Yves here. I left the original headline on this post because it would drive readers crazy and a better one would be very Daily-Mailish. However, the subhead gives a better idea of the focus of the piece: Reconstructing our tax system is an integral part of future national industrial policy as we restart the economy.
Marshall Auerback uses the international row over taxing Big Tech as a point of departure for discussing the role of tax in industrial policy. And don’t pretend we don’t have one. Health care is subsidized by virtue of employer-provided health insurance being a corporate tax deduction but not taxable to the employee as a benefit. Real estate and oil and gas get special breaks in the code. Amazon got big because states were very slow to crack down on its evasion of sales tax (which they’d made the mistake of long tolerating with mail order catalogues). Auerback provides other examples and I am sure readers can add to the list.
By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute
Major talks between the United States and the European Union to establish a shared tax framework for multinational companies broke down on the issue of seeking to secure an agreement on digital taxation. Big tech, which is heavily a U.S. creation, has long been in the sights of European economies, as their profits and revenues have soared and they have increasingly become major components of the 21st-century economy.
Taxation is one of those areas that exposes the contradictions at the heart of globalization. Globalization of goods has proceeded quickly, as has the harmonization of industrial standards across countries.
Harmonization of taxation? Not so easy.
The power to tax is the ultimate national prerogative, one that very few sovereign nations would ever seriously contemplate surrendering to a multinational global entity, even in limited degrees, as has been done in trade (e.g., the World Trade Organization), or global security (e.g., the United Nations). It therefore seems ironic that the Trump administration, largely driven by an economic nationalist agenda, would contemplate, even on an interim basis, changes to global taxation law that would affect leading U.S. big tech companies.
Yet in spite of Trump’s America First rhetoric, he did authorize Treasury Secretary Steven Mnuchin to attempt to get the EU and the U.S. on the same page on a global digital tax framework, in part as a means of curbing the practice of global tax arbitrage. It would make sense for all concerned to agree on a framework that provides some degree of tax uniformity.
In theory, that is; as with agriculture or oil, the tech business is a multinational one, but curiously the U.S. Treasury remains loath to expose big tech to the same kinds of global tax pressures that Monsanto or Exxon regularly deal with today. Perhaps this is because these Silicon Valley behemoths are now among the most economically dominant and profitable U.S. companies, as well as increasingly large sources of political funding for the parties (although more so Democrat than Republican at this juncture). That would explain why the Trump administration wants to keep as much of that revenue pie for itself.
But since so much of the future will be increasingly digitalized, something has to give. Indeed, in the new internet-based economy, there is much to be said for an approach to taxation that recognizes that revenues can be earned via online activities, irrespective of whether or not the company generating the profits concerned actually has a brick-and-mortar presence in that particular country. In India, for example, this is the rationale behind the imposition of “a 2 percent tax in April on online sales of goods and services to people in India by large foreign firms,” as the New York Times reports. This move by Indian Prime Minister Narendra Modi’s government in turn has encouraged the “European Union… [to revive] its push for a similar tax as a way to help fund response measures to the coronavirus.”
The United States is certainly going to go for every advantage to protect its tech industry, but Washington must recognize that the EU (and likely the rest of the world) will move ahead with plans to tax these tech giants, with or without agreement from the United States. But absent a buy-in from Washington, a failure to produce any kind of agreement will simply perpetuate the kind of destructive global tax arbitrage that was the rationale for the talks in the first place. It also has the potential to expand the global economy’s growing list of trade disputes.
By virtue of the odd institutional arrangements of the eurozone (where state money has been divorced from the control of the national governments since the establishment of the euro), raising revenues from taxation to fund economic activities is a matter of ensuring national solvency for these countries.
There are also geopolitical considerations at work: if the EU is prevented from generating additional revenues for its tax base, it will dangerously push the United States and Europe even further apart, making the disagreement over relative defense budget contributions among NATO members seem puny by comparison.
