How to stifle an economy

Following my little rant on Wednesday, it’s clear vet gets it (albeit with more cynicism than I had intended), but it appears none of the powers-that-be (including the mainstream meeja) have noticed a problem.

So let’s try again.  First, in the current world, with big tax breaks for empty properties:

Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.

Landlord: Here’s our price list (it’s only 10% up on last year).

Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?

Landlord: That’s our price. Take it or leave it.

Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?

Landlord: Goodbye.

Entrepreneur is unable to open new business.  The area doesn’t get its new service.  Jobs are not created.  High street just falls further into dereliction, as only charity shops (who enjoy good tax breaks of their own) can afford it[1].

Contrast a world where there is no tax break for empty properties.  Now the half-derelict high street is costing the owner real money, so it’s in his interest to come to a compromise with the entrepreneur:

Entrepreneur: I’d like to rent your business premises. Here’s my business plan: as you can see, it moves into the black in year 3. I’ll be bringing this great new service to the area, and I’ll employ 6 people there.

Landlord: Here’s our price list (it’s only 10% up on last year).

Entrepreneur: There’s no way I can afford that initially. How about a reasonable reduction for those critical first two years?

Landlord: We’re not a charity, and we have to consider our investment and overheads!

Entrepreneur: But you have a monopoly on business premises, and 30% of the high street is standing empty. Surely it’s in everyone’s interest for me to open shop?

Landlord: Well, we can’t meet your request in full, but maybe we can meet you halfway for the first two years.  I’ll put it to my board and see what we can do.

Entrepreneur: Thank you.

A better outcome all round, except for landlord who fears lower rents more than empty properties!

p.s. glad to see the chattering classes have picked up on how damaging the employment tax is (maximum marginal tax rate on earned income now rises to 76%[2] from April 2011).  Though it’s the fact that the increase also applies to middle-income people that’s mostly stirred things up: guess that’s where there are more votes.

[1] Nothing wrong with charity shops, but they tend to be remarkably similar to one another, and the demand for what they do is satisfied by one or two – not the ten or twenty we commonly see in a high street today.

[2] If you earn £100k, and get a rise to £101k, government will take £620 of that rise from your paycheck and another £140 employment tax from your employer, for a total of £760.

Posted on December 12, 2009, in economy, tax, uk. Bookmark the permalink. 2 Comments.

  1. Can you spell out the calculation for us hard of thinking who don’t have to worry about this limit.

    Currently I thought it was 40% plus 1% plus 12.5% employer NI contribution marginal making the marginal rate about 10% more than that paid by the average earners (20%,11%,12.5%).

    I understand the reduction is personal allowances put a glitch in at £100,000, which seems ridiculous. I don’t understand why they did that at all, seems an irritation with almost no merit – I assume they would raise more cash, more fairly, if they dropped the upper rate limits from nice round numbers by a few percentage points.

    Also I don’t think one should add the £140 to the total and call £760 as 76%. As otherwise if the rate were 99% they would take £990 and £140, and the marginal rate would be 113% but you’d still get £10?!? I think one needs to add the Employer contribution to the total salary, as well as to the tax, if you wish to calculate an accurate percentage.

    The tax break for empty properties does seem insane. But the same arguments against that have long been used to argue for a land value tax, and the powers that be don’t want that because they have wealth tied up in land.

    I have long regarded taxes on things we want to encourage (income for example, employment, value add) as simply inadequately imagination on the part of government to figure out how to tax things we don’t want (carbon emissions, deforestation, environmental pollutants, traffic accidents, crime, obesity, ill-health etc).

  2. 40% + 1% + 12.5% are the old figures (approx – I think the NI components are fractionally higher: 1.3 and 12.8 or somesuch?)

    NI has now gone up twice since then, adding 1% to each component, hence +2%.

    And the killing of personal allowance puts the 40% up to 60% in a band from £100k to £113k, after which it goes back down again.

    I agree there are different spins you can put on it. I cite 76% because that’s the proportion of the headline salary (or, strictly speaking, taxable income) taken in tax.

    And I agree entirely with your last paragraph. When they make me chancellor ( ! ) I’ll look to approximately halve income tax over a term (specifically, eliminate the component called NI on both employers and employees), and raise the money from destructive activities (pollution) and finite resources (land value) instead.

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