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How terribly amusing from the European Commission

Summary:
There's a great deal of shouting from the European Union about the taxation of digital business. An insistence that really, such companies must be paying more tax where value is added. Which is, of course, how the system currently works. Most of he value is created in the US, given that's where all the programmers are, and that's where it gets taxed, under US rules. Really - profits cannot be paid out to shareholders until US profit taxes are paid.This doesn't satisfy European politicians of course as they want to be able to spend that revenue. Thus the shouting. However, in the course of their reasoning they let slip something terribly fun, an agreement, an admission perhaps, that we shouldn't be taxing corporations at all:In the field of taxation, policy makers are struggling to find

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There's a great deal of shouting from the European Union about the taxation of digital business. An insistence that really, such companies must be paying more tax where value is added. Which is, of course, how the system currently works. Most of he value is created in the US, given that's where all the programmers are, and that's where it gets taxed, under US rules. Really - profits cannot be paid out to shareholders until US profit taxes are paid.

This doesn't satisfy European politicians of course as they want to be able to spend that revenue. Thus the shouting. However, in the course of their reasoning they let slip something terribly fun, an agreement, an admission perhaps, that we shouldn't be taxing corporations at all:

In the field of taxation, policy makers are struggling to find solutions which would ensure fair and effective taxation as the digital transformation of the economy accelerates. There are weaknesses in the international tax rules as they were originally designed for "brick and mortar" businesses and have now become outdated. The current tax rules no longer fit the modern context where businesses rely heavily on hard-to-value intangible assets, data and automation, which facilitate online trading across borders with no physical presence. These issues are not confined to the digital economy and potentially impact all businesses. As a result, some businesses are present in some countries where they offer services to consumers and conclude contracts with them, taking full advantage of the infrastructure and rule of law institutions available while they are not considered present for tax purposes. This free rider position tilts the playing field in their favour compared to established businesses.

Not paying corporation tax is an advantage to those who don't pay it as against those who do. Which is what we've been saying about corporate and capital taxation all along. If you tax corporations then there will be less investment in them in your economy. This makes everyone poorer - the deadweight costs are high. This is indeed exactly the same reasoning which leads us to insisting, as a result of optimal tax theory, that we shouldn't be taxing the corporations at all.

Which is interesting, even amusing, don't you think? The EU's justification for why they just must tax companies is the very reason basic theory says we shouldn't be taxing corporations at all.

Tim Worstall

Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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