The missing profits of nations
voxeu.org
voxeu.org
(note: Jeff Bezos DID get enough money out of it to become the richest man on earth, but not through profit. Rather he got "capital gains on his shares", which is the same thing in practice, but a very different thing for the IRS. Oh, and since it's "paper profits only" (mostly) he hasn't paid tax on it either)
People think the internet businesses got successful because it's "just a better way to do business", but it gets a ~20% government subsidy. 30% if hailing from China (for instance, free shipping really is free from China, or I should say, paid by the US taxpayer mostly)
The reality is Amazon, and to a lesser extent Google, Apple Yahoo, Microsoft and Facebook are government-sponsored companies that have been given extreme preferential treatment for close to two decades now.
Without that 20% advantage, there is no way Amazon could compete with Walmart. Without that, the business model is absurd, even now.
Microsoft, selling software "locally" (ie. tax free in the Bahamas) but internationally, and even more so, Yahoo, Facebook, Google, ... selling services "locally" (in Delaware, Ireland and the Bahamas) is a homongous tax loophole.
(note: they don't sell to "you". They sell to, say, Microsoft Ireland for $final_price - 5%, then the "only profit" is that 5%, and that's all they pay tax on. For FB/Yahoo/Google/... it's even worse)
As an analysis of the cost structures of these companies will tell you : if these loopholes were all closed, the internet "revolution" would end. All these companies would rapidly shrink to 10% of their current size. This seems absurd to many, but rewriting the financial statements of these companies taking normal tax structures into account will tell you this.
2) Ability to shop around for the cheapest jurisdiction for international sales (which means outside of the US Amazon paid low single digit tax rates on everything)
3) Ability to sell stuff from people and not being forced to prove they pay taxes or have it impounded
All 3 above are not available for brick&mortar retailers.
In case you were wondering why the CEO of Amazon, Jeff Bezos, is a Wall Street banker and not a geek.
That's wrong and impossible to support in fact. You can spot a fraudulent claim like that easily because it wings an arbitrary number that on the surface appears absurd (and as it turns out, is).
Tax Microsoft at the OECD median, their net income for 2018 would be about ~$25 billion. Their tax rate for Q1 was 14%, which is comparable to the effective corporate tax rate in much of Europe.
So you don't like their 14% rate and think it's too low? How would raising that to 18% or 20% change anything fundamentally? It wouldn't. And it certainly wouldn't "rapidly shrink [them] to 10% of their current size." Whether their net income is $23b or $26b or $28b annually, Microsoft remains worth a similar value as to what they are today (ie well over half a trillion dollars).
The same holds true for Facebook, Apple and Google.
Making ridiculous claims without anything supporting them, doesn't make for a very good argument position.
This is not what I mean. Replace Microsoft tax with an auto repair shop's taxes. Everything produced and installed and serviced locally.
1) Sales tax/VAT. On the full amount of the sales, not just the lowest they can get away with. That's 10-27% depending on the location. No interstate commerce exception. No import/export exception.
2) Corporate tax in the local jurisdiction. That's the 14% tax rate (and there are jurisdictions where this is 35%). This comes on top of the sales tax of course.
3) Capital gains or profit tax in the local jurisdiction, on the company side (there is ALSO capital gains tax on the investor side, it's not either/or everywhere). This is going to be somewhere from 0% in some (few) places, 15% (normal) up to 58% (in jurisdictions where capital gains is taxed like income) (note that this will be charged before buybacks or dividend payouts are allowed). Auto repair shops don't get to pick ... why should Microsoft ?
This is ignoring lots of varied taxes, TAX DEALS, real estate investments, owned real estate, depreciation for machines being allowed or not, any investment/loan taxes, ...
Now we have a minimum of 35% tax, up to 81% tax, on any amount of money that shows up in the share price or is paid out to investors.
THAT's the figure to be compared to the 14% tax rate. THAT's why Walmart and "brick&mortar" retailers feel slighted.
THAT's why everybody should be angry as hell at people like European Commission president Juncker, as he was one of the pioneers of allowing companies evade tax within Europe. Of course, that's also why it won't ever be fixed without replacing most/all of the political establishment in Europe (but US is not that different)
https://www.fool.com/investing/2018/04/08/trump-is-right-ama...
> You forget the effects of the "full reinvestment" policy. Amazon barely paid any tax at all
Is there anything stopping other companies, Amazon competitors like Wal-Mart or otherwise, from following this same policy? If no, your claim that companies like Amazon are government sponsored holds no water.
