If you think a new ‘Amazon tax’ will save the high street, think again

Should Rishi Sunak combine a new digital sales tax with a reduction in business rates on bricks-and-mortar shops? It’s a beguiling package: popular, intuitively fair, simple, kills two birds with one stone. “Chancellor taxes Amazon to save the Covid-ravaged high street” would not be an unwelcome headline in Downing Street.

Unfortunately, it’s also too good to be true.

For a start, retail is not the Manichean world divided into digital and physical camps as is so often presented. There are shades of grey. Some high street retailers have significant digital sales.

More than half of the sales of the high street clothing giant Next, for instance, are now online. And many small retailers have sought to diversify during the lockdown by selling digitally.

Amazon also owns some physical shops, including the Whole Foods grocery chain. Many would be surprised to find out that parts of Jeff Bezos’s empire would also be getting a tax break under this proposed package.

Business rates is a flawed tax. But it’s flawed not because of the reason most commonly given, that it (supposedly) penalises bricks-and-mortar retailers and benefits the digital giants.

Rather it’s flawed because it taxes the value of buildings rather than the underlying land, thus failing to discourage undeveloped or simply unused units. So, if the building is a wreck it has no (or negligible) rate value, and the owner or tenant would pay no or little business rates, even if the building sat on a plot of prime land.

Economists have long understood that land is often the soundest base for taxation because it can’t be moved to avoid levies.

It’s also highly attractive as a source of revenue from an economic perspective because the value of land often reflects private unearned “rents” – the windfall benefits that accrue from public investment in infrastructure such as new road or rail links.

And if one wants to talk about fairness, what could be fairer than the community benefiting – via higher tax revenues – from investments that the community itself has paid for?

There are plenty of reliefs for smaller companies in the business tax regime. The smaller companies that pay it are generally on lucrative sites – with lots of customer footfall and often wealthier local residents – with higher rents which reflect that.

Economists also think that, over time, the true economic burden of business rates mostly falls on landlords rather than tenants, in the form of lower rents relative to what they could charge otherwise. Alas, while tenants notice the rates bill, the lower rents tend to be invisible.

One also needs to bear in mind that business rates is a considerable source of tax revenues, bringing in around £30bn a year in normal times, around 4 per cent of the total tax take. Anyone who proposes to scrap it – or even take a big chunk out of it – should propose where they would make up the shortfall. Which other taxes should rise? Which areas of public spending should fall?

Business property taxation is an area, like the taxation of residential housing, which arouses unusually strong emotions.

In part that, of course, reflects public anxiety about the future of the high street and wider concerns about community cohesion.

But it’s not hard to identify an element of guilt here too. Even before lockdown put a rocket under online sales, the steady increase in digital purchases reflected the way we increasingly prefer to shop. A strategy to protect and revitalise high streets is fair enough, but we should beware of assuming that tax breaks can turn back the digital retail tide.

Meanwhile, the popular image of Amazon as a bogeyman stems, in large part, from how little corporation tax the company pays given its vast sales to UK customers. People sense there’s something unjust about the arbitrary shifting of profits, through a nudge on an accountant’s spreadsheet, to jurisdictions around the world where the tax rate is lower.

And there is. But this is a general problem in a world of footloose multinationals, not one limited to digital sales companies, and it needs to be tackled as such.

Emotions inevitably drive politics to some extent. But history tells us that tax policies driven by emotion rather than dispassionate analysis don’t tend to end well. And the chancellor would do well to remember what the savvy customer realises: if a purchase looks too good to be true, check the small print.