This drive for a digital taxation framework represents a cry for help from all across Europe—the UK, France, and Germany all want in. After all, Google, Apple, Facebook, et al, all derive significant revenues from their European operations. It’s not unreasonable for the EU to want a piece of that pie. It is widely expected that there will be some form of agreement, probably in stages, over the coming years. But it is also inevitable that tech companies will find new ways of avoiding taxes, and that overall multinationals and their coterie of investors will continue to find ways to keep the tax haven game going.
The negotiations could take some years—and until we get to the point where both sides can agree on a workable digital tax framework, there are other ideas worth considering. Taxing inescapable assets, such as land, and reconsidering our treatment of intellectual property are two ideas that should be considered.
In regard to the former, a national property tax is one possibility. The United States had one in 1798 in the quasi-war with France and again in the War of 1812. The 19th-century economist Henry George was one of the first to promote a land tax on the grounds that such “taxes could fall on… [unproductive] income without increasing costs to the rest of the economy… [such as] labor and industry,” Michael Hudson writes in “Henry George’s Political Critics.” As economist Bill Mitchell, who cites Hudson, writes, George’s idea was also consistent with the views expressed by John Stuart Mill in his 1848 book Principles of Political Economy that:
The ordinary progress of a society which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies?
A land tax could also help to prevent housing bubbles, thereby mitigating the significant affordability gap now prevalent in many of America’s largest cities. And it also addresses the issue of tax avoidance, as land is an asset that can’t be parked into an offshore bank account.
A second approach would address taxing intellectual property (IP) rights that are attributed to Bermuda or the Cayman Islands.
Here, the economist Dean Baker is right: “[G]overnment-granted patent and copyright monopolies have been made longer and stronger over the last four decades. Many items that were not even patentable 40 years ago, such as life forms and business methods, now bring in tens or hundreds of billions of dollars to their owners.”
Instead of letting rentiers accumulate vast fortunes from a single innovation and then playing whack-a-mole trying to tax them, Baker is correct to suggest limiting patent and copyright terms, or force firms to share their IP, or have the government buy out their IP and publicize it for free to stimulate innovation. As Thomas Jefferson said when he set up the patent office, IP is a necessary evil that should be minimized in the public interest.
The alternative is an approach suggested by the economist Mariana Mazzucato, whereby the government secures a perpetual royalty stream from tech companies for the IP, on the grounds that massive public investment laid the groundwork for these companies’ considerable profits. As Mazzucato notes, “Without the massive amount of public investment behind the computer and internet revolutions, such attributes might have led only to the invention of a new toy.”
Overall, the tax system in the United States is making things worse. In their most recent work on inequality, The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay, economists Emmanuel Saez and Gabriel Zucman illustrate, as economist Michael Roberts writes, how the “American tax system, … far from reducing the rising inequality of income and wealth in the U.S., actually drives it higher.” Roberts cites the authors’ work in support of the proposition that the U.S. tax system is in fact highly regressive and entrenches existing wealth inequality:
“Contrary to widely held view, [the] U.S. tax system is not progressive. The effective rate of tax takes into account all forms of taxation on the individual (income taxes, corporate tax, capital income taxes[,] etc[.]). On that measure for the top 400 income holders (billionaires) the effective tax rate is 23% while it is 25-30% for working and middle classes. America’s tax system is now technically ‘regressive’ and is ‘a new engine for increasing inequality.’”
A large part of the problem is that the U.S. tax system taxes labor far more harshly than “property and financial assets,” which receive disproportionately favorable taxation treatment. Additionally, as I’ve written before, the U.S. corporate tax is low and has been lowered even further, thanks to Trump’s recent tax reform package.
Some figures, notably former Federal Reserve Chairman Alan Greenspan, have proposed national consumption taxes. Consumption taxes do capture spending that occurs within a country, but they are problematic in the sense that they are regressive (as Roberts notes). On the other hand, this is the Swedish model. In the 1970s, Sweden’s high income tax created capital flight and induced the emigration of the wealthy. In response, the Swedish government capped income taxes and raised revenue for big government from the VAT and payroll taxes. These are regressive in incidence, but as a quid pro quo, if spending is progressive then the overall tax system itself can become progressive and largely retain its political legitimacy, as it does in Sweden.
