Let’s Tax the Poor

Random Thoughts from the High Desert

Written by Sig Silber

Would a tax on large retailers be a tax mainly on the owners of these businesses or substantially a tax on the customer?

And if the poor tend to be the primary shoppers at chain stores, is a tax on chain stores more properly viewed as a tax on the poor?

The story starts with this article.The argument goes as follows:

“Local councils in England are requesting the right to impose a “Tesco Tax” on large supermarkets, in an attempt to recirculate supermarket spending in small communities.Derby City Council, backed by 19 other councils across the country, is formally asking the government for the right to apply this new levy, similar versions of which are already in place in Scotland and Northern Ireland. If the government agrees to the plan, supermarkets would face a tax of up to 8.5 per cent. The request is being made under the Sustainable Communities Act, which allows councils to present the government with solutions for local problems.

Research has shown that 95% of all the money spent in any large supermarket leaves the local economy for good, compared to just 50% from local independent retailers;”

Curiously I have found similar research results in the U.S. which are shown below.

You can find this graphic all over the web including here. Notice this is a campaign by a non-profit that supports local business versus chains. It should be fairly obvious to most people that businesses come in all sizes and there are reasons why they do. So the question is not should there only be large nationwide or regional chains or only be small local businesses but what mix makes the most sense and how different are they re the impact on the local community.

The data used in the U.K. and the data widely distributed in the U.S by the advocates for “buy local” would seem to be making the case that there is a huge difference and a positive benefit to residents of the community.

Does this analysis pass the smell test? I think not.

The arguments for the proposition that small is always better for the community includes a number of assumptions including:

• Somehow local independent businesses do not have to purchase product and services from out of state.
• The profit earned by individual chain stores which is indeed shipped out of state (usually in the range of 5% for chains with large stores to 10% for smaller establishments as they have more corporate overhead to deal with) is more than the benefit to consumers from the purchasing power of the chains. This purchasing power often results in savings to the consumer in the range of 30% to 40% compared to the prices charged by independents.
• Chain stores rarely buy from local suppliers. According to the graphic above, when a pipe bursts at a Walmart, they call Bentonville Arkansas rather than a local plumber?
• All things sold in a chain store are sold by the chain store. In reality there are many leased departments some of the common ones are jewelry, pharmacy, food services, banks, eye exams. A fairly reliable way to tell a leased department is whether they have their own cash register. This dates back to when it was considered safer to collect payment in your leased department and reimburse the store for other items that are rung up on your cash register than to rely on the store giving you credit for your merchandize when it is rung up at the general checkout aisle. Items rung up at the main checkout that are not properly ticketed or scanned etc are allocated by formula to the lessees and the level of trust is not always 100%. Full Disclosure: I once was an executive in a discount department store chain so I know how this works.

I think that encouraging chains to buy locally and removing obstacles that discourage them from doing this is a good idea but complicated because one characteristic of many chains is that you can buy it anywhere and return it anywhere which is complicated for locally purchased merchandise that is not carried by all stores in the chain. Also if you carry the concept to the extreme with 100% local purchases there would be no market for any company in town to sell their product or services outside of town. So that sounds like a backward step to me in terms of economies of scale and not in the best interest of consumers nor those looking for employment at firms that that sell products and services outside of its local market. I do not wish to get down to that level of detail but are locally produced advertisements and marketing materials inherently superior to those produced by the firms that provide services to chains? Should there be no regional or national advertizing agencies? Should all store fixtures be manufactured locally? is creating clients for local tax preparers a legitimate role for government when the cost of the tax preparer will be passed on to customers? Does government represent the average citizen or the Chamber of Commerce?

The Managing Editor of Global Economic Intersection, John Lounsbury, has expressed the following observation to me.

“If you doubt the wealth transfer, travel throughout rural America and observe how many of the opulent houses built in the years before 1970 were owned by local merchants.”

I have observed the same thing here in Santa Fe and everywhere I have ever lived. So it seems to me that these very concerned people who want to protect everyone from chain stores are actually imposing a significant tax on those who are precluded from access to chain stores or who might be impacted by schemes to equalize the playing field and force chain stores to raise their prices.

I suspect that a careful analysis of campaign contributions would support my surmise with data.

As an aside, if you run the computer models of where to locate a retail establishment, and I have but very long ago, the best place is next to your competition. People much prefer to reduce travel sometimes called VMT and this also reduces GHG. So clusters of establishments of all different sizes appealing to a variety of buyers seems to have many advantages over a monoculture.

Like many things, people value choice and when government takes actions to reduce choice, they are not doing most people (other than their campaign contributors) a favor.

One has to be careful when accepting the arguments presented by special interest groups as they have a goal and presenting complete information usually is not part of their goal. Eschewing economies of scale and the benefits of the rationalization that has taken place over time of highly fragmented distribution systems amounts to a tax on the poor.

It is not good public policy. Stealing from the poor to make the rich richer is certainly not Robin Hood.