Territorial taxation

Dan Mitchell points us the case of Google and its US corporate tax liability. Google has organised its affairs so as to minimise its tax liability. Some people carry on like this is ‘a bad thing’.

Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google’s tax disclosures.

“Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.”

Taxpayer Funding

The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google’s creation. Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research. Google now has a stock market value of $194.2 billion.

I would have thought that Google had repaid many, many times any burden that individuals had imposed on the taxpayer. Both through taxation and through the benefits that Google has provided. In any event the NSF either has property rights in Google or it does not. Based on the story it looks like it does not.

I’m far more interested in the territorial v worldwide taxation aspects of the story. Worldwide tax systems are IMHO an abuse of globalisation and sovereignity. Australia, for example, taxes its tax residents on their worldwide income while the US taxes its citizens on their worldwide income (its a bit more complicated, but that captures the broad policy intent). Governments are expanding their powers beyond their own borders and so undermine the benefits of international policy diversification. Political power should be severely constrained and one obvious way to do so is to contain it within territorial boundaries.

Second last word to Dan Mitchell

This is a matter of sovereignty and good tax policy. From a sovereignty persepective, if income is earned in Ireland, the Irish government should decide how and when that income is taxed. The same is true for income in Bermuda and the Netherlands.

From a tax policy perspective, the right approach is “territorial” taxation, which is the common-sense notion of only taxing activity inside national borders. It’s no coincidence that all pro-growth tax reform plans, such as the flat tax and national sales tax, use this approach.

Of course the revenue lobby will complain that this makes it easier for ‘the rich’ to avoid tax and people will engage in schemes to reclassify domestic sourced income into foreign sourced income and so on. The solution to that ‘problem’ is easy – cut tax rates. Cut spending while you’re at it.

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36 Responses to Territorial taxation

  1. daddy dave

    Taxpayers also paid for a scholarship for the company’s cofounder, Sergey Brin, while he worked on that research.

    Oh boo hoo.
    So a scholarship is a business loan, after the fact – if you happen to found a successful business? Make him pay it all back, every penny! He’s rich so he must be evil.

  2. TerjeP

    Political power should be severely constrained and one obvious way to do so is to contain it within territorial boundaries.

    The Australia court system claims jurisdiction over Australian citizens for certain legislated crimes committed abroad (eg child sex offences) but not yet for others (murder). So the trend is not just in regards to tax. I think it’s a hard issue to be black and white about (I’m against sex with children) but I agree there is cause for some concern regarding the inability to vote with your feet. Ultimately the failure to strike the right balance resides with the legislature.

  3. TerjeP

    So a scholarship is a business loan, after the fact

    The author seems to be claiming that it’s an equity stake. There is some merit in that idea but only if it’s explicit and before the fact.

    John Humphreys is working on such a scholarship scheme in Cambodia.

    http://humancapitalproject.com.au/

  4. conrad

    Australia, for example, taxes its tax residents on their worldwide income while the US taxes its citizens on their worldwide income

    I think you need to be clearer on that. At least as a private individual, foreign income doesn’t get taxed twice (i.e., in the country you made it and Australia), it simply increases the tax bracket you get on money earned in Australia. With the US stuff, where you do really get taxed twice, which I can never understand the motive for (apart from trivial amounts used to pay for your admin as a US citizen), there is a non-negligible threshold before this happens, although I’ve forgotten how high it is.

  5. Sinclair Davidson

    Terje – conflating tax avoidance with child sex offences doesn’t take the debate very far.

  6. Blake Van Buren

    It is certainly possible Google, et al, blitzed their competition not so much by offering a superior product but by cheating on their taxes. The superior “cost advantage” would enable the tax cheat companies to acquire an unbeatable edge in obtaining capital, labour and undercutting prices.

    I imagine it’s almost impossible to compete with moral garbage who lie and cheat, thereby “outcompeting” the chumps still playing by the rules. Welcome to American financial capitalism.

    Anyone with integrity is corporate roadkill.

  7. .

    ““Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?” Briloff said. “It was paid for by the United States citizenry.” ”

    Stupid Americans thinking they are the centre of the universe.