> Jeff Bezos DID get enough money out of it to become the richest man on earth, but not through profit. Rather he got "capital gains on his shares", which is the same thing in practice, but a very different thing for the IRS
Except it is not even remotely close to the same thing in practice. Jeff Bezos doesn't have $150B sitting in a bank account somewhere. How do you propose to tax money that he doesn't have access to? The very second he accesses any of it by selling shares, it is taxed. Are you proposing that everyone who has any kind of appreciating investment (so, anybody with a 401k) annually pay taxes out of pocket on the gains? You're going to piss off a lot of ordinary Americans if so.
> People think the internet businesses got successful because it's "just a better way to do business", but it gets a ~20% government subsidy. 30% if hailing from China (for instance, free shipping really is free from China, or I should say, paid by the US taxpayer mostly)
You completely lost me here. Where is this 20% government subsidy for being an "internet business" coming from? As somebody who's helped run an "internet business" I wasn't aware of such a subsidy, was I completely missing out??
And as somebody who currently is working on supply chain logistics involving shipping items to the US from China, I was also unaware that there was a program where the US taxpayer would fund our costs. Can you point me to such a program please? It would help me tremendously.
> Microsoft, selling software "locally" (ie. tax free in the Bahamas) but internationally, and even more so, Yahoo, Facebook, Google, ... selling services "locally" (in Delaware, Ireland and the Bahamas) is a homongous tax loophole.
This is the only part of your comment which seems grounded in reality - big corps absolutely take advantage of fancy accounting and overseas tax havens. What this has to do with "internet businesses" is utterly beyond me.
> As an analysis of the cost structures of these companies will tell you : if these loopholes were all closed, the internet "revolution" would end. All these companies would rapidly shrink to 10% of their current size. This seems absurd to many, but rewriting the financial statements of these companies taking normal tax structures into account will tell you this.
To make such a bold claim, surely you've done such an analysis, or at least have read such an analysis that you can link to?
I think the grandparent is referring to this:
https://www.quora.com/Why-are-Chinese-goods-so-cheap-to-ship...
"Under current rules, those charges (called terminal dues) are set ludicrously low for certain countries, among them China. (Under UPU rules, for example, China, the world’s second-largest economy, gets the same break on terminal dues as do Gabon and Botswana.) This means that the USPS actually charges China Post less to deliver a package from China into the U.S. than it charges a U.S. business or customer to deliver a similar size package within the 48 states. The post office is losing money on every package it delivers from China — costs it has to pass on to its own American customers, not to mention U.S. taxpayers."
Are you saying shipping from China has no advantages whatsoever?
Can you explain how this product costs $1 and ships worldwide for free?
https://www.fasttech.com/products/1299/10003175/1236402-1000...
What subsidies are you even talking about? Most of your post sounds like stuff you just pulled out of your ass
This is why there has been a bunch of hoopla over Irish tax incentives for example, as it allowed the likes of Microsoft, Apple and Google to claim all sales inside EU was done by their Irish office. The rest simple earned just enough to cover expenses...
(Side note: the alternative of taxing profits where the revenue is generated does not make much sense as this would be equivalent to a sales tax.)
[0] https://www.nytimes.com/2017/11/06/world/apple-taxes-jersey....
[1] https://en.wikipedia.org/wiki/Double_Irish_arrangement#US_mu...
Doesn’t that mean Ireland is fucked in 2020?
If tax law provides the incentives, companies can do all sorts of gymnastics to obfuscate those two things. There is always a loophole if you look hard enough for it.
Pay workers where they live? Why not hire them through an offshore firm that pays them as international contractors?
Buy resources where they are produced? Buy the rights to the resources from an offshore company who owns the IP rights to the method of production.
These are convoluted examples but the point is, companies can always add a level of misdirection to fit within a loophole.
And sales taxes (vs. VAT) is a terrible idea overall, it is a tax on consumers, not on companies, as it only applies on the final sale to consumer.
Undoubtedly a sales tax can be regressive but don't those exceptions move it far enough into being a tax on discretionary purchases? There doesn't seem much anti-VAT feeling in the UK outside of occasional axe-grinding from the popular press.
For example, by placing their operations in a separate country with lower taxes and shipping from there. So you need income tax, sales/vat tax, and corporate taxes to prevent any gaps.
you are correct that sales tax is almost always regressive, but please be careful making this kind of "just so" argument regarding taxes. the place in the production pipeline where taxes are collected has almost nothing to do with who ultimately bears the burden of the tax. see https://en.wikipedia.org/wiki/Tax_incidence if you're interested in learning more.
