The tax twilight zone

It's not often that a newspaper article generates absolute disbelief (although sometimes irritation or disagreement with one or two aspects). But the articles in today's Scotsman and Herald (among others) alleging that an "£850 million" increase in business rates revenue is a tax increase (or tax bombshell) are pretty much twilight zone stuff. The £850 million figure is in itself wrong, the product of double and triple counting (an approach that was much derided when it became the tactic of choice of Gordon Brown to over-inflate his spending promises - it is a practice that rightly fell into disrepute). But that is not my main beef.

The articles are based on an analysis by the Centre for Public Policy for the Regions (who should know better - this is really rookie stuff). The Scotsman piece also has quotes from two business organisations, both of whom should also know better - but of course both may have been quoted out of context.

So let me explain why the articles are wrong.

First, if you have 1000 businesses paying £1000 each in business tax, you have revenue of £1,000,000. If over time you have new businesses starting up (perhaps because of the most competitive business rates relief package in the UK) and you then have 110 businesses paying £1000 each, the total tax take becomes £1,100,000. That is a 10% increase in tax revenue, but it is not a tax increase on business because those same businesses are all still paying that self-same £1000 each. This is what is referred to as buoyancy. It means more businesses (and presumably more jobs) and is a good thing.

Second, when the government publishes its estimate for business rates revenue it factors in the possibility that some businesses will appeal against their valuation. At the start of a new valuation period that estimate is based on few real cases and few appeal results. But again, over time, actual results come in and the estimate becomes more and more accurate. So again, as illustration, taking the 1000 businesses with their £1000 tax bill. The government might estimate that 200 will appeal and 50% of them will be successful. However, in reality only 100 of them do appeal and only 50 of these are successful. That difference results in 5% more revenue than anticipated. So revenues are higher, but the tax rate for business is not increased. Those who appealed are paying what is independently assessed as the correct and fair tax rate for their business.

These two elements (along with inflation) form the bulk of the extra £500 million revenue raised. It is revenue, therefore, that reflects buoyancy (new businesses), which is good,  and the appeals results, which are independent and widely regarded as fair.

None of this might generate a good headline, but it is the reality. This is not rocket science and the leading figures at the CPPR, when they worked for Jack McConnell and Wendy Alexander, must have gained this basic understanding of how the system works.

In this budget, there are two tax changes. One is a public health levy on the largest supermarkets that sell tobacco and alcohol, with the money raised going to pay for preventative spending to try and reduce the impact of, for example, alcohol or poverty and improve people's life chances. This amounts to £30-£40 million a year and will be paid by a minuscule fraction of Scottish businesses (and for those businesses, will equal just 0.3% of their turnover). As some people have pointed out, these same companies will, under minimum pricing for alcohol proposals, be prevented from selling booze at pocket-money prices. This will generate additional revenue for them and so there will be no net loss - the difference is that some of the money they will pocket as a result of minimum pricing will come back to the public purse (to be invested in making Scottish society stronger, healthier and fairer).

The second, is reform of empty property relief, which results in an even smaller additional revenue (somewhere around £18 million). This measure has been welcomed by the Federation of Small Businesses who know that the current system means there is no incentive for landlords in some of our town centres to have property occupied. As a result they can keep rental levels high and opportunities for business growth and town centre regeneration are limited. The measure is designed to remove that perverse incentive. It will mean fewer properties lying empty for no good reason in our high streets, more businesses being formed and paying business rates, and yes, as a result higher business rates revenue. The change, as proposed, will still mean that empty property relief remains, but in a more effective form and the package on offer in Scotland will be twice as generous as that available in England.

As a final thought, the CBI, in the Scotsman article, suggest that this demonstrates what would happen if Scotland had responsibility for corporation tax. Yes, it does, but not in the way they are trying to insinuate. If the same approach was adopted on corporation tax as business rates what would happen? Rates would be lower than in England, as a result more businesses would be protected during economic downturn (and survive, protecting jobs) and more would grow in times of economic recovery (creating jobs). That means that there would be more businesses in Scotland - each paying a lower tax than their competitors elsewhere in the UK - but together contributing to higher tax revenues. And Scotland would have more jobs, more income for the government and more to invest in the things that really matter, which, together, will improve the lives and life chances of more Scots.