Tuesday, 21 February 2017

Business Rates

There has been a lot of discussion, over the last week, about Business Rates. The Tories have once more got themselves into a bit of a pickle, because they are in danger of alienating some of their small business supporters in the better off parts of the country, particularly London and the South-East. The basic issue is this. Business Rates are calculated on commercial property values, and in the better-off parts of the country, particularly London, commercial property values along with other property values have soared into an unsustainable bubble over the last decade. That means that Business Rates in these areas should rise. On the other hand, in other parts of the country, property values have stagnated or fallen, and so Business Rates in these areas are scheduled to fall. Overall, the Tories claim that the falls in Business Rates, will be larger than the rises, but it is those facing the rises, and specifically the largest rises that are complaining, and putting pressure on their Tory representatives.

Of course, the fact is that, commercial property has not been revalued for seven years. The revaluation should have been done, and the effects implemented ahead of the 2015 election, but the Tories, fearing the kind of hostility they are now encountering, deferred it to boost their election hopes. The reality is, therefore, that for the last seven years, when property values in London have soared, businesses there and elsewhere, that experienced these property bubbles have benefited compared to other parts of the country, who likewise, therefore, continued to pay too much in Business Rates. In other words, as with many more things, for example, the cost of commuter rail travel to London, the rest of the country has been subsidising already buoyant businesses in the capital.

The owners of these businesses in London, are complaining about the size of the rises they now face, of as much as 300%. But, the fact is that they know how Business Rates work, and they know that in the last seven years, at least, property values in London have been in an unsustainable bubble. They have had seven years, during which time their Business Rates were lower than they should have been, to have set aside some of their profits to cover this rise when it came, or else to have used that time to relocate their business to other parts of the country, where property values have not soared, if the question of such rates are a significant impediment to their business.

After all, that is how the capitalist market is supposed to operate. If costs rise in London to a level where firms make lower profits than in say Stoke, those businesses should relocate to Stoke, where their costs will be lower, and their profits higher. That would provide work for the people of Stoke who over the last seven years and more, have suffered from the policies of fiscal austerity that in part have been driven by the government's attempts to keep interest rates low, and to keep the property bubbles in places like London inflated. The increase in the demand for labour-power in Stoke would then increase workers wages in the area, and increase the demand for property, bringing about a rebalancing, whilst the fall in employment in London, and fall in the demand for property, would decrease London wages, burst the London property bubble, and thereby bring about an equalisation. This is the basis for the formation of a general rate of profit that drives the allocation of capital in a capitalist economy.

As this reallocation of capital, to places like Stoke, then occurs it not only raises living standards in the area, which have been decimated, as a result of the conservative policies implemented over the last thirty years, but on the back of those higher revenues for workers and businesses, it would also raise local taxes to finance the decayed infrastructure and so on that has been destroyed over that period, and which has led to the rise of reactionary forces such as UKIP and Brexit. There is then no economic rationale for the Tories collapsing, over the demands of business owners in London and other areas, where property values have soared. But, as with the situation before the 2015 election, and other issues relating to property bubbles, the reason the Tories are likely to buckle is purely political.

It isn't big businesses that are complaining about the rise in business rates. For these businesses, such taxes represent only a small part of their profits. It is the small businesses that are complaining, because the tax forms a larger part of their profits. But, that is the problem the Tories face, because they represent the interests of these small private businesses, as well as the interests of money-lending capitalists, and landlords. It is these small private capitalists that make up the core of the Tory party membership, and of its electoral base. Yet, if the Tories concede to those interests in London, it will relatively disadvantage the same social layers in the rest of the country.

Looking at the small businesses in London, either they own or rent those properties. The business owners who own the property, of course, have not complained about the huge speculative capital gains they have made in the prices of those properties over the last seven years and beyond, which have absolutely nothing to do with any effort on their part. Their is a good economic argument for encouraging such beneficiaries of these speculative capital gains to realise them by selling their properties and moving their business to some other lower cost part of the country, as described above. There is no economic argument for facilitating further such speculative gains, and allowing those business owners to benefit from them, by effectively subsidising their current Business Rate liability.

After all, the basis of the rise in those rates is not a rise in the actual tax rate itself, but is the fault of that very rise in property values. If small businesses in London want to see lower Business Rates, they should place the blame where it lies, on hugely inflated property values, and seek to burst that property bubble.

For those businesses in London that rent their premises a different set of questions arises. Firstly, high commercial property prices are a reflection of high commercial rents, because property prices are capitalised rent. But, as Ricardo and Marx described long ago, the reason there are higher differential rents in one area as opposed to another, is because the difference between commodity values and the price of production is greater in some areas than others, so that surplus profits are obtained, and landlords thereby levy a differential rent on this surplus profit. In other words, the economic conditions in London, facilitate surplus profits for businesses there, which enables landlords to levy higher differential rents, which thereby inflates property prices. There is little economic basis, let alone social justice basis, therefore, for the less well off, economically depressed parts of Britain, to subsidise London business, and London landlords, by subsidising the business rates of small businesses in the capital.

The same small businesses that are complaining about the rise in Business Rates, do not seem to have complained in the same way about the higher commercial rents they have had to pay over the last seven years, and yet one might assume that these rents are a more significant portion of their profit than is Business Rates. Higher Business rates, required to finance local services and so on, in London, would reduce the amount available to be paid out as rents to landlords, which would in turn assist in lowering London property values. There is no reason that anyone should be subsidising London landlords, who have made a killing from simply being parasites leaching off the economic activity of others.

