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Taxing tech giants on revenue only ends up with us customers paying more

EU proposals to tax internet companies based on sales in each country fail to apply the tax burden on the right people

Much brain power is being overused in attempting to make the US tech giants contribute more to Her Majesty’s Revenue. The initial complaint, that the current international business taxation system doesn’t deal well with digital, is entirely correct – it doesn’t.

The problem is that almost all of the suggested solutions to this inconvenience run up against two rather harsh economic facts. One is that businesses never really pay any tax at all, and the other is that the problem of not paying any taxes at all is already largely solved.

For example, a cornerstone of the European Commission’s case against Apple was that those profits plucked out of Europe to go hide in Bermuda were not being taxed anywhere, by anyone. This was the lever that allowed the claim that Ireland should be taking a cut even if its government had to be forced to do so.

President Trump’s recent change to US tax law now means that all of them – Google, Facebook, Microsoft and the rest – will pay US tax even if they do squirrel non-US profits away offshore. That basic complaint now fails.

Of course, no government ever does really argue that untaxed money is a major problem – it’s always that the specific government complaining doesn’t get a share. This is why the “problem already solved” point will be ignored. It is also why we are now seeing turnover taxes and the like being floated – if Google sells some amount into the UK, then charge some percentage of that as tax and be done with it.

There are minor technical problems with this. Snapchat has been making losses, but it would have to pay the turnover tax anyway, wouldn’t it? Doesn’t that make it more difficult to build a new company? But the bigger problem is something that all too few grasp about taxes.

Who is it that we want to tax anyway? Well, the rich folk enjoying all those profits, that’s who.
Tim Worstall

Economists insist that there are only us humans around. Any and every tax means that the wallet of some live human being gets lighter – simply because we homo sapiens are the only live beings with wallets.

Inheritance tax can be said to be upon the estate of the deceased, but the wallets of those getting the inheritance will be lighter by it, too. Companies are not live humans – as with legal people they have certain rights, such as free speech, but they are still not people with wallets to lighten.

Any tax nominally paid by a company will therefore really fall upon some other real live human. VAT is collected by the company, but really paid by consumers. Employers’ national insurance really comes out of the wages of the workers. A profit tax falls upon some combination of shareholders in the company and workers in the economy in general.

Economic burden

The examination of all of this is known as the study of tax incidence. Who hands over the loot isn’t necessarily the person who is really carrying the economic burden of a tax. This matters hugely in trying to design a tax system. For who is it that we’re trying to tax? We do rather have to make sure that the incidence accords with the desire.

And this is what isn’t being done in these EU proposals about tech company taxation. The initial observation – that economic activity is going on in the UK which HM Revenue & Customs doesn’t receive a slice of – is entirely true. But who is it that we want to tax anyway? Well, the rich folk enjoying all those profits, that’s who. Which is where our problem comes in.

A profits tax is paid by the shareholders in the company being taxed, in some proportion, and all the workers in the economy levying the tax. The observation is that if you tax something, you get less of it. Profits are the return to investment; tax them and there will be less investment. That makes all the workers poorer because it is investment added to labour that raises wages.

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This is not, in the slightest, controversial nor even argued against in economic circles. How much of the burden goes to each is discussed, but the basic idea not at all. So, at least in part, we get to tax the capitalist plutocrats by taxing profits. This might not be a good idea, what with lowering the workers’ wages at the same time, but the desires of the bureaucracy for revenue are myriad.

Note that customers don’t carry the burden at all. We assume that capitalists are greedy – they’re already charging the maximum they can for their products and services. So, taxation of profits just changes who gets them, not the prices charged in the market.

This entirely changes when we decide to have a turnover tax instead. Here the incidence will be upon the customers or consumers, as with VAT. Sure, it will still be the company that is writing the cheque, but that burden appears in the form of higher prices.

Convenient vessels

Imagine it. Google must pay, say, 5% of its UK turnover in tax. So Google’s bills to UK customers will have an extra 5% added to them. No one in Britain can avoid this tax if they want Google’s services. But it’s not the people who buy ads from Google we are trying to tax, is it? We want Sergey and Larry and Google’s shareholders to be paying – exactly the thing this revenue taxation system doesn’t achieve. Which is rather where our basic problem comes in.

Standard theory says we shouldn’t be trying to tax intermediates and intermediaries, such as companies, in the first place. They are convenient vessels in which to do so, but that’s all. The digital economy makes them inconvenient to tax, so, OK, let’s change the tax system. But if we do that, we’ve still got to make sure we are placing that tax burden on the shoulders we wish to carry it. And a turnover tax simply doesn’t do that, being borne by customers, not investors or plutocrats.

All of which might be a certain signal to us – one conception of government is that we get all the clever people to sort out the hard stuff for us. Doesn’t seem to be working that way, does it?

This was last published in February 2018



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