Taxation horrors and Europe’s frustration

Facebook’s European headquarters in Dublin, Ireland
Instead of finding new ways to tax tech firms like Facebook, Europe should work on fostering increased innovation by paring back complex regulations (source: dpa)

At their meeting in Tallinn, Estonia, in mid-September, European Union Finance Ministers discussed new measures for taxing internet-based companies. They want to establish a system that could be brought to the Organisation for Economic Co-operation and Development (OECD), which would adapt these measures to global standards.

Whew! Finally, wealthy companies like Google, Facebook and Apple will be taxed and punished for their rapacious capitalist methods to the detriment of European taxpayers.

Of course, this is the populist side of the story. The cynical side is that there is an undeclared economic war between the United States and the EU. On one side, the U.S. Department of Justice issues fines against European companies for the alleged violation of American laws. On the other side, Europe retaliates with tax claims resulting in complicated schemes that are administrative nightmares.

The OECD has a program to limit practices called “base erosion and profit shifting” (BEPS), which is supposed to ensure that companies are not moving their results to jurisdictions with lower taxes. The scheme is extremely complicated, opens wide possibilities for arbitrary assessment and abuse of authority, and probably costs more than the additional tax revenue it generates.

The more complicated a system is, the more vulnerable it is to manipulation

The new measures discussed in Tallinn are likely to produce a similar nightmare, and will also affect European businesses.

Unfortunately, these are just some examples of an illogical, overly complex and oversized system. This is not only a European problem, it is a global problem. The more complicated a system is, the more vulnerable it is to manipulation. Taxpayers’ abuse of the system might even increase, but such complexity will especially lead to a high degree of legal insecurity and arbitrary application of the rules. In any case, it creates huge, unnecessary costs for the economy. All this is harmful.

Remedies are very easy. Simplifying tax systems would save enormous costs for governments and taxpayers. It would not necessarily reduce taxes received, but it would relieve resources and therefore benefit the economy and society. It will result in more freedom and reduce citizens’ dependence on the authorities.

European complex

The Tallinn decision might also be an indication of a European “inferiority complex” in the face of American tech giants. But instead of slapping new taxes on these companies, Europe should ponder why it is less competitive than the U.S. in the field of technology.

It might want to start by looking at differences between the European and American defense industries. Defense is one of the only areas where government programs bring innovation, and such research and development has frequently resulted in new technologies for civilian use. A striking example is that both the internet and Silicon Valley got their start through U.S. Department of Defense projects. Over the last 60 years, the U.S. has invested heavily in defense. This has not been the case in Europe.

The main remedy, however, would be for Europe to adapt to a culture of increased innovation and entrepreneurship. Rather than public grants schemes for innovative endeavors, this would simply mean fewer restrictive regulations. It would also require a less risk-averse attitude and a better ability to accept failure. New ventures frequently fail, but in Europe, especially among government authorities and financial institutions, few are willing to excuse such failures or offer a second chance.

The solution – so simple, but apparently difficult to implement – is streamlined taxation and regulatory systems, and especially a better acceptance of risk and failure.

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