“Levelling the Playing Field” Is No Argument for an Online Sales Tax

This article appeared on Conservative Home on August 5, 2020.
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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

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