Tuesday, May 28, 2013

On Google's Eric Schmidt saying it's fine to dodge taxes if it's legal

From Paul Collier, a development expert, writing in Prospect Magazine:
"For companies to claim that they are morally in the right by having devised loopholes is ridiculous, even if their behaviour has been legal. Any society rests not just on laws but on conventions that make life decent and tolerable. If every citizen pushed right up against the limit of the laws, it would be unworkable. Society relies on people having a degree of mutual respect. Companies rely on a certain level of public spending, for example on the education of the people they employ. All this relies on people and companies paying taxes."
This is one of several reasons why Google's boss Eric Schmidt has recently been wrong - dumbfoundedly wrong - in his claim that everything's just fine with his company's tax compliance.

Collier is right (even if we don't agree with every last word of his article) - but there's plenty more to be said on this topic.

When it comes to corporate taxes, as Collier suggests, there is a  large grey area between the two poles of tax evasion (by definition, illegal) and tax avoidance (by definition, not illegal, but still involving getting around the spirit of the law.

Corporate CEOs have a choice as to how aggressive to be when pushing up into this grey area, towards (and sometimes over) the edge of the law and into the seriously dark side.

Some fine investigative work by Tom Bergin of Reuters, and revelations in the Sunday Times and elsewhere, show us that Google has done exactly this - claiming to the tax authorities that it hasn't been running its sales operation out of the UK, while it has actually been doing just that. (That way, it has been claiming that it isn't taxable on its UK sales.) But if it has really been running sales out of the UK, this raises the question of whether Google has been lying to the UK tax authorities and to parliament and whether it has been evading - yes, evading - tax. (Ultimately, it's for Britain's hopelessly conflicted tax authorities, which on recent form wouldn't say boo to a corporate goose, to decide the answer to this question.)

This does look very ugly for Google: a clear choice by Schmidt, it seems, to push right up against the boundaries of the law, effectively taking the decision to de-fund hospitals and schools and the resources for filling those widening potholes in the roads, and so on.

This isn't just a Google thing, of course: it's a generalised problem. As Prem Sikka reminded us recently:
"Following a briefing from a former PwC insider the PAC chairperson said that the firm “will approve a tax product if there is a 25% chance – a one-in-four chance – of it being upheld. That means that you are offering schemes to your clients where you have judged there is a 75% risk of it then being deemed unlawful” 
There is no CEO, anywhere in the world, who has a fiduciary duty to push aggressively, as far as he or she possibly can, up against the boundaries of the law.

So Schmidt is wrong: quite wrong. Either he doesn't understand the issues, or -- perhaps more likely -- he is an example of the situation where it is difficult to get a man to understand something, when his salary depends on his not understanding it. And make no mistake: corporate tax avoidance feeds directly into corporate CEOs' stock options and bonuses and so on.

Yes, we need to hold governments' feet to the fire, to tighten up the tax system as far as possible. But we also need to hold the feet of the CEOs of those aggressive corporations to the fire.

A little while ago, we wrote about Schmidt stating that "I am very proud of the structure that we set up. . . . It’s called capitalism," picking his argument into little pieces and then revealing the true nature of his assertion.

Foolish? Self-serving? Evasive? Take a look at our blog entitled Google boss Eric Schmidt takes a dim view of capitalism, then you decide.

Oh, and then there's the small matter of Google enjoying a quasi-monopoly on internet search, thus  reaping economic 'rents:' the 'income of the man who reaps where he does not sow.'

The response of any seasoned economist when they see the word 'rents' is to reply with a three-letter word ending in '-x' : a word that has been making unusually large numbers of newspaper headlines in recent months.   We like the word so much that we even put it in the three-word name of our organisation. 

Schmidt is defending the indefensible. (I was on BBC World Service TV last night making this argument, though I can't find the link.)


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