> How to fix it?
Make a tax code as simple as possible. So simple there is no room for interpretation.
Make a tax code as simple as possible. So simple there is no room for interpretation.
They can suppress their 'profit' whichever way they want, they can't suppress their revenue in a given country.
The digital services tax is imposed at a rate of 3% on the gross revenues derived from digital activities of which French “users” are deemed to play a major role in value creation. The law not only affects digital companies but, more generally, digital business models.
https://home.kpmg/us/en/home/insights/2019/07/tnf-france-dig....
That rapidly turns into a disaster of consolidations and monopolies. You don't want that.
Think about the difference between big company $BIG selling you the consumer a million Widgets for 10^9 currency units, versus 26 small companies $a..$z each selling to the next in a long supply chain which results in a million Widgets.
In revenue taxation, big company $BIG pays 10^9∗$TAX_RATE.
Whereas the 26 small companies pay something more like 26∗10^9∗$TAX_RATE because each time a company pays the next company, that's revenue for the next company.
The difference in tax between those two scenarios is so enormous, that it would create enormous pressure for companies $a..$z to consolidate into a single company.
Repeat this across the entire economy, and you have enormous pressure to consolidate everything into as few companies as possible.
In short the market/regulatory environment should support disaggregated business as a first class citizen, mergers and vertical integration as a very second-class construct. To the tune of if you merge, you must maintain 3 sets of accounts. The original accounts separately, and a combined set. You must gain more capability or utility to create value for the public as the combined company than by being separate. The capacity to measure the utility amplification being facilitated through the extra set of books. As more companies are bought and merged, the audit workloads would increase very quickly. Failure to make a good case for why you should continue to run as a merged company kicks in an orderly spin-off of the previous acquisition to get operated by someone else. M&A's should not be one and done. This greatly complicates hostile takeovers, makes the business model by which large entrenched entities buy out and kill up and coming competitors, at best, a stalling tactic, but more often a worthless waste of time to the perpetrating company as much as it is to the public.
If you let M&A's have their cake (the capital assets of another company) while giving them the option to cut fat without insisting that they "compensate" the public for the decrease in competition, only one side will ever benefit, and it won't be the public.
They won't avoid it to get some minor edge.
They will avoid it because every company formation and financial advisor will point out that it's commercial suicide to start your own company in that environment, and that instead you should take your idea to an existing company which specialises in opening "nearly autonomous departments", for an instant 30% or so increases in post-tax income, or 30% edge over competition on prices, or 30% edge on salaries you can pay, for exactly the same kind of business. (30% representative of some countries not others... adjust for your locale).
The few real companies specialising in that would love your M&A and tax regulations, as they could take a few % of every small business' profits, and have some levers of control, effectively government mandated.
After that, the millions of small companies which already existed, who cannot consolidate due to your M&A restrictions, will gradually either go out of business due to competition, or find a way, though contracts, deeds etc, to transfer their activity into these "autonomous department" companies without actually merging. It's not uncommon to transfer some of a company's activity this way already, so that would just be scaling it up.
You can try restricting all of that, but it will be very difficult as you would have to do it restrict what sorts of things people can agree to in contracts in a very significant way, and in doing so, restrict what are currently effective business arrangements for some companies to make them less effective. That would be an enormous change to business culture, and I suspect even if you did restrict what can be agreed in private contract terms, alternative ways to transfer what gets done where would be found very quickly and easily.
But it didn't look to me like that's what the GP comment meant. I assumed they meant tax on revenue taken by each company. No need to account for expenses...
I'd hoped that would be obvious from my comment, but if not I hope I've clarified that now.
ps. It looks like other commenters here are confused about this language, and arguing over the semantics of what "tax on revenue" means.
VAT doesn't solve all tax fairness problems unfortunately, which is a shame because it's a fairly well administered system, and good at catching fraud.
There are good reasons why VAT is not the only tax on businesses. One of those reasons is that immediate revenue and expenses are a poor model of many business accounts. Accountants use more sophisticated models (there are professional standards they have to adhere to), and despite their quirks and loopholes, these are generally better, fairer, more representative models of the state and value of a business and the money flowing through it, and as a result, for most "ordinary" businesses (i.e. not international corps gaming the system heavily), that ends up making taxation fairer.
