Business rates, which raise about £27 bn (4% of total UK tax revenue) may be the least conspicuous of major taxes.

But recently they have become more conspicuous. Retailers, in particular,  have protested loudly. In the spring, the government commissioned a review.  And last week, George Osborne agreed to transfer responsibility for the tax from central government to local authorities, which can cut – but will have limited power to increase – the rate of tax.

The protests of retailers have more to do with the state of  retailing than the effects of the tax. Shopping now accounts for only one third of total consumer spending.  Since the global financial crisis the volume of food sales has fallen slightly, while  retailers have been steadily adding space. Hence the travails of superstores. Sales volumes of other items such as clothing and  electrical goods have risen slightly but their prices have not,  so shop takings have stagnated.  At the same time, online sales have grown to around 15% of retail spending in Britain.  Business rates are not the cause of the pressure on retailers but they have become a convenient whipping boy.

The retailers wielding that whip believe that the business rates they pay are a tax on shopkeepers   and perhaps shoppers.  Mostly they are wrong.  Understanding the impact of business rates is a textbook illustration of the distinction between the formal and effective incidence of a tax – the distinction between the person who has the legal liability for payment and the person who ends up out of pocket

A property tax like business rates is both a tax on land and a tax on structures.  But in varying proportion.   A small shop in an ultra prime location in London might rent for up to £200 per square foot, and 90% of this figure reflects  the value of the land;  an office block in the City commands £70 per square foot, of which the land might represent two thirds.  But an industrial warehouse in a depressed region could  do well to recover £5 per square foot of space, almost all of which represents the cost of the building.

The Nobel Prize winning economist William Vickrey wrote that a levy such as business rates is a combination of a good tax and a bad tax.   Rents of Bond Street shops and offices in Mayfair are high because demand is high and these locations are scarce.   If we tax work, or savings, or beer, there is likely to be less work, savings, and beer consumption.  But the supply of retail premises on Bond Street and office blocks in Mayfair is essentially fixed. Since the time of Henry George a tax on land values has been regarded as a ‘good tax’ because it is a tax on economic rent, which has little or no distorting effect on economic decisions.

The corollary is that the main impact of business rates is on property values.  If business rates in London were lower, rents and investment values of central London property would be higher So if retailers had their way, and achieved substantial reduction in the rating burden, their joy would be short-lived:  in the medium and longer term, the beneficiaries would be the owners of central London properties – real estate companies, pension funds, the Dukes of Westminster and the Queen.

In less desirable locations, however, business rates are  a tax on building costs rather than land values.  That is Vickrey’s bad tax:  an arbitrary and irrationally discriminatory tax on industrial and commercial activity.  A wholesale reform of business rates would produce large windfalls for an undeserving group. But a rebalancing  between the elements of the good tax and the bad tax might make a lot of sense.