    As I use google, does this mean I should get a green card?

  8. Entropy

    I have always found it ironic that a company that gathers copious amounts of private and personal information from people that use any of its products to sell to its advertising customers has as its slogan “do no evil”.

  9. daddy dave

    It is certainly possible Google, et al, blitzed their competition not so much by offering a superior product but by cheating on their taxes.

    Google blitzed their competition by offering a superior product. Period. To claim anything else is so stupid it must hurt your head to just think it.
    Google search was revolutionary, and was far, far, better than any comparable products. Likewise for their contextual advertising business model. Totally out-of-the-box. In fact, some of Google’s original competitors still exist and are a mere click away, if you want to start using them again.

  10. JC

    Blake:

    I don’t really think that’s true. I would say their closest competitor- Yahoo- isn’t a big taxpayer either.

    In addition, as much as i despise Google because of the left wing leanings of the founders and the other schleps there, they are taking advantage of tax laws that are available to all US multinationals, which is that money earned offshore not repatriated isn’t taxed under US law.

    This hardly makes them any different from other US corps.

  11. daddy dave

    Blake, I take back that excessively scornful language. What you said was not stupid, it was merely ignorant.

  12. Peter Patton

    dd

    May I interject here? I would like to present the case for your reinstating a judgement of ignorant AND stupid! :)

  13. daddy dave

    no… ignorance is simply a lack of specific knowledge. I don’t regard it as a serious charge. In fact feel free to accuse me of ignorance when the occasion arises.
    Stupidity on the other hand can’t be rectified.

  14. JC

    Stupidity on the other hand can’t be rectified.

    So Homer definitely isn’t ignorant?

  15. Peter Patton

    I have always looked at the discourse ethics of this situation much differently than you. I think it is unacceptable to draw a stupid person’s attention to his/stupidity, for the same reasons I do not pull wings off butterflies; it’s cruel. The genuinely thick and ugly aren’t that way through laziness or lacking in respect for you, they are that way because something went awry in their mothers, preventing the miscarriage that justice would deliver.

    Ignorance, on the other hand, signals some of the most dissolute and bedint habits imaginable; sloth; inability to manipulate parents to send you to a private school; disrespect for the cornucopia of discursive and performative routines one’s demanding friends, acquaintances, and blog pals shall demand you tap into within 5 seconds of meeting.

    My response to marauding gangs of the dumb and stupid is to immediately start passing a plate around to pay for their vasectomy or hysterectomy, before jumping 6 lanes of traffic to stave off Maggie Blackamoor-like (Little Britain) vomiting.

    After the most awful evening out for dinner in Surry Hills last night with my girl just back from the US, where the service from Crown Street to Taylor Square, and every single waiter we had was a real think dumb nut AND pig ignorant, I realized its the dumb I cannot cope with.

    For the ignorant, we can earn charity hours tutoring them. I use reverse psychology on them, hoping they will be spurred to rise at dawn tomorrow and hit the library! This is why condescend to lavish so much attention on THR, as he not dumb, merely ignorant. ;)

  16. daddy dave

    Peter,
    I don’t think I’d ever call someone who is actually stupid “stupid.” I don’t think someone who is actually low IQ is likely to be found on catallaxyfiles wondering aloud about Google’s business model. The idea that Blake is actually a stupid person is absurd, which is one reason I took it back immediately after saying it.

  17. daddy dave

    I make an exception for Homer.

  18. Entropy

    JC, I am pretty sure that the google founders, just like the other corporate honchos that live in silicon valley, are lecture becuasec it seems the cool option. Steve Jobs just had a love in with Obama FFS. Hope he told the one that the best way to create jobs is to remove impediments to companies making products people want to buy. But jobs probably told him to give handouts to people that buy the most recyclable laptops.

  19. Entropy

    Damn. Shouldn’t type on an iPhone while mrs entropy is driving. That should be:

    ” are lefties because it seems the cool option”

  20. Blake Van Buren

    It is possible to argue in the alternative that Google was only able to develop a superior product because it wasn’t overly fussy about paying its taxes, or more likely, deliberately overclaimed R&D concessions and other tax breaks.

