Abstract
The incomplete devolution of taxation powers to English Local Government has been constrained by central government’s doubling of reductions in property taxes for small firms. The aim is to stimulate local growth, but we question the economic logic. We analyse reductions in place since 2005, with a newly linked dataset for all firms that incorporate administrative data down to local units. We find the reductions do not overcome supposed market failures, do not stimulate job growth and once we control for firm age, that the targeted small firms do not produce extra employment. Young firms and larger firms have better growth rates, but there is no systematic size effect. We conclude that the tax reductions fail because they do not account for tax capitalisation (i.e. incidence shifts from firms to property owners), the basic characteristics of the average small firm or develop a clear mechanism for change among heterogeneous economic actors.
Highlights
The UK Government announced the “end of the national tax on local growth” (HM Treasury 2016 p. 9) in the autumn of 2015
In 2010, Small Business Rate Relief (SBRR) increased to 100% for properties with rateable value (RV) up to £6000 and tapered to zero at £12,000
The final patterns of average growth by size and age are similar to that in the cited literature, we show in Fig. 2a the shift in average size effects comes through an increase in the average effects of larger firms, when we hold the age distribution constant, rather than a large reduction in the average effect of small firms
Summary
The UK Government announced the “end of the national tax on local growth” (HM Treasury 2016 p. 9) in the autumn of 2015. The Government significantly expanded and made permanent the current policy of National (English) reductions in the property tax for small firms (called Small Business Rate Reliefs or SBRR). In support of SBRR, introduced in 2005, it is argued (e.g. repeated in HM Treasury 2016) that BR forms a greater proportion of small firm’s fixed costs than those of large firms and limits their ability to compete or innovate This is not a sufficient condition for differential tax reductions unless there is a greater social benefit from small firm’s growth and becomes immaterial, if through tax capitalisation, the economic cost/benefit transfer to property owners. We show that even if there were a mechanism the principal recipients, small old firms, are the least likely to be the catalyst for local employment growth These findings bring into question the Treasury’s homogeneous micro management of local property taxes.
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