One of the Conservatives’ key election pledges has been to cut business rates. In many ways, this is understandable, given the significant financial burden they represent for many small companies, especially retailers.
Despite the gross value-added from the retail sector being less than 10 per cent, retailers pay 25% of all business rates, equivalent to £7.6 billion. There is no doubt that the financial pressure has contributed to stores closing and many high streets looking desolate.
So, on the face of it, cutting business rates appears to make sense. You’d be offering relief to businesses and it would also be popular with the electorate.
But, appealing though it might seem, cutting business rates will do nothing to solve the long-term pressures facing businesses. As the Institute for Fiscal Studies explains well, business rates are paid by the owners of the land, not the businesses themselves. As there is only a limited amount of land for shops, especially in places such as central London where rents and business rates are highest, any cuts to business rates will just lead to higher rents. As a result, the burden on businesses will remain the same in the medium to long term.
Tinkering with business rates will do nothing to help struggling businesses. The next government needs to be far more ambitious in this regard and commit to scrapping business rates completely and replacing them with a land value tax.
A land value tax is an idea with an impressive historic pedigree. It was supported by such luminaries as Henry George, Adam Smith, and Milton Friedman to name just a few.