Do You Know That Business Rates Are Paid By Landlords, Not Renters Or Occupiers?

We've one of those begging letters in the newspapers today, the ones that always turn up whenever there's a tax change. Please don't tax me boss, tax those people over there!
The problem with this specific request is that the people are either simply unaware of who it is that really pays business rates or they are hoping to dissemble a little to protect their own interests. For the truth is that the economic incidence of business rates is upon landlords, not upon the people renting or occupying a building.

Leading high street chains have warned the Chancellor that popular pubs and restaurants could disappear as a result of a swingeing rise in business rates.

A group of business leaders have written a letter to Philip Hammond urging him to reconsider the plan that could see some companies hit by a 42 per cent rise in rates.

The problem with this claim is that it's not the operating businesses which carry that taxation burden. Yes, it is true that it is that operating business which hands over the rates cheque. But who pays the money and who bears the cost of paying the money are not the same thing at all. The study of this difference is known as tax incidence:

The Association for Licensed Multiple Retailers (ALMR) has written to Philip Hammond asking for more transitional relief for the sector.

Business rates in England and Wales are being updated to take into account changes in property values.

The original report is here in The Times:

Britain’s high streets face losing some of their most popular pubs and restaurants because of big rises in business rates, Philip Hammond has been warned.

Companies including the owners of Pizza Express, Greene King pubs, Wagamama, All Bar One and Slug & Lettuce have written to the chancellor to ask him to rethink a plan under which some outlets will be hit with a 42 per cent increase in their rates this year.

So, to the tax incidence of business rates (property tax to non-Brits). It is the owner of the property who bears the true cost of the tax. Take an example, as here, of a pub. OK, that pub has a rental value, some amount that people are willing to pay to occupy it and begin trading from it. That amount being set by what people think they can make out of it of course. But how that cost is split between taxation and rent makes no difference to the occupier at all. They are interested only in the cost of occupying the building and care not one whit where the money goes.

On the other side though the landlord is intensely interested in what the level of taxation is. For he also knows that there's a market value to his premises. And the more that goes in taxation then the less of that market value goes to him, said landlord, in rent. Thus it is the landlord who bears the economic cost of business rates. And if rates rise then rents will fall meaning that the occupiers will be in the same position they are now, landlords worse off. And let's be honest about it, we're not going to cry bitter tears over landlords having to chip in a bit more to run society now, are we?

We also have a useful test of this. Back in the times of St Maggie various economic development zones were set up. One thing done to try and encourage companies being that business rates were not charged. At which point rents promptly rose to cover those rates not being paid.

All of which leaves us with something of a puzzle. Why are these business leaders writing to the government about this tax? If they're all renters then the tax won't hit them anyway and most assuredly they should know this. And if they're all landlords then it cuts into their profit from owning a building sure, but not from running a business in it. So, frankly, who cares?

Tim Worstall wrote this for Forbes