But the issue with sales taxes is that it is applied on the final sale, which generate distortions when the products are being imported, or have a long supply chain spread across a country, as it is a tax on the consumer, the value is only capture at the consumer location, not along the supply chain (that's what I meant as a terrible idea).
https://tax.thomsonreuters.com/blog/onesource/sales-and-use-...
But between VAT and sales tax, I strongly oppose a pure sales tax, although I would be ok with VAT charging a final tax which is allocated to the consumer location (vs. the location of the business).
Pure VAT: taxed where value is generated.
Pure Sales: taxed where the consumer is based.
Mixed VAT-Sales: mostly taxed where the value is generated, plus where the consumer is based.
The mixed VAT-Sales model would generate a better allocation of tax funds across the entire supply chain, all the way to the consumer.
I think it's only when you have non perfect market condition (like monopoly, monopsony, captive company) that the real added value is not visible and where your idea of mixed taxes is needed. Do you think it make sense or do you something other in your mind?
So? That is a problem for necessities like food, housing. But not for advertising, phones and computers, gas, cars, etc...
For example, the subsidiary company might have ownership of a trademark, and the onshore company pays a ludicrous amount to license that trademark. The accounts show this as a cost for the onshore company, lowering its profits; whilst the offshore company makes a large profit. An example I've come across (but can't find/verify them at the moment) is pencils being bought from an oversea office for thousands of dollars each.
If corporations were charged based on location of costs rather than profits, as you suggest, I can imagine this being used the other way: almost all of a company's assets, from across the globe, are funnelled into an offshore division, in order to pay a ludicrous amount for some trivial local item (e.g. rent and security guard for their empty 1-room office).
PS: I think these sorts of tricks are the reason the article keeps using the phrase "tangible assets", rather than just "assets".
Certain cult classic movies that look like flops on paper. I always wonder if the money went down a subsidiary black hole to keep insiders happy.
Tax land.
But why this eagerness to tax them so much in the first place? Because of unfairness relative to smaller companies and employees who carry the whole burden of taxation and those tech giants pay close to zero.
In land based tax system you wouldn't collect much from large tech, but you wouldn't collect much from small businesses and employees either. Fairness achieved.
Now you might ask, wouldn't we be really short in tax revenues if we kept only land taxation? The answer is pretty surprising that it would likely collect even more revenue that current system based on sales tax, income, vat, etc., but I encourage the careful reader to study land based tax systems on their own to discover their simplicity and beauty.
I'll just hint that there is so much value stored in real estate (of which the biggest part is its location value, ie. land) that it dwarfs world stock and bond markets together. So just imagine making it a base for a tax.
That said, this isn't rocket science. As the article points out, it's simply an unwillingness by the host countries to hold multinationals who utilize tax havens to account.
The big players (none of which are tax havens) certainly would have an interest in building it, and in giving it power.
Comments like this one and https://news.ycombinator.com/item?id=17620701 are a bit like littering. I'm sure you wouldn't do that offline, so please don't do it here either.
The UK could normalize the status of these and remove all the advantages that make them attractive as tax havens, but doesn't seem interested in doing so. Perhaps because of all the nice money involved, perhaps because the British government has other things to work on right now.
I would have liked to see an exploration of how high-tax countries encourage those differences in "Pre-tax corporate profits (% of compensation of employees)" and how the taxing of individuals has changed in the same time.
Germany for example has a progressive income tax capped at 42% yet while incomes rose over the decades, the tax exemption limits did not, effectively reducing the salary needed to reach that cap from 24-times-the-mean-wage two 2-times-the-mean-wage.
I'll bet 10% of $17bil is still quite a bit more than whatever Google paid in US taxes that same year. Is it because "making the use of tax havens illegal" is hard/impossible?
What the logic behind this 'ideal'?
the corporate tax is actually very controversial among economists. it seems like a straightforward case of "making the big corps pay", but there is very little consensus as to who ultimately foots the bill for this type of tax.
Here's a fun explanation of the kinds of hoops corporations will jump through to dodge taxes: https://en.wikipedia.org/wiki/Double_Irish_arrangement
If the penalties were harsh enough, wouldn't it change this dynamic?