How does this play into national industrial redevelopment? If the goal is also to redomicile manufacturing, taxation measures can be reinforced via local content requirements, as I have suggested before. Forget incentives; coercion works even better.
Do these things, and many of the problems associated with global tax arbitrage, offshore accounts, or outright tax evasion go away. In the meantime, the breakdown in these digital tax talks between the U.S. and EU is likely to mean more tariff impositions by the Trump administration, followed by retaliation from the EU (and the rest of the world). A renewed trade war is hardly what a highly depressed global economy needs at this time.
Lost in this crossfire is the fact that the rest of us would certainly benefit from finally facing down those with vested interests, who will no doubt mobilize strongly against viable tax reforms, and continue to undermine global cooperation. That means governments continuing a futile attempt to police increasingly creative tax and accounting dodges.
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A Carbon tax with carbon tariffs to avoid arbitrage gets my vote. Throw in a UBI to make it progressive, and just ignore all the complex Dutch sandwiches or whatever nonsense tax dodges people have come up with. Hard to hide an oil well or a coal mine. Although LA does have some pretty sneaky ones.
The Russians, OPEC, the Chinese central party, and pretty much most ordinary people who don’t live a very comfortable upper class European lifestyle aren’t as environmentally woke as Greta.
CO2 is going to keep spewing until a cheaper alternative comes about that can bring the billions in the developing world up to a first world lifestyle. (Current wind-solar-battery tech is still no match for coal or LNG in places like Vietnam, and of course nuclear has been banned from the table).
just saying.
Please define ‘lifestyle’ so we know how many Terra-like orbs contemporary hominids .. within worlds’ first thur third .. we need, generally .. to achieve such.
Somehow, I don’t think we’ll get what we want! We only have access to the one we’ve derived sustenance from, from time immemorial, up to this point in human history ..
.. and the Vegans certainly won’t be lending a .. tendril, or whatever appendage they use to communicate the concept of ‘sharing’.
#Webeonareown!
What about a “reverse” VAT for BtoB services provided by Google or the declining Facebook in which when the service is provided by a company located abroad the tax is paid by the buyer in it’s own country? Is this the scheme in India?
If you order something from say outside the EU, the postal/courier service is responsible for you paying the VAT (which basically turns into “you don’t pay? You don’t get your parcel”).
For FB, Google etc. to get to the final person, it also has to go via a carrier. So just make the carrier responsible to pay the tax, and let them to charge it to Google/FB etc. – or block their traffic. To make it sweeter to the carriers, tell them they can keep part of the revenue “to cover their costs”.
Yes, you can anonymise the traffic, but a wast majority of the end users for these services has no interest in doing so, never mind the capability. And since it would not cost them, they would not even have incentive to do so.
I believe the proposal by Dean Baker is the best one. Reduce the ‘earnings’ and thereby sidestep the argument of over-taxation on ‘earned’ income. The IP-laws are by design to benefit the few over the many and in this modern economy the few who benefits are seldom the people who generate the IP. Employment contracts tend to put the ownership of IP in the hands of the employer and the employee is expected to be satisfied by being allowed to do loved work.
& to stop the hoarding of income then I believe that productivity gains should be taken out as time instead of money.
The tax in India is interesting. The ones in India who buy from Facebook and/or Google pay the tax to the Indian tax-authorities and neither Google nor Facebook used to allow the WHT-deduction when payment is remitted to them. It means that both Google and Facebook can claim to their investors that they are not paying much taxes but the tax on the activity is paid it is simply not shown on their income statements.
The classic argument that ‘it is always the customer who pays the taxes’ is very true for that tax. Difficult to explain how it works, one explanations is that it is similar to a sales tax ecept that the buyer is expected to file and pay the taxes to the tax-authorities as opposed to when the seller collects, files and pays the sales-tax to the tax-authorities.
We can’t really have a global economy until we understand how the economy works.
The globalists had a meeting to choose an economics for globalisation.
Let’s pick a really bad economics for globalisation.
What about neoclassical economics that brought capitalism to its knees it the 1930s?
That is bad, let’s use that.
It’s not only God that works in mysterious ways.
