Ryan Bourne: “Levelling the playing field” is no argument for an online sales tax

5 Aug

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Some time soon, we’ll see more automation in the fast food sector. Burger-making machines are real. Franchises such as McDonald’s have rolled out self-ordering touchscreens. It’s not difficult to imagine a world in which fast-food worker numbers collapse. In the longer-term, when the technologies become widely affordable to businesses, cost reductions from these sorts of labour-saving investments will benefit consumers through lower prices.

Not every competitor chippie, kebab shop, or burger outlet will make the transition, of course. Some will struggle under what will then become the higher cost, labour-intensive model, finding their niche in the market. Others may simply go out of business – unable to compete on price and without the ability to invest in the machinery.

Would this be a problem? Or is it simply an example of capitalism’s creative destruction? 

Imagine if the struggling companies and their employees demanded Parliament pass a “burger automation tax” under the premise of “levelling the playing field” with those companies that took the plunge. Think how dangerous supporters of consumer-led capitalism would consider it for popular price-reducing innovations to be held up as a problem. Consider how bemused we’d be if the savings in labour costs were dubbed “unfair competition,” simply because not every company realised them.

Well, we are seeing an analogous argument capture policymaking today. And, bizarrely, free-marketeers within the Conservative party are not really speaking out against the muddled thinking.

The UK government is kite-flying about an online sales tax of two per cent, or taxing online deliveries to consumers. One of the many justifications given for even considering these Luddite measures is to “level the playing field” between online retailers and the High Street, given the latter face business rates.

Here’s the problem: there already is a level playing field. Just as all businesses face the same minimum wage laws, they also face the same overall tax regime. This includes business rates – which is a tax on the rental value of commercial property, not sales.

Faced with those policy realities, businesses are free to decide how to operate and structure. Innovative online sellers such as Amazon have simply adopted business models that repudiate the need for a high fixed‐cost physical presence in expensive inner‐city areas.

Operating from out-of-town warehouses is a cost-saving business decision akin to the potential automation in fast food. To then suggest that online retailers not needing to rent high-value property is some distortion of competition that requires a corrective tax, as the Treasury reportedly believes, is just bizarre.

It’s this business decision that partially explains why online sellers can provide low prices for consumers, enhancing their welfare. The idea that adopting this model is some underhand advantage is as daft as saying that Amazon’s packaging costs are a disadvantage for it, requiring a “packaging-equivalent tax” on High Street stores’ sales.

To echo the 19th century classical liberal economist Frédéric Bastiat, the bricks-and-mortar retailers using this level playing field argument are akin to candlemakers petitioning the Government about the sun flooding the market with cheap light.

Now if the Government thinks that the current business rates regime is an inappropriate tax on rental values or has distortionary impacts on commercial property use (I agree, but think the impact overblown) then, by all means, they should change the law faced by all. If councils are worried about car parking charges’ impact on high street retailers, then they are within their rights to adjust them.

But let’s not talk as if it’s unfair competition when firms, faced with a tax regime, innovate to reduce costs to provide a service in a way that consumers prefer. For make no mistake, it is customers that will ultimately bear the costs of any new sales or delivery tax in the form of higher prices, especially those whose use of delivery is less responsive to price, such as in rural areas.

Of course, increasingly traditional retailers are themselves re-orienting to online, especially during Covid-19. Any cuts to business rates (to the extent they are passed through by landlords) might allow for some consumer price reductions to “compete” better with online firms for sales. But if these same traditional retailers then face a new tax on their growing online sales anyway, the Government will have given with one hand and taken with another. 

And which companies will suffer disproportionately from the new administrative burden of having to deal with an online sales tax, do you think? Will it be Amazon? Or is it more likely to be smaller companies navigating the online market for the first time?

This whole debate highlights a broader gripe I’ve had with Conservative policy thinking for some time. Conservatives used to understand the case for consumer-led markets, as extolled by Jeff Bezos in a US Congressional hearing last week. They trusted customers to make choices in their own best interests. Our revealed preferences were thought to represent us trying to maximise our wellbeing under the circumstances we face.

But increasingly MPs seem to think they know better. Sure, customers might be flocking to online retail, especially during a deadly pandemic. But what they really want, we are told, is a thriving High Street. Who you gonna believe: MPs or your lying eyes?

The idea that any business providing the same product must face the same tax and regulatory cost base to truly compete on a “level playing field” is easily dismissed. Wind and nuclear power both produce electricity. But if someone told you we needed a tax on wind power to make up for the safety costs of nuclear, you’d think they were utterly mad. So what do we think is different about retail, after we’ve decided that it’s appropriate to tax commercial property consumption?

Now perhaps the Government’s real aim is not to “levelling the playing field.” Some say a tax on online deliveries would reduce congestion – a daft argument given a van delivering to 30-40 places would cause far less traffic congestion than everyone going to stores. Some say that the Government simply needs the revenue – in which case £2 billion is a relative drop in the ocean. Our communitarian friends, with their stale 1950s vision of High Street’s somehow engendering “community,” want to pull any lever to try to preserve the town centres of yesteryear.