Someone mentioned using a higher rate for higher revenue. That suggests an example where the better models which incorporate time and stored value results in fairer, more appropriate taxation. If you have a higher sustained revenue, year on year, it makes sense to use the higher rate if that's the policy. But if you make zero in year $X and twice your normal in year $X+1, then back to normal in years $X+2..., all just because you had a big customer pay late for the first year, fairness says you ought to end up paying the appropriate tax rate for your steady normal in the long run, not twice as much tax thanks to your late-paying customer!
The accountants' model handles that just fine, as it says you earned the money fair and square in year $X even though you didn't get paid that year. And that's generally better for limiting tax avoidance too, because it reduces the ways in which co-operating companies can game the system by timing their payments to each other to cheat. (VAT doesn't show this problem because it's a fixed percentage, but it occurs with progressive taxes, meaning variable percentage.)
My current biggest gripe with taxation is that it's mostly paid in the countries where the corporation lives, not where the revenue is made. Facebook sells 10 mil worth of ads in France? Facebook should pay (some) taxes for the 10 mil in France.
It seemed like such a simple solution to the often complained about problem of multinationals shifting profits to tax havens, since it’s much easier to determine where revenue is from, but I almost never see it discussed when corporate taxes come up. I wonder if it will ever go anywhere.
For example, if you sell something before you have paid for it (this is very common), and then put the money from selling into a bank where it earns interest, and then withdraw that money and pay for the thing you sold:
You will have made sale_price - purchase_price + interest.
In a VAT system, you will pay VAT on sale_price - purchase_price (or your customer will, depending on how you sell things), but not on the extra interest you earned.
So that's already a loophole. You can game the tax system by selling things before you buy them and earning interest.
If you're smart enough, you might even sell things for exactly the same as you pay for them, and still make a profit due to the interest while you hold the money. You could get even smarter, and hold that money on behalf of your upstream supplier to withdraw when they need to spend it. Before you know it, you're paying zero VAT, and all your profit looks like interest.
But you have to pay an accountant to make sense of all these for you. The cost of the accountant isn't a direct cost of making the thing you're selling.
So that gives you the difference between gross profit (sales price minus costs associated with the thing you're selling) and net profit (what you have after paying for everything needed to run the business).
That's literally a tax on value added.
With a broad enough definition and inclusion of other, unrelated prices at that negative part, one can claim that in a time-frame of several years, both average to nearly the same. But that doesn't make them equal, and if you go read those tax-codes, you will discover the ones being discussed add to very different figures even on the long term.
I'll just add here another encouragement to go out and get an understanding of tax codes. Odds are they will be relevant for everybody that frequents here at some point on their lives, and odds are that if you don't know them, you'll only discover their relevance after the fact, when they have already caused you some problem.
No matter which company in the supply chain pays it!
With VAT, it's raised prices and shown on the receipt.
With other business taxes, it's raised prices and not shown on the receipt.
Customer pays either way.
Of course, competition and other factors also govern prices. It's not a given that changing business taxes always causes a business to change its prices by a related amount.
But that is the same for VAT and other business taxes too.
GP comment (me) points out that the proposed change is not a good idea.
P comment (riknox) points out we can always address that problem by doing what we currently do already (VAT).
I agree, we can solve the problem of the proposed change by continuing to do what we are already doing :-)
Ie, you buy through 1000 transactions, and you sell through 1500 transactions for a net total of +€5k within the country.
Tax that €5k, not the individual transactions.
Unless I'm missing something.
I'm still not seeing how it applies to the proposed example.
For instance, Google France makes 1bn euro in revenue, but purchases Google services from Google Ireland for 999mn, thus almost no profit and thus no tax. Google Ireland make 20bn but pay 19.99bn to Google Bermuda, which is the exclusive licensee of Google IP worldwide (even though the IP is almost exclusively produced in the US).
Taxing revenue means that these shenanigans do not reduce the tax paid in a particular country to zero.
That they would pay French taxes on that €1bn, and the French wouldn't care what they did after that.
I'm suddenly hit with the image of a child whining that having to do homework AND chores is too hard, and their parent telling them to suck it up.
Besides, tax revenue doesn't just disappear into some govt hole, it gets redistributed as services and grants and the like. The loss in operating revenue is likely made up in increased business. Your low margin goods get fked but people are more willing to purchase the higher margin value-adds.