The economics of globalisation has always had an Achilles’ heel.
In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics.
Not considering debt is the Achilles’ heel of neoclassical economics.
When you use neoclassical economics, policymakers run the economy on debt until they get a financial crisis.
Policymakers don’t realise it’s the money creation of bank loans that is making the economy boom as they head towards a financial crisis.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
At 25.30 mins you can see the super imposed private debt-to-GDP ratios.
https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
Policymakers run the economy on debt until they get a financial crisis.
1929 – US
1991 – Japan
2008 – US, UK and Euro-zone
The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above.
We need to work in parallel to get a bit more idea of how this economy thing actually works.
This means everyone doing their own thing, until someone discovers how to run an economy successfully over a long period of time.
We can then build up slowly from there to iron out all the wrinkles along the way.
The globalists were a tad over-confident in trying to form a global economy at this stage.
Just a small thank you to Yves for commenting on the headline (which I didn’t choose and didn’t particularly like either – click bait, I thought). I’m not a globalization enthusiast, in large part because tax seems to be one of those areas where the globalization advocates do not seem particularly enthralled with the idea of harmonisation (as they do, say, for industrial standards or IP enforcement).
But I do think we have to ponder the issue in the context of a sensible industrial strategy which, as Yves rightly points out, is non-existent right now.
Tax – a heavy demand – to make onerous and rigorous demands on – assessment, duty, imposition, impost, levy strain, stretch, test, try.
If you want to slow down, impede or hamper some human activity – you tax it, make it harder to do or profit from. Taxes come in many forms seen and unseen = a fine, fee, tax, levy, surcharge, social security payments, payroll taxes, licensing etc.
If you want to encourage an activity – remove taxes.
A common misconception is that corporations pay taxes – they really don’t. Whatever product or service being offered has the tax cost baked in to the ultimate price which is paid by the consumer – this means the cost is passed through. If a corporation can figure a way to capture the money that is to be passed through in the form of taxes, and convert it to its own bottom line – well it is such a huge pot of money that, as is evidenced by fancy tax code manipulation and the breaking of laws – globally – that all gloves are off in that pursuit – no matter the consequences to life on this planet – this voracious con job and government manipulation by the laughable ‘Free market’ as defined today – it is a global disaster.
The way the tax code is set up today – the non-producers, speculators,polluters, realtors, private equity, stock buy backs, scammers, puffers, unearned income earners, rentiers – ie: asset price inflators are tax advantaged
Being unburdened of taxation, these asset price inflators collect for themselves an unseen tax upon everyone else which makes the cost of living and doing business for everyone else extremely high.
As normal, sane human beings, where should we lay the heavier taxes, on industry or speculation – on labor or unearned incomers?.
This isn’t new – the same old same old, just dressed up a little different, but naked the same damned thing as been going on for ever.
Yes folks – there are good people and bad people — just as there are good companies and bad companies, just as there are just taxes and unjust taxes, good markets and bad markets, good governments and bad – till we get are heads around what we want for our generations yet to come.
In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
If a man earns his income by producing wealth nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.
Written around 1925
PS: Has anyone told Pence that those dumb asses who say they have a ‘constitutional right to Not wear masks’ are dumb asses because they do not have a right to threaten other peoples lives with their dumb ass bio-hazard selves. Just like they have no right to shoot a gun willy-nilly in a public place or shout fire in a public place
A good idea might be to stop using so many euphemisms.
Locally we have fees, adjustments, rates, etc.
We should, as written above, only use the word “income” and not profit, capital gains, etc.
Better yet, as suggested, consider transactions as the basic action to tax.
What would be the best way to go about discouraging various tax havens like you see in small island nations in the Caribbean and Asia? It would seem to be difficult getting their governments on board because the good business they have in hiding the assets of the international financial class and multinational corporations.
I am not sure how you would discourage the setting up of said offshore accounts unless you forced them somehow, but I am not sure how you would do that without violating international sovereignty laws.
Shaxson and others have written about how and why those havens came about, and mentioned some of their silent backers. Many vested, and overlapping, interests make changes more difficult, although not impossible. Washington could influence that process mightily.