You're missing one piece of the puzzle: the Irish government is fully complicit in all this, with a "beggar thy neighbour" strategy to cream off taxes from their supposed partners and allies.
It is at the very least hard. How would the law work?
Will it be illegal for a company to sell/transfer their intellectual property to a company in the Caribbean? Will it be illegal for that company to license intellectual property to a company in the US?
Everyone feels they can recognize tax evasion when they see it, but to come up with a set of quantitative tests that can be applied fairly is difficult. Being able to apply the law consistently is essential, as the government will picking market winners and losers if they let some companies get away with tax evasion but not others.
One of my biggest criticisms of income tax is that it is such a nightmare to implement fairly as income is very fungible.
Why not? I'm sure the tax havens would be very quick to adopt sensible tax rates to stop the ban.
So you need all countries to coordinate on this front. I also don't see how the ban would encourage the Caribbean to adopt "sensible" tax rates. In the Bahamas, Bermuda, Cayman Islands, or the Virgin Islands, the corporate tax is already zero. Not sure how much leverage such a ban would actually have over these countries.
The second problem is in the actual legislation. How is the law going to be written? Is it going to be a fixed list of countries that congress must update? Any country with a 0% tax rate? A new FTC style body that adjudicates which countries are "tax havens?" Because all of these can be circumvented with just a little elbow grease.
The final problem is enforcement. Can intellectual property be sold to other countries in the US? Can those companies be sold to foreign companies? If a US company is a acquired by a foreign company, could that company then not license software to US companies? Are all transactions between US and foreign companies going to be individually monitored? Because that is a lot of work, and if you don't do that, it's very difficult to enforce the law.
Basically, if someone was to sit down with the specific goal of designing a tax that could be easily evaded, they would come up with the income tax. Personally, I feel it's better if we adopt taxes that are more easily enforced and more progressive than the income tax. But for some reason, the corporate income tax remains relatively popular with politicians and voters around the developed world.
Yea, I don't think there would be anything "simple" about this, for all of the reasons listed in my reply above.
> Seems to work well for China.
We have very different definitions of "work well." I assume you are referring to the recent tariffs, in which case we gave China an ultimatum, and they said go for it, and are imposing retaliatory tariffs.
If China had actually changed any of their trade policies to be more fair, I would have considered that to have "worked well."
What we got instead was a trade war, which was to be expected. Basically ultimatums are always an ineffective negotiating tactic as they force politicians in the receiving country to reject the offer, no matter how reasonable.
No, I'm referring to the fact that foreign (Western) companies cannot sell in China unless part of the products are made there, and can't own Chinese companies without Chinese co-ownership. It all resulted in a massive transfer of IP to China, simply because for most companies, the tradeoff still made sense (short-term at least) (Google is a notable exception).
The amount of law and international agreements that would be overturned by such a change is truly staggering, so I’d still say this is the antithesis of simple.
Further, I’m not sure China’s model, and protectionism in general, is a better strategy. No way to know, but I expect China’s economy would be stronger if it didn’t have these protections.
Like I said, there are a hundred things we can tax; why do we only want to tax the one that’s easy to evade?
(By “forbid” I of course mean “tax so heavily it just doesn’t make any economic sense”.)
We should do only one of those things.
Every person should incorporate themselves and do what the big guys do.
1) Nation states are their own sovereigns. Judging from that humans usually support things like the united nations and the law of nations, that will always include their sovereignity over their tax-design.
2) international flow of money is usually desired and thus encouraged. If you can afford to limit the flow to your country, fine. But less fortunate might be hard to convince to decline the benefits of it.
3) The more money you can spend on tax-lawyers, the more likely you are to be able to design your tax burden more efficiently around your needs (needs meaning your business objective + less taxes)
Also IMHO it's fair to say that the more complex a country's tax code, the higher the income-inequality in terms of access to tax-rate-optimum.
This a solution which is easy to explain, but hard to implement.
(Submitted title was 'Don't be taxpayer – Google Alphabet made $19.2B in revenue in Bermuda'.)
https://news.ycombinator.com/newsguidelines.html
Edit: also, could you stop posting unsubstantive comments generally?
I think at least one of those four words must be incorrect or poorly chosen.
The tax avoidance strategy of choice, the Irish Sandwich, is perfectly legal in Ireland and the Irish government actively invites companies to use it. They take taxes away from EU countries and collect generous subsidies from those same countries, double-dipping. Focus your ire there, or Luxembourg, or any of the other countries who have made a whole industry out of it.