Yet those arguments are self-evidently absurd or futile in the face of ongoing trends. The “level playing field” line is more dangerous precisely because it sounds as if it’s pro-competition. If Conservatives really believe, however, that the role of Government is to correct for businesses finding ways to reduce their fixed costs, as if this were some unfair advantage, then they are further through the economic looking glass than I’d realised.

Ryan Bourne: “Levelling the playing field” is no argument for an online sales tax

5 Aug

Ryan Bourne holds the R Evan Scharf Chair in Public Understanding of Economics at the Cato Institute. 

Some time soon, we’ll see more automation in the fast food sector. Burger-making machines are real. Franchises such as McDonald’s have rolled out self-ordering touchscreens. It’s not difficult to imagine a world in which fast-food worker numbers collapse. In the longer-term, when the technologies become widely affordable to businesses, cost reductions from these sorts of labour-saving investments will benefit consumers through lower prices.

Not every competitor chippie, kebab shop, or burger outlet will make the transition, of course. Some will struggle under what will then become the higher cost, labour-intensive model, finding their niche in the market. Others may simply go out of business – unable to compete on price and without the ability to invest in the machinery.

Would this be a problem? Or is it simply an example of capitalism’s creative destruction? 

Imagine if the struggling companies and their employees demanded Parliament pass a “burger automation tax” under the premise of “levelling the playing field” with those companies that took the plunge. Think how dangerous supporters of consumer-led capitalism would consider it for popular price-reducing innovations to be held up as a problem. Consider how bemused we’d be if the savings in labour costs were dubbed “unfair competition,” simply because not every company realised them.

Well, we are seeing an analogous argument capture policymaking today. And, bizarrely, free-marketeers within the Conservative party are not really speaking out against the muddled thinking.

The UK government is kite-flying about an online sales tax of two per cent, or taxing online deliveries to consumers. One of the many justifications given for even considering these Luddite measures is to “level the playing field” between online retailers and the High Street, given the latter face business rates.

Here’s the problem: there already is a level playing field. Just as all businesses face the same minimum wage laws, they also face the same overall tax regime. This includes business rates – which is a tax on the rental value of commercial property, not sales.

Faced with those policy realities, businesses are free to decide how to operate and structure. Innovative online sellers such as Amazon have simply adopted business models that repudiate the need for a high fixed‐cost physical presence in expensive inner‐city areas.

Operating from out-of-town warehouses is a cost-saving business decision akin to the potential automation in fast food. To then suggest that online retailers not needing to rent high-value property is some distortion of competition that requires a corrective tax, as the Treasury reportedly believes, is just bizarre.

It’s this business decision that partially explains why online sellers can provide low prices for consumers, enhancing their welfare. The idea that adopting this model is some underhand advantage is as daft as saying that Amazon’s packaging costs are a disadvantage for it, requiring a “packaging-equivalent tax” on High Street stores’ sales.

To echo the 19th century classical liberal economist Frédéric Bastiat, the bricks-and-mortar retailers using this level playing field argument are akin to candlemakers petitioning the Government about the sun flooding the market with cheap light.

Now if the Government thinks that the current business rates regime is an inappropriate tax on rental values or has distortionary impacts on commercial property use (I agree, but think the impact overblown) then, by all means, they should change the law faced by all. If councils are worried about car parking charges’ impact on high street retailers, then they are within their rights to adjust them.

But let’s not talk as if it’s unfair competition when firms, faced with a tax regime, innovate to reduce costs to provide a service in a way that consumers prefer. For make no mistake, it is customers that will ultimately bear the costs of any new sales or delivery tax in the form of higher prices, especially those whose use of delivery is less responsive to price, such as in rural areas.

Of course, increasingly traditional retailers are themselves re-orienting to online, especially during Covid-19. Any cuts to business rates (to the extent they are passed through by landlords) might allow for some consumer price reductions to “compete” better with online firms for sales. But if these same traditional retailers then face a new tax on their growing online sales anyway, the Government will have given with one hand and taken with another. 

And which companies will suffer disproportionately from the new administrative burden of having to deal with an online sales tax, do you think? Will it be Amazon? Or is it more likely to be smaller companies navigating the online market for the first time?

This whole debate highlights a broader gripe I’ve had with Conservative policy thinking for some time. Conservatives used to understand the case for consumer-led markets, as extolled by Jeff Bezos in a US Congressional hearing last week. They trusted customers to make choices in their own best interests. Our revealed preferences were thought to represent us trying to maximise our wellbeing under the circumstances we face.

But increasingly MPs seem to think they know better. Sure, customers might be flocking to online retail, especially during a deadly pandemic. But what they really want, we are told, is a thriving High Street. Who you gonna believe: MPs or your lying eyes?

