The Public Accounts Committee is quizzing Google about its tax payments this morning. Google says it complies with tax law. Critics don’t find that a satisfactory answer. Google is a household brand. How can it be that they pay so little tax?
The fundamental issue is that, while Google’s services may be used a lot in the UK, the value is created elsewhere – for example, the programming for the search engine doesn’t happen here. This makes Google different from, for example, a car manufacturer who assembles cars in the UK.
In that example we can see the future too. Google will be a big player in self-driving cars. Even if those cars are built in the UK, arguably a large chunk of the value will lie in the software, which won’t be created here. Over time, more and more industries may be eaten by firms in Silicon Valley and more and more profits may move from the UK to be taxed elsewhere.
We can respond to this in the UK by lowering our own taxes. This may make it more likely that firms base their value creation and hence profits here. Though this is a race to the bottom that others can participate in too.
An alternative is to tax revenues rather than profits. This might ease some of the issues about deciding where the value was created – and hence where the profit should be taxed. But it’s a big change and whichever country adopts this change first may be at a disadvantage to others – for example, consumers in that country may face higher prices as firms pass on the revenues tax; or innovation may come more slowly to that country, as firms start by selling in the places where they don’t face a tax on revenues.
These feel like intractable challenges. But there may be another solution, one that starts by recognising rather than railing against the global reach of firms like Google. What I mean is that their profits could be taxed globally too, regardless of where the value creation occurs, and those tax revenues then used to meet global challenges. There are certainly plenty of those facing us: climate change; large scale movements of people due to conflict; finding new antimicrobials as resistance to the ones we have increases.
National governments don’t capture all the benefits from any help they provide from national tax revenues in tackling these issues. The public goods that are created by common action are global rather than national ones. As a consequence national governments are always reluctant to contribute. So let’s pay for them using global taxes.
Global taxes can’t be levied on individuals because we’re not world citizens in any very meaningful sense, we’re national citizens, with our views and preferences represented via our votes in national parliaments. But there are increasing numbers of companies, and profits, which are genuinely global.
There are major challenges in delivering anything like this. Global taxes would have to be set at a level that doesn’t reduce innovation or the benefits of it. We would need a set of threshold conditions to determine when a firm stops paying taxes to individual nations; and starts paying global taxes instead. Countries that stand to lose part of their tax base from a change like this, particularly the US, would have to be persuaded that the benefits, even for them, are significant.
Nevertheless there is a fundamental change going on in the economy, with technology firms and other firms that produce intangible goods, operating free from national boundaries, taking an increasing share of the pie. This fourth industrial revolution, as the World Economic Forum billed it as its meeting in Davos last month, requires big new thinking about tax as well as other issues.
Rather than haranguing technology companies to very little benefit, creating new global taxes could be about recognising that they are linked to a global public, not any specific national one – and taxing them accordingly. It allows us to settle a high-profile problem, one which will steadily get worse, about how to tax them as well as raising revenues to deal with the major global problems that we’re facing. It’s an ambitious solution, but I suggest it deserves a closer look.
From the firms’ perspective it would be much cheaper to deal with a single tax system than dozens of national ones; and the regime would be more certain too, changing only when all the participating nations agree rather than whenever there is local political pressure or a deficit to deal with in any specific country.