Google is in a row with France about how much corporate taxes it pays. Like the Obama Administration’s outrage about businesses moving headquarters abroad, this dispute demonstrates corporate taxes, along with personal income taxes, are obsolete.
Google markets ads in France, where the corporate tax rate is 33.3 percent, through an outpost in Paris that employs about 150 professionals. However, the ads are formally sold by its subsidiary in Ireland, where corporate taxes are 12.5 percent.
Obviously, that scheme creates tax savings—something many large European companies exploit. However, Google Ireland, in turn, pays Google Netherlands for patents and copyrights, which in turn pays a subsidiary in Bermuda for the intellectual property, where corporate taxes are ZERO!
Under European tax laws and treaties, businesses pay taxes where a good or service is made, and don’t have to pay taxes in a country where orders merely are taken but where they lack a “permanent establishment.”
Looking at Google France, it’s tough to say it’s not permanent, but how much of its ad revenue should be taxed by Paris is something quite again.
If we were talking about a U.S. produced Ford F-150, not much—only the salaries and overhead of the salesforce in France. But where are Google’s internet ads produced?
The creative work, under European laws, should be taxed where the commercial artists and software engineers are domiciled—and France is already getting those taxes. However, the ads, unlike an F-150, become alive on the Ethernet—a nefarious space like the supernatural where leprechauns rest when they are not about their earthly mischief.
France’s motivations might seem legitimate but for Paris’ acquisitive instincts.
Consider, for example, the spat between Google and French newspapers. The latter put their stories online and permit readers access for a fee or in exchange for viewing ads the newspapers sell—both provide fair compensation for content.
In 2012, French newspapers pushed for a law that would require Google to pay for stories it linked through its search engine—even though searches bring newspapers eyeballs, fees and more ad revenue.
The row over corporate taxes is not about tax fairness. It’s about protectionism and the sad state of the European economy—terribly slow growth, high unemployment and national treasuries in France and other Mediterranean states that are broke from taxing too much and paying voters not to work.
Apple, Amazon and other U.S. tech companies are under attack by national and EU tax and antitrust authorities for taking advantage of tax breaks that are the everyday occurrence of competition among jurisdictions for jobs—including U.S. states like South Carolina, which lured BMW.
Just as corporations locate where taxes are fairest, so do creative individuals who provide services. Advanced industrialized countries with the lowest personal income tax rates have the most big earners.
Lower personal tax rates encourage high income individuals to save and invest—that creates growth, jobs and real prosperity.
In a service based economy, it’s virtually impossible to tax income at its source, because businesses and people can easily move and some even change their citizenship. Or like Google ads, it’s tough to find the source at all.
Seen in this context, the quest by political leaders like President Obama to compel businesses and citizens to stay put, or at least be taxed within their jurisdictions, makes little sense.
In the end, we should rely totally on consumption taxes—for example, a value added tax—and abolish the corporate and personal income taxes altogether.
Sooner or later the wealthy spend their money, or it does them little good. Unspent, the income does the rest of us a lot of good. Those savings get plowed back into investments in R&D and tangible assets that create goods, services, jobs and prosperity.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a national columnist.