Tuesday, 28 May 2013

Fair Tax - Kitemark Needed?

It happens in all great industrial upheavals, first there is a boom then a premature bust, followed by a period of consolidation, then we get the monopoly ‘robbery barron’ era, before settling down into a better regulated more consumer friendly state.  The evolution of train transport and telephony business followed this pattern as has the oil industry, all bringing untold benefits to society but at some cost!  The internet has followed the same pattern with the boom in 1997-2000, the bust in 2001-2003, the recovery and consolidation, and now we are in the robber-barron phase.  The evidence is all round us.  Business oligarchs have made undreamed of fortunes, The lack of enforceable regulation means a small number of companies have been able to secure and then operate virtual monopolies  (Google, Amazon, Apple) and a consequence of this crazy wealth creation is that they have become uncontrollable.  They have been aided by both the rise of the internet and the fact that we live in a global market.

Whilst we may not be seeing hired killers enforce company law in the wild west as in the railroad boom,  the tactics of today’s titans have a whiff of the gunpowder about them.  Most obviously these companies have eschewed their responsibility to pay tax, although they bleat on about the amount of sales and pay-roll taxes they pay, they don’t take the trouble to pay taxes on earnings, which every civilised country levies on profitable companies. They channel turnover and profits into shell companies based in low / no tax jurisdictions, they use and abuse local tax rules to ensure that their shareholders are the only stakeholders who benefit.  This avoidance of corporation tax is a neat way of perpetuating their global monopoly, it harms their smaller competitors and makes it more difficult for start-ups to get going.    Politicians on both sides of the Atlantic have attacked Apple, Google and Amazon for their tax arrangements, but it’s going to be difficult to regulate these sprawling monopolies. This matter of tax avoidance is a particularly raw never when the Western world is going through a great economic depression and governments need every tax dollar they can get their hands on, and the chart below (taken from the Economist) shows there is now an unsustainable gap between the profits business make and the taxes they pay.  Since globalisation took hold corporation tax has declined from around 30% of all tax collected to under 10% in many advanced economies, this is not sustainable in the medium term and risks an anti-business backlash that could be very dangerous to the western economies.



 http://www.economist.com/blogs/graphicdetail/2013/05/daily-chart-14

In addition to these issues of tax avoidance there is the sneaking suspicion that these global brands are able to manipulate markets to suit themselves.  Microsoft has had multiple business anti-trust problems both at home and in other key markets and more recently the US Federal Trade Commission has begun an informal inquiry into Google’s display advertising business, opening a new front in the internet search company’s antitrust battles just months after it appeared to resolve earlier investigations on both sides of the Atlantic.  Among the issues under review are whether Google uses its dominant position in distributing advertising to drive business to its in-house advertising exchange. That practice risks hurting other companies like Yahoo and other search business that have tried to build exchanges of their own.  The way in which Apple orchestrates itunes as the primary or sole retailer of music and other media is also a concern.

The pressure on these tax-avoiders is beginning to mount. Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the IT giant had paid no tax on billions of its profits over the past few years.  In the UK Eric Schmidt defended Google’s tax practices and said the internet group would continue to invest in the UK “no matter what” after Ed Miliband, Labour leader, criticised the company for going to “extraordinary lengths” to avoid paying tax.The Google executive chairman said that governments, not companies, had to set tax rules. “If the international tax regime changes, we will absolutely follow it.  Trust me, I did not design such an irrational structure. It would not have been designed this way by a computer scientist, I can assure you,” said Mr Schmidt.  What he didn’t tell us was the lengths and costs Google go to ensure the money they make in the UK is recognised in Ireland.  Mr Miliband made a point of rebuking Google at the conference “I can’t be the only person in this room who feels deeply disappointed that a great company like Google, with great founding principles, should be reduced to arguing that, even though it employs thousands of people here in Britain, makes billions of pounds in revenue here in Britain, that it’s fair that it should pay just a fraction of 1 per cent of that in tax.”  This is giving anti-business politicians like Ed Miliband a great excuse to raise the temperature when there is already a strong feel in the UK that US regulators have used massive fines to make some of the UK's best business less competitive (BP, Standards Chartered, HSBC, Glaxo, etc).   We should also remember that this tax issue is not restricted to IT companies, recently Goldman Sachs and Starbucks have been criticised in the UK.
It seems pretty clear that there needs to be some regulation and probably the best way forward would be for businesses to have to achieve a ‘mark’ of social responsibility, this would cover tax, anti-competitive activities, regulator fines,  and cheap labour.  Companies who achieve the ‘mark’ could use it in their marketing others would be forces to issue a health warning (like the tobacco companies) warning their customers that they pay no tax and employ child labour.  These warnings should be given prominence on all forms or display, broadcast and web advertising.  If Apple had to have a banner on all its packaging, advertisements, web pages, etc telling us that it pays no local tax it might make the management and customers think twice.  
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