    The fact Yahoo pay jack all tax as well actually bolsters my case. American financial capitalism self-selects for deceitful, moral garbage and men of good will can go f**k themselves.

    Even if I’m wrong, why should the fact someone designed a slightly better search engine entitle left-wing billionaires and their company to evade billions of dollars in tax?

  21. Blake Van Buren

    I imagine I’m more pathological than stupid – so watch out.

  22. JC

    It is possible to argue in the alternative that Google was only able to develop a superior product because it wasn’t overly fussy about paying its taxes, or more likely, deliberately overclaimed R&D concessions and other tax breaks.

    No no and no. Google was NEVER a tax driven investment. Ever.

    Even if I’m wrong, why should the fact someone designed a slightly better search engine entitle left-wing billionaires and their company to evade billions of dollars in tax?

    I agree with you. Leftwingers should not be allowed to take advantage of US tax laws if they favor them :-)

    However US tax currently allows for non domestic profits to be left untaxed until the point of repatriation. That’s just how the law works there.

    In a just world that law, or any tax breaks of course should not apply to Google, buffet or any other fucker that makes nice with the Demolition party, however I think that would be unconstitutional.

    However I am in deep sympathy with your great point.

  23. Blake Van Buren

    Is that how the law works, or is that how people work the law. Transfer pricing is a disgrace and most corporate accounting has degenerated into a exercise in manipulating earnings and hiding liabilities.

    I really would like to know what the libertarian response. What do you do when breaking the law is legal and large corporates can afford the millions it costs to essentially be above the law?

  24. JC

    That’s the law. Nothing hidden about it. If a firm derived earnings from offshore (outside of the border) they will not be taxed until it’s brought into the US.

    Its not a loophole or a tax dodge. It’s well understood and accepted American tax law.

    We have that here too by the way.

    The reason why Google pays so little tax is because.

    1. it’s still writing off a lot of capital investment

    2. it derives a large part of income from overseas.

    I wish the law and the constitution could be changed to only allow it for GOP supporters, but it would be hard to finagle.

  25. JC

    Here’s a small blurb from an I-Bank about google

    Event: Google reported solid 3Q10 results, driven by better than expected
    revenues and margins, as well as a lower than expected tax rate. As a result,
    non-GAAP EPS of $7.64 vs. $5.89 beat our $6.82 estimate by 12%.
    ?
    Investment Case: Gross revenues grew 23% y/y to $7.3 billion, 2% above
    our estimate. This is consistent with our positive long term view on core
    global search ad growth, which, for GOOG, should translate into mid-teens
    annual growth through 2015, assuming market share gains.
    ?
    Helped by a lower than expected TAC rate and in-line expenses, EBITDA
    margin of 59.6% vs. 63.2% exceeded our 58.0%, which should alleviate
    concerns about margin pressure. We are raising our FY10 EPS est. by 4%
    to $28.73 vs. $23.22 to reflect the upside in 3Q10 as well as higher paid click
    growth in 4Q10.
    ?
    Catalysts: Google provided some (rare) new data points on emerging
    initiatives including mobile, display, and YouTube. These insights are
    consistent with our view that 1.) display (at a $2.5b annual run-rate) is
    gathering momentum based on our conversations with ad agencies, 2.)
    mobile (at a $1b annual run rate) represents an incremental opportunity vs. a
    threat, and 3.) YouTube, which is monetizing 2b streams/week, or about
    10%-15% of total streams vs. mid to high single digits in 2009 (by our est’s),
    is on the right track to profitability. In our view, this color should help improve
    sentiment around the sustainability of Google’s long term growth.

    Valuation: We maintain our Outperform. Google is currently trading at an
    19x P/E multiple on our 2010 EPS estimate (x-stock comp). Based on our
    DCF model, we carry a $700 price target which implies that Google can
    trade at a 20-21x P/E multiple on our 2011 EPS estimate.

    They have every large top line revenue growth that really looks like it will continue on for a long time.