The Tories, of course, are likely for purely political reasons to subsidise both the small businesses and landlords in London and the South-East, which again effectively means helping to keep those property bubbles inflated, and paying for it by draining surplus value from productive investment, and from the more deprived areas of the country. It is the same conservative political agenda, which over the last thirty years left large swathes of the country in a state of decay and decline, with similar conservative policies in the US and EU having the same effect that then leads to the rise of reactionary separatist and nationalist agendas and parties.

When house prices entered an unsustainable bubble, it led to the 2007-9 financial crisis. The bubble in house prices should have meant that demand for them, itself largely artificially stoked, for speculative purposes, by the Tory government in the 1980's and after, collapsed, causing a collapse in those prices. In fact, that is what happened. In parts of the US, property prices fell by around 60%, the same was true in Ireland. In Britain, house prices fell by 20% in short order – demonstrating that the high prices had nothing to do with some structural shortage of supply – and were on their way to exceeding the 40% drop they suffered in similar conditions in 1990. But, instead of allowing that collapse to proceed in order to restore some semblance of rationality to the property market, first the Labour government of Gordon Brown, slashed banks borrowing costs so that they could subsidise mortgages, and then as those money drugs wore off, after 2010, the new Tory-Liberal government, artificially boosted demand yet again with the Help To Buy scams, and so on, so as to prevent the bubble from bursting. The Tories are addicted to these property and financial bubbles, because the illusion of wealth they create is central to the fictitious wealth of those sections of the population on which they rely for their support. But, the cost of keeping those bubbles inflated is to damage actual economic growth and productive investment. Moreover, the cost of doing that has grown more and more over the years, so that it is now unsustainable.

Rents are at massively inflated levels, and yet rental yields are at record lows; dividend and bond yields are at near zero levels, and yet the amounts paid out in dividends and interest are at high levels; mortgage rates have been reduced to record low levels, and yet mortgage payments have soared, and an increasing number cannot afford to buy a house, because house prices themselves have ballooned to ridiculously high levels. In the meantime, dragged down with all of this debt, increasing numbers of people cannot get through the month without resort to high cost credit on their credit cards, or to payday lenders charging up to 4000% p.a. interest rates. This is not just unsustainable, it is way beyond unsustainable. The lesson that should have been learned over the last thirty years is that economies cannot be built upon such fictitious wealth and debt, and when this bubble inevitably bursts, the consequences will be much greater than in 2008, when that reality first broke through.

Of course, Business Rates are themselves a bad tax, just as domestic rates had been, and as Council Tax is now. They are all regressive forms of taxation, which is why, in relation to Business Rates, it is the small businesses that are complaining, not the big businesses. It would be far better to replace both Business Rates and Council Tax with a local income tax. Modern computer technology makes that quite easy to achieve.

In fact, asI wrote previously, I would also scrap Corporation Tax, and replace it with much higher taxes on dividend income, so as to encourage firms to reinvest their profits into the business rather than pay it out as dividends. I would accompany that with changes in the laws on corporate governance, so as to remove the rights of shareholders to elect company boards, and instead give that right to the workers and managers within the company. That would also deal with the question of corporate raiders simply buying up the shares of a company, and then using their control to shift production elsewhere.

And, as I also wrote some time ago, if companies are to be taxed, they should, like workers, be taxed on their sales not their profits. If workers paid income tax only on the profits they made from selling their labour-power, as companies do in paying corporation tax on their profits, then workers would pay no income tax, because they make no profit on selling their labour-power. The cost of producing their labour-power is equal to the price they obtain for it, in the form of their wages – if they are lucky!

The problem with local income taxes is that in those areas of the country where economic activity is already depressed, and where more is required to cover things such as social care, health care and so on, the tax base is also lower. That means that either the services provided in those areas are of lower quality, reducing the use value of labour in that area, and also acting as a deterrent for other inward investment, or else the rates of tax levied in such areas have to be higher, again acting as a deterrent for inward investment, and encouraging the better paid workers to also move out to lower tax areas. That was witnessed in New York, during the 1970's, for instance.

In order for such local income taxes to work properly, therefore, they have to be accompanied by forms of fiscal transfers from a central state authority, so as to create a more level playing field within the overall economy, and in order to prevent a race to the bottom in relation to taxes, and services. In fact, that is one reason that not only is Socialism In One Country a reactionary and utopian concept, but in the modern globalised world, with a world economy, and capital taking the form of huge multinational companies, even the idea of social-democracy in one country is a reactionary and utopian concept. It is why the foundation of the Eurozone was always flawed, and why the EU will have to bring about greater fiscal and monetary integration, and introduce greater fiscal transfers across the member states, so as to promote growth in economies such as Greece, Portugal, Italy and Spain.

It is also why Brexit is a thoroughly reactionary concept that will damage the interests of workers, particularly in Britain, for decades to come, if it is ever pushed through.


Postkey said...

"Rents are at massively inflated levels, . . . "

Are they?

Index of private housing rental prices IPHRP


Boffy said...

Yes, they are. Just look at the way Housing Benefit has ballooned to cover the increases.

Postkey said...

You have the statistics?