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Europe needs tax system overhaul for digital age

LONDON — The performative outrage aimed at large tech compan..

LONDON — The performative outrage aimed at large tech companies that dont pay taxes seems to be never-ending. Despite unrelenting criticism from European governments — including the U.K., France and Germany — after Googles multinational tax planning was first exposed in 2010, there has been little progress in efforts to rein in the U.S. giants.

But the blame lies with European governments, not U.S. tech companies.

The reason these companies dont pay nearly as much in taxes as traditional outfits is not that they dont comply with the rules. As with the vast majority of public companies doing business on large consumer markets, they couldnt stay in business for long if they were blatantly breaking the law.

The problem is our current tax system, which doesnt account for the new ways of doing business in a more digital economy. Our tax forms only include boxes that were designed for businesses of the Fordist economy. Todays big tech companies simply dont fit in those boxes.

The solution, of course, cannot be for tech companies to renounce innovation and go back to the past. Rather, we must invent a new scheme that takes into account their new models.

There are three obstacles to implementing such as revolutionary change.

If we want to keep pace with the digital economy, European policy and politics urgently needs to get behind an effort to overhaul the way we tax companies.

This wont be the first time that the tax system radically evolves to fit new ways of creating, capturing and redistributing value.

Most of our tax system was designed in the 20th century to account for the rise of the Fordist economy, which was marked by the invention of the automobile and mass production.

Personal income tax was deployed in the 1910s to make the most of the rise of salaried jobs: taxing workers income was made easier by the introduction of the workers salary, a single-sourced, recurring revenue stream. The modern corporate tax on profits, meanwhile, was established in the 1920s by a group of economists working for the League of Nations to avoid large corporations seeing their profits taxed twice by two different governments as they expanded their businesses across national borders. VAT was invented in the 1950s to account for the lengthening of value chains in many industries.

The future of the tax system is not merely about large corporations paying their fair share.

Proponents of a simpler tax system have come up with fanciful ideas to fix the systems complexity and contradictions, such as replacing all taxes with a single flat tax based on income, or phasing out all mechanisms to rely exclusively on VAT.

While none of these solutions are practical, they do correctly identify that all taxes — whether they are levied from corporations or households, workers or capital owners — are eventually paid for by people, whether they are workers, consumers, or savers.

This realization gave rise to a more practical idea: Instead of fixing the current, dysfunctional corporate taxation, we could simply get rid of it altogether and levy taxes exclusively on individuals rather than corporations, by taxing personal income on one hand (personal income tax and payroll tax, for example), and individual transactions on the other (such as with VAT or sales taxes).

There are three obstacles to implementing such as revolutionary change. First, renouncing taxing profits would privilege certain individuals over others and raise questions of fairness. In many cases (but not all), taxing corporate profits is simply a way to correct the imbalance, from a tax perspective, between workers and shareholders and to prevent the latter from escaping income taxation altogether. Indeed, taxing a corporations profits is simply a centralized way of taxing its shareholders dividends. It also makes it possible for a government to tax dividends paid to foreign shareholders.

The second obstacle is that in the current state of tax administration, its still much easier to tax a corporations profits than to go after its many individual stakeholders. A corporation is a hub for financial flows: Prices paid by customers and paid to suppliers; wages paid to workers; dividends and stock buybacks paid to shareholders. Instead of running after each of those individuals to tax their income or the transactions they take part in, its easier to tax the corporation itself — all the more so because it has a proper accounting system and various auditors and legal services that can certify the corporations financial position and operating results. Individuals, on the other hand, are harder to track, scattered, and often messy in their personal finances.

The third obstacle is, of course, political. Weve gotten used to the idea that taxes should weigh on both corporations and individuals, and that this balance is a matter of fairness. And so its difficult to make people realize that taxing corporations is merely a proxy for taxing people.

But now that technology and data are making it easier to track individual financial flows and assess compliance, we could move away from taxing the corporation as a proxy for the individual, and focus instead of taxing personal income and individual transactions.

Doing so will require a clear, consensual view of the economics of taxation and the potential of technology and will only be possible with a widespread support for a broader overhaul of our entire tax system. VAT has become dysfunctional and massively affected by fraud, and it should be radically upgraded. Personal income tax as we know it is becoming less relevant in a world where people dont have the simple, stable situations we were used to in the 20th century.

The future of the tax system is not merely about large corporations paying their fair share. Its about designing a new tax system that better fits the digital world altogether.

Nicolas Colin, a former French civil servant, is co-founder and director of The Family, a pan-European investment firm and the author of “Hedge: A Greater Safety Net for the Entrepreneurial Age” (July 2018).

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