Who is really being subsidised?

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The hospitality sector is up in arms about changes to business rates which, they say, will make their businesses unsustainable, and are asking for changes which will reduce the amount of tax that they need to pay. They are saying, in effect, that they are unable to charge a price for their products which is sufficient to cover all their costs plus returning a reasonable profit. Looked at in hard market capitalism terms, as discussed here, that means that many of those businesses are simply not viable. Left to its own devices (which is what many capitalists claim to want), a capitalist market would force a reduction in capacity (some businesses would fail) such as to achieve a new balance between supply and demand at a (higher) price which makes the remaining businesses viable.

Now I’m not a huge fan of unfettered capitalism, and whilst markets are, in general, an efficient way of allocating resources, the idea that they are or should be completely unregulated is not a sensible way of determining social priorities. Governments have always interfered, in various ways, to moderate the impact of markets in pursuit of wider goals. And the government may well be right in thinking – for reasons of employment retention, or for reasons of social cohesion, that maintaining a higher level of provision of restaurants, pubs and hotels than the market can profitably sustain is a good thing, and thus decide to offer some sort of assistance. Those in the sector want to see that assistance in the form of reduced taxation, but it isn’t the only way of achieving the aim. Tax breaks are a form of subsidy. They don’t always look like that, because it involves taking less from the business rather than giving them a handout, but a tax regime which adjusts rates for some categories of businesses in order to keep otherwise unviable businesses in existence cannot be other than a selective subsidy.

It isn’t the only way of providing a subsidy. The government could, instead, decide to take the same amount of money and issue vouchers to each household, enabling them to enjoy a discount off the bill for food and drink – subsidising the pints not the pub. It looks very different, of course, but the effect is the same: people would be able to go out and enjoy a meal or a drink which they couldn’t otherwise afford, and the businesses would be receiving an income sufficient to make them viable. Better yet – for those who are greater fans of markets than I – it would enable the consumers to choose which pubs and restaurants received the extra custom and therefore money, rather than being a blanket subsidy for all.

For a number of reasons, I wouldn’t actually propose that, but it’s interesting to note that many of those demanding tax breaks would be furious at the idea of ‘giving’ people money to eat out. It’s a universal benefit which they are getting without working for it, they would argue. Yet, in economic terms, it’s exactly the same thing: the same amount of money produces the same effect in terms of people being able to afford food and drink and businesses remaining viable. It raises an interesting and more general economic question: when the government gives a subsidy, who is it actually subsidising? Is it the business, the owners of the capital involved, the consumers, the suppliers, or the employees? In practice, all of those people benefit in some way or another, regardless of the form in which the subsidy is paid or to whom it is paid. So why is a ‘tax break’ deemed an entirely valid approach, whilst a handout to customers is some sort of undeserved freebie? The answer, of course, lies in who sets the agenda and boundaries of debate. And it isn’t the customers.