Yaaaawwnn and you Americans still vote for biden. Let’s not be too hopeful eh?
Ian, you sound- oh so bored-
I am an American and I have not voted for Biden – ever. I also vote at every opportunity.
So, as you are overseas? from the USA – how do you see it – your ideas, your solutions, you must have some as this seems Yaaaaawwnn === o sorry
Lets hear it = lets have it
I get the debate on the corporate side, but it would also be nice if the US would also stop taxing individuals on the basis of citizenship – the only country along with Eritrea to do so – and not residency.
Taxes, fees, rents, assessments, combined with inflation in the cost of the goods, services, and sundries needed for general sustenance.. Those are things the middlin classes are drowning from. And we don’t get tossed a Fedpreserver whenever WE overindulge, resulting in us spilling overboard, sinking into the Depty Deep!
So again, how about abolishing corporate income tax altogether, since it’s long since been rendered uncollectible. Corporations hire armies of lawyers and accountants to devise elaborate scheme of tax evasion. That of itself is a huge waste of “talent” and effort. Instead tax both the wealth and income of the owners of corporations, the stock and bond holders. A corporation ostensibly worth $200 bn can afford to hire their minions to evade taxes, but an owner worth just $1 bn would find it much more difficult and relatively costly to do so. And individuals are much more easily held criminally liable than corporations for similar reasons. And can be located and stripped of their passports.
A universal land value tax is essential as well, not just to prevent housing/RE bubbles, due to an excess provision of credit by banks, who will always lend on the basis of collateral, rather than for productive purposes, (which they are largely unqualified to assess), but more especially to dismantle corporate industrialize agriculture, a huge source of GHG emissions, and permit new generations to embark on regenerative agricultural practices, which would reduce emissions and form carbon sinks as well. In both cases there is a generational conflict and blockage, as high land rents prevent the under 45 year olds from accessing opportunities, while coddling the older largely suburban generations in their illusions about “property values” as a deserved entitlement, rather than simply a use-value, not per se a productive investment.
A high VAT tax, if coupled with a sharply progressive, mostly negative income tax would also be useful, in curbing luxury consumption while redistributing income to where it is most needed. But it could also have some tariff-like effect, insofar as it might redirect domestic consumption toward non-tradeable sectors. which is perfectly legal under WTO rules. (Though maybe abandoning the WTO with its noxious ISDS provisions might be in order).
A carbon tax-and-rebate scheme could also be useful, provided it is not regarded as a self-sufficient piece of market “magic”, but supplements the needed ficsal regulatory and industrial policies required to develop and implement alternative energy and resource efficient systems. For countries like the U.S. which have exported their consumption “externalities” to poorer and less energy efficient and regulated countries, imposing such a tax, (also legal under WTO rules) would provide a powerful incentive to reduce GHG emissions world=wide, insofar as developing countries would want to still earn export incomes.
But if one would really want to overcome the multiple crises we’re now facing, then deconstructing the whole hypertrophied financial system and extraterritorial corporate power, the system of inverted totalitarianism in which we are entrapped, by anti-monopoly enforcement, de-privatization of public resources, the curbing of artificially constructed IP “rights” – (84% of the notional value of the S&P 500 consists in “intangib;le assets”)-, and reduction of extravagant debt loads are in order. And that means seizing control of “independent” central banks and rendering them subservient to public and national fiscal purposes, rather than letting them prop up the existing and failing “order” ad hoc. Ensuring the taxation of wealth and income is relatively trivial, when compared to how such paper claims are generated in the first place.
The whole “treasure islands” system of tax evasion is absurd. (Guernsey and Jersey are not part of the U.K. but are Queen Elizabeth’s territories by virtue of her claim to be the Duke of Normandy). In fact, all these “off-shore” registered entities are actually accounts at the Fed or other CBs. And Ireland, Luxembourg, the Netherlands, and a number of U’S’ states, such as Delaware and Wyoming are participants in these schemes. So if nothing else could legally avail, there is always an old tried-and-true solution:
https://www.youtube.com/watch?v=HHhZF66C1Dc