With this thinking, you can very much say that tax revenue does just disappear into some hole. The effect of taxation in this thinking is that it applies brakes upon the accumulation of wealth and causes existing wealth to be worth more (via deflation). This is counteracted by the inflation from created wealth via govt spending.
A weird alternative to taxation could be to print more and more money without taxing any of it. This would be functionally a flat tax on all existing wealth in that fiat currency via inflation.
It doesn't just disappear into the misty fog of the central bank though. It goes onto some government ledger.
This ledger has some considerable effect. It greatly constrains what the government can spend.
If the ledger meant nothing, you would not see government needing to borrow via issuing bonds when it needs to spend more. The cost to government of borrowing goes up and down according to circumstances, and is outside of government's direct control.
In other words, all the parts are related, partly by design, and this strongly affects the consequences of issuing (or destroying) currency at the central bank to the point where it's not really meaningful to think of taxation as destroying currency.
If the government did issue enough currency to go on a spending spree, before long not only would inflation harm other parts of the economy, it would also find that the prices of its spending spree went up, so it would have to issue more, and...
Ultimately no matter how much currency it issues, there's a strong drag in real terms on how many things the government can obtain from others and cause others to do via commerce.
That limit on its spending power makes the ledger balance something much stronger than a hole into which tax disappears.
Most people operate on low margins economically, saving 5% of your paycheck would be an outstanding achievement for many.
Better to tax value adds than revenue, which is simply money flowing through the economy.
All these arguments about which country gets to collect a few percent tax, of a few percent profit, are dwarfed by this much larger slice. Which every country is free to adjust as they wish.
- Collection can be reduced by deducting VAT on company purchases, meaning the company only pays the difference between the VAT charged to the customer and the VAT they've incurred on purchases.
- It's regressive. It primarily affects poorer consumers since it is effectively a tax on the end user rather than the company.
- Some countries aren't free to set their own rates. For example, in the EU the standard rate cannot be set below 15% without first changing EU law (and convincing a majority of Member States to agree to do that) so it's not very competitive.
There's an argument that VAT is regressive but this isn't it. Who effectively pays (meaning economic incidence) is complicated. But sometimes it works out that poorer people pay a larger proportion of their income in VAT than do richer people. It seems entirely OK to have a mixture of regressive and progressive taxes.
And sure, not completely free within the EU, but the range of acceptable rates is pretty wide, maybe 17-27 exist today? I haven't done the numbers but France could surely raise an order of magnitude more money from VAT than they collect from corporate profits, if they wished.
VAT is definitely not a tax on profit, that's usually called "corporate tax" [2] which is a completely different thing.
https://www.amazon.com/Fine-Mess-Global-Simpler-Efficient/dp...
See ~26 minute into this interview for a more in depth proposal that makes a lot of sense. Separate collecting money and spending money. https://www.econtalk.org/john-cochrane-on-economic-growth-an...
This is not a problem, this is a benefit. If you separate tax collection from tax policy you are still able making economic and social policy via other tools.
Basically tax policy is a low bar to entry way to get the laws you want but in a lossy capacity. Instead of making something legal/illegal outright you can just make it "illegal unless you jump through hoops and/or pay money" or you can provide a tax incentive for something you like (easier to sell than a subsidy). This lets you get dumb policy that would otherwise never pass. Big business benefits from this by getting carve-outs that make them more money or by getting policy that lets them use scale to their advantage. The authoritarian upper middle class benefits from this by using tax policy to create a carrot/stick system to kinda sorta make the poors act the way they want. And of course the government and politicians benefits from the current system because it gives them influence and power.
So right now we've got big business, the top ~30% or so of society and politicians/the government benefiting from the status quo. In order to remove politics from taxes big business is going to have to pay more (or everyone else will have to pay less, an equally large pill for a lot of people to swallow), the upper middle class will have to lose a set of carrots/sticks to kick the poors around and the government will have to accept a net decrease in power. The only way to get these groups to accept this is to spend a century boiling the frog. I don't think we'll ever get simple tax policy overnight.
Especially because the way a lot of deductions end up working in practice is that you withhold the money from people in the first place and cash it out in the end of the year when you calculate your actual tax burden.
>It is more efficient to let people keep money than it is to take it from them and give it back
Direct subsidies in the form of tax credit don't incur any costs of moving money because no money are moved, but functionally it is almost the same.