the new rules were welcomed by small businesses. However, as with so many of this government’s policies, the picture looks rather different on closer inspection.
Until 2012, income from business rates went into a central pool to be distributed among local authorities. Councils now retain a proportion of rates raised in their area; by 2020, it will be 100%. At the same time, the funding councils receive from central government will be withdrawn. This was already a disastrous policy, leaving deprived areas to deteriorate further and locking councils into the pursuit of economic growth at all costs. Now, however, the new exemptions will slash business rates receipts by about £7bn – more than a quarter of the total.
A local authority’s decisions will be predicated, directly or indirectly, on the need to please big business, rather than to support the local economy.
Not only will this require councils to make even more cuts to public services, it will force them to favour large corporations over small local businesses, since only the former will provide them with any income. A local authority’s decisions will be predicated, directly or indirectly, on the need to please big business, rather than to support the local economy. No new Tesco? No more bin collections. A law that appears designed to please small entrepreneurs is more likely to force them out of business, as the clout of big corporations grows still greater.
Even in the short term, the advantages for small businesses may be illusory. The Institute for Fiscal Studies has pointed out that reductions in businesses’ tax bills are likely to lead to higher rents for business premises, as tenants will be able to afford to pay more. The real transfer of wealth, then, does not even involve small businesses: the legislation takes money from local government coffers and gives it to landlords. This is starting to look more like the Osborne we have come to know.
Business rates are not a useful tax. They disproportionately hit small businesses, and they tax the use of property rather than the land it stands on, which offers a perverse incentive to landowners to leave land vacant. Economists of all stripes agree they should be replaced by a land value tax (LVT): free-market advocates like the Institute of Economic Affairs favour the LVT because it doesn’t skew the market or discourage economic activity, while radical economists see it as key to creating a more equal society, since land is the principal form of unearned wealth. However, the power of landowners has meant politicians are unwilling to implement an LVT; so instead of bringing in proper reforms, Osborne continues to tinker with the system in whatever way he thinks will keep Tory voters on board – in this case, small business owners who have been duped into believing rates exemptions will really benefit them.
It is much easier for a hostile government to dismiss the views of those who do not contribute through income tax.
The income tax personal allowance, which has been going up more rapidly since the Conservatives returned to government and now stands at £11,000, is another taxation policy that benefits ‘the little people’ less than you might think. Taxation is part of the social contract: we all contribute and we all benefit. Those who do not contribute – and there are a lot of them: the IFS reports that 43% of UK adults do not earn enough to pay income tax – have less of a stake in society. It is much easier for a hostile government to dismiss the views of those who do not contribute through income tax. When low earners pay nothing through this system (though of course they still contribute, disproportionately, through other taxes such as VAT), it allows the government to justify laws that penalise them, like the outrageous and nonsensical proposal to deport non-EU nationals who earn less than £35,000.
We must stop seeing taxation as an evil, and embrace it as a key part of any functioning society. Yes, our tax system is too regressive and needs significant reform. But while business rates exist, the case for exemptions is far from clear; and the much-trumpeted Tory policy of taking low earners and small businesses “out of tax” just sounds too much like taking them out of the equation.