The idea that any business providing the same product must face the same tax and regulatory cost base to truly compete on a “level playing field” is easily dismissed. Wind and nuclear power both produce electricity. But if someone told you we needed a tax on wind power to make up for the safety costs of nuclear, you’d think they were utterly mad. So what do we think is different about retail, after we’ve decided that it’s appropriate to tax commercial property consumption?

Now perhaps the Government’s real aim is not to “levelling the playing field.” Some say a tax on online deliveries would reduce congestion – a daft argument given a van delivering to 30-40 places would cause far less traffic congestion than everyone going to stores. Some say that the Government simply needs the revenue – in which case £2 billion is a relative drop in the ocean. Our communitarian friends, with their stale 1950s vision of High Street’s somehow engendering “community,” want to pull any lever to try to preserve the town centres of yesteryear.

Yet those arguments are self-evidently absurd or futile in the face of ongoing trends. The “level playing field” line is more dangerous precisely because it sounds as if it’s pro-competition. If Conservatives really believe, however, that the role of Government is to correct for businesses finding ways to reduce their fixed costs, as if this were some unfair advantage, then they are further through the economic looking glass than I’d realised.

Damian Green: Here are our One Nation ideas for reviving post-Covid, post-Brexit Britain

27 Jul

Damian Green is Chair of the One Nation Caucus, a former First Secretary of State and is MP for Ashford.

There has been a flurry of comments about One Nation Conservatism, and what it means in the 2020s, over recent weeks. This is very timely, as for many years the One Nation tradition was linked with pro-European views, to the point where views on Europe seemed to become its defining characteristic.

Those times are clearly past, and one of the aims of the One Nation Caucus of Conservative MPs is to set out a new set of policy priorities, both in domestic and international policy, which we want the Government to adopt. We hope that we are pushing at a reasonably open door, as the Prime Minister has always described himself as a One Nation politician, and certainly his levelling up agenda is absolutely in that tradition. His description of himself as a “Brexity Hezza” may have been rejected by, well…..Hezza, but nothing is easy these days.

Getting the country back on the track it voted for last December is the task for the next four years, and One Nation ideas will play a central role in the successful pursuit of that project. The last thing the Conservative Party or the country needs is a continuation of the Brexit divisions. If the only thing that matters is how you voted in 2016, we will never move on. So through the summer and autumn the One Nation Caucus will be publishing a series of policy papers designed to set out a full agenda for government in the post-Covid period.

The first of these papers is Restarting the Economy, which brings together six MPs from various intakes to address the central issue of our times. Stephen Hammond is the lead author, and he emphasises the importance of a relentless focus on levelling up to extend growth beyond London.

Key proposals in the paper include the development of new local economic bodies to drive growth, expanding the number of planned freeports, and creating technology adoption funds to support the Fourth Industrial Revolution. The report also suggests a number of policies to protect people on low incomes, including suggestions for ending consumer rip-offs, and proposals for managing repayments of Covid business loans, recommending an approach similar to the Student Loan scheme.

Each of these is a meaty idea in its own right, and the full paper is available on the One Nation website. But this array of economic ideas is only the start of the wider project to position Conservative ideas at the heart of the national political debate post-Covid.

Labour may be under new management but one of the features of the Starmer era so far has been the avoidance of any policy discussions. This is clearly a conscious tactic, but while Labour pursues it there is a space to fill in shaping the public mind. It is often observed that intellectual regeneration is more difficult inside a governing party, but it is not impossible, and is absolutely necessary if conservatism is to have another successful decade.

The financial crisis, Brexit, and Covid-19 have been three black swans that have swept aside the original plans developed the last time the Conservative Party was in opposition. They have incidentally also swept aside Tony Blair’s fond idea of making the twenty-first century “the progressive century”, by which he meant the New Labour century. How does that look in 2020?

So now is exactly the right time for One Nation Conservatives to think hard and set up debates. After the economic paper our next publication will be on social mobility, how we can bring it back, and why we must not think about it in traditional terms. Following that we will be publishing a paper on the environment, showing how capitalism is not the enemy of achieving carbon New Zero, but the only way of reaching it.

Future papers will look at Britain’s place in the world, covering trade and aid, and specifically what the new configuration of the Foreign Office and DfId offers in the realm of making our aid spending (which One Nation Conservatives strongly support) more effective in the future. We will also be taking a hard look at schools and what they can do better to spread opportunity, and at the new world of work.

It is very pleasing that all cohorts of the Parliamentary party have contributed to these papers. Former Ministers have worked with many members of the 2019 intake on the individual ideas, proving that there is no shortage of new thinking on the back benches, and that One Nation ideas are alive and well in the rising generations within the party.

Whether or not you think of yourself as a One Nation Conservative, I hope you will welcome the fact that those of us who are in that tradition want to contribute publicly to the key debates that will dominate the coming decade. The public will of course judge the Government mainly on its actions. But every political party needs to demonstrate that it can apply its principles to new circumstances. In a world that changes as fast as this one constant intellectual regeneration should be our goal. The One Nation recovery papers are a contribution to that.