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Business Comment

James Moore: Ed Miliband's making a political mistake with his business rate promise

Outlook Ed Miliband's pledge to roll back rises in business rates by reversing the Government's planned cut in corporation tax stands current orthodoxy on its head.

For years governments of all hues have been cutting headline rates of corporation tax. This calls a halt to that in favour of tackling a more regressive form of business taxation.

Business rates exist as a cost with little relation to the ability of firms to pay them. Corporation tax might not be much loved, but it is at least a progressive charge linked to earnings and therefore the ability to pay.

What's more, the change in tack ought, in theory, help small businesses on whose expansion business rates act as a brake. Voters might also find the idea of bashing big businesses to help smaller ones rather compelling.

So why the lack of an unequivocal endorsement from the groups representing the firms that are poised to benefit, such as the Federation of Small Businesses or the British Retail Consortium, whose town-centre based members suffer the iniquities of business rates most of all.

It's because there are numerous flaws in Mr Miliband's logic. While they give him some credit for recognising the trouble with business rates, in stark contrast to the Treasury, his approach is something of a blunt stick that does little to address a host of underlying problems with the charge.

Take the way annual rises are calculated, a particularly sore point. Business-rate increases are linked to RPI inflation, abandoned by government for most purposes in favour of CPI inflation, RPI has, of course, been higher than its cousin for quite some time. Crucially (for businesses) it is also more volatile. Rates' linkage to property (and the rateable values thereof) also results in perverse outcomes.

Then there's hiking corporation tax to pay for the cut. Again, in theory, this isn't a terrible idea.

It's not as if corporation tax in Britain is high. Headline rates are actually lower than in any major developed economy, lower than the average of the Brics (Brazil/Russia/India/China) and lower than the Organisation for Economic Co-operation and Development (OECD) average. British corporation tax would still be highly competitive were a Miliband administration to put this policy into effect.

But promising to increase it now represents particularly poor timing. Britain relies on big, international businesses far more than most of its European competitors to provide employment and changing that will take some time.

In the meantime, if Mr Miliband is serious about addressing the big flaw in the modest economic recovery delivered by the Coalition – the fact that wages continue to lag behind inflation – he needs job creation to tighten the labour market. Promising to kick the businesses that might provide those jobs isn't terribly clever politics. He's cutting off his nose to spite his face.