  26. Blake Van Buren

    That assumes the law and corporate accounting aren’t as plastic as they are in reality. Management have an incentive to be aggressive in pushing the legal and accounting boundaries, there are enormous grey areas and areas of virtual non-compliance that they can exploit.

    Most corporates are so blase they take a risk management approach to their legal obligations and sock it to expensive fall guys like Meredith Hellicar when they come unstuck. Its hilarious to watch and they won’t deliberately murder someone but it’s not healthy and puts pay to the view that everyone is equal before the law.

    Some of us are clearly above it, some of us refuse to comply with it and the rest of us pay the way of the aforementioned groups of people.

  27. JC

    Blake.

    I really don’t know why you’re arguing this point. You could say argue I’m wrong and present the evidence that I have the US tax law incorrect. But I’m 99.9999% sure I’m right.

    It’s law. It’s allowed in the US in the same way as it’s allowed here.

    There’s nothing crafty about this.

  28. Blake Van Buren

    JC, I think I’m actually transcending the Google issue and branching off onto the issue of commercial morality generally which is in a sorry state in the United States at the moment.

    There was a time when people’s intrinsic decency was such that they wouldn’t contemplate noncompliance with the law to the extent that is now routine. The most important institutions in society are internalised values, not formal institutions.

    Hell, certain sections of society don’t even take our criminal law seriously. There should be signs in public places – “NO RAPING”, with “Penalty – average three years jail” in small lettering below.

  29. JC

    There was a time when people’s intrinsic decency was such that they wouldn’t contemplate noncompliance with the law to the extent that is now routine.

    I disagree. I find the US to be a very moral society, so moral in fact that people have taken to the streets and are about to throttle the Demolition party with such an upper they may not get up for a while, as a result of ruining state finances to the point where they will go broke.

  30. Blake Van Buren

    You’re talking about the middle America I love and I agree the revival of their interest in politics has been a joy to behold and nothing short of inspirational.

    Unfortunately, those Americans has been crowded out of Wall Street, Hollywood, the mainstream media and the political elite by the other type of American who elbow others aside by having a lower moral character.

  31. Blake Van Buren

    American politics really is just completely balls-to-the-wall awesome:

    http://www.youtube.com/watch?v=OTSQozWP-rM

    “And the Chinese were left holding worthless American dollars … ha, ha, ha”.

  32. rebel with cause

    The Obama administration sure does despise American enterprise doesn’t it? Taxing overseas profits sounds like a great way to make US multinationals less competitive.

    Competition will drive firms to minimise their tax liability to the extent that it is profitable to do so. If firms are spending a lot of money to find loopholes in the tax code, then that is a casd for simplifying the code Blake, not for some education campaign to improve corporate morality or whatever it is you are raving about.

  33. Jacques Chester

    It is possible to argue in the alternative that Google was only able to develop a superior product because it wasn’t overly fussy about paying its taxes, or more likely, deliberately overclaimed R&D concessions and other tax breaks.

    It’s also possible to argue that mutant chickens are caused by alien visitations, or that pigs really can fly.

    The simple fact is that Google was orders of magnitude better at actually finding relevant results than any other search engine. They had a completely different algorithm from everyone else and had a simple, fast-loading search page. Almost overnight they converted the tech community to using them exclusively. Subsequently the rest of the world followed suit.

    That same search technology was used to set up Adwords, transforming Google into the world’s leading advertising placement firm.

    What propelled Google to the forefront was creating a genuinely disruptive invention. What has kept them there is a relentless effort to improve their core technology and operations.

    Taxation arrangements are basically irrelevant; Yahoo Microsoft have the same arrangements.

  34. Jacques Chester

    Should read “Yahoo and Microsoft”.

  35. TerjeP

    Most corporates are so blase they take a risk management approach to their legal obligations

    I don’t see what this has to do with morality.

  36. Andrew Reynolds

    Blake,
    You answer your seeming question on risk management in your own comment – the law is plastic and at times difficult to understand. All activity carries some risk, both from a legal standpoint but also morally and ethically.
    The only real way to manage all that is from examining the various risks involved and trying to balance the often competing priorities. A risk management approach is the only way to balance your legal obligations.

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