Issue 180: 2018 11 29: Low Hanging Fruit

29 November 2018

Low Hanging Fruit

Digital Services Tax.

By John Watson

In optics, “focusing” is the process of concentrating light on a particular place, usually by means of a lens.  The spot on which the light is focused gets brighter, but of course that is compensated by the darkening of the areas from which light is taken away.  It is the same with politics.  The focus of attention on our relationships with the EU means that other aspects of government are receiving less attention than they need.  Once Brexit is more or less set (and however things are finally resolved they are clearly coming to a crisis now), Mrs May or her successor will have to turn their attention to other things.  How will it look when they survey the scene?

The overall problem is shortage of money.  The funding of public services has been cut drastically in the years of austerity since 2008, and although some of the early cuts may have been into fat, it has clearly gone way beyond that.  We do not have enough policemen or teachers.  Local authorities have been forced to close libraries.  Students are being overcharged for their tuition.  As Corbynista pointed out last week, many young ladies cannot afford sanitary products.  It isn’t just the public services, either.  Slow growth in wages has meant that workers have suffered reductions in living standards.  These are hard times indeed and have been since government borrowing rocketed at the time of the crash and the forces of fiscal rectitude demanded that it be controlled.

One of the odd things about all this is the debate to which it has given rise.  People will tell you that they are for “austerity” or for “relaxing austerity” as if the choice was a matter of preference, to be determined in accordance with their political priorities.  That isn’t right at all.  No one likes austerity, least of all the politicians who see it cutting down their elbow room.  Whether and to what extent it is necessary is a technical question of economics, way beyond most of us to judge (although we may perhaps be permitted a sceptical view of those whose economic solutions sound too easy or too populist).

Where we can have a view is on how resources should be allocated.  Should we spend less or tax more?  And if we tax, by whom should the tax be borne and how should it be levied?  It is easy to get this wrong.  Pushing up taxes on businesses can result in their relocation abroad.  Walk through the streets of North London and you will hear a lot of French being spoken.  That is because a lot of French businessmen have moved here in order to escape from labour laws which hamstring employers.  High rates of tax on business could easily send the flow the other way.  Then taxation can have unexpected side-effects.  High levels of stamp duty land tax on the acquisition of residential dwellings have decimated the market in expensive properties.  The result: empty-nesters are over-housed because of the costs of moving smaller – not great when we have a national housing shortage.

Still, taxes there must be, and the Government will have to wrestle with how to maximise them without losing the confidence of those who pay.  Colbert, the finance minister to Louis XIV, put it in a nutshell:

“The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”

Quite so, but how do you do it?  Is there any low-hanging fruit to be harvested?

The government thinks it has found some, and the consultation on a new Digital Services Tax is the start of a campaign to monetise the opportunity.  Oddly, the tax will only come into effect if the OECD/G20 have not agreed a satisfactorily way of taxing cyberspace by the proposed start date of April 2020.  That makes it a “backstop” and it is a backstop, which would fall away in favour of an international system when and if that was agreed.  Still, there is a difference between this and the other backstop which has been in the news recently; everyone expects this one to come into effect.

Give or take the special regime for companies with very low margins, the maths of the tax is simple.  2% is charged on revenues reflecting value “derived by the business from the participation of UK users”.  This expression conceals a subtlety.  UK users do not “participate” by using a service, but only by making a contribution to its development.  Facebook is a success because of the content loaded by its users who are thus regarded as participating.  People who play video games do not participate because all they do is to use the service.

It is this thinking which has restricted the tax to three types of organisation: social media platforms, search engines and online marketplaces.  In each case the participation of the users is fundamental to the business and HMRC use this factor to argue that the legislation is just an extension of the general principal that tax is levied where value is created.

Well, yes, you can see that as an intellectual point, although it is perhaps more obvious with social media sites and online marketplaces than it is with search engines, but one cannot help wondering whether this is being over-scrupulous.  Why should the tax be restricted to cases where content comes from the UK?  Why should it not go broader and attach generally to e-businesses which exploit the UK market?

The nineteenth century American economist Henry George believed that tax should be focused on rents from land, something of which there was a limited supply which could not be moved away.  Much the same can be said of the UK consumer, and the digital industry could be taxed when that market is exploited.  There is however one difficulty.  Rejigging the digital service tax in this way might catch online newspapers like the Shaw Sheet and obviously that would be completely unacceptable.  Fortunately, however, the tax will not come into effect unless a business has worldwide receipts of £500 million of which £25 million are linked to the UK so we will probably be OK for another year or two.



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