Beginning last year, mainstream reporters began kvetching about a rather brilliant tax strategy used by Google, Apple and hundreds of other technology firms. It’s been the path to survival for these companies. It relies on a feature of digital goods that would have otherwise been impossible with physical goods. Firms are setting up revenue-receiving subsidiaries in lower-tax states and countries as a means of lowering their overall tax liability.
The most-colorful tactic is called the Double Irish With a Dutch Sandwich. It involves setting up holding companies to receive profits in Ireland, where corporate taxation is 12.5%, and in the Netherlands, too, rather than the in the U.S., with its outrageous rates that can be above 35%, including state taxation. Another step is to create virtual corporate offices in states with no corporate taxation.
These tactics are saving Apple, for example, some $2.4 billion annually from being confiscated, according to a report in The New York Times. Wal-Mart and other physically bound companies can’t do this. “Technology giants have taken advantage of tax codes written for an industrial age and ill-suited to today’s digital economy.”
That is true enough, and this is true in many more ways, as well. Thank goodness the tax code is ill-suited for the digital economy; if it were suited, the digital economy would be far less advanced than it is!
It is precisely because so many features of digital economic life escape the anachronistic regulatory machine that the technology sector is booming while most everything else is breaking under the weight of government control.
Consider that the latest data on U.S. economic growth are pathetic — anemic!. And this is the stuff the government dishes out, which probably paints a prettier picture than the grim reality.
Yet how can anyone be surprised given the explosive growth of government power and debt over the last 10 years? It’s crowded out private growth and left hardly any room for enterprise to breathe at all. If you doubt it, ask anyone who is actually trying to make a buck these days.
After all this bludgeoning, the real question is why hasn’t the American economy been actively shrinking 5% per year? Why are there any signs of life at all?
It has something to do with the emergence of digital technology. That’s been our one source of salvation. It’s as if government sank the economic Titanic and then lifeboats made from digits suddenly appeared in the water to save us all. Without the growth of technology, we would all be sleeping with the fishes by now.
Digits are light and quick and can scoot around to avoid the killer sights of the government tax police. The production of their most-valuable assets can take place anywhere on tiny units. They are is scalable, copyable and infinitely reproducible, to permit the marginal unit production costs of items sold to fall to zero, or close to it.
Put this all together and you have a workable model for escaping the grasping clutches of greedy governments all over the world, especially those whose systems of exploitation are rooted in analog anachronisms like Keynesian-style macroeconomic planning.
In a laissez-faire world, the advent of the digital revolution would have inspired double-digit growth like we see in many other countries today. In the American case, the government has been stealing so many of the gains that our heads are barely above water.
It is one of history’s great missed opportunities. In the Gilded Age, with relatively little regulation and taxation — plus a gold standard and a Congress that was restrained by it — innovations led to growth like we have never seen before or since in the United States. (See Thomas DiLorenzo’s How Capitalism Saved America.)
In these years between 1870 and the end of the century, lives lengthened dramatically. Per capita income soared. Innovation beget innovation. Wealthy, successful entrepreneurs were national heroes. A new model for building civilization through trade and commerce captured the imagination of an entire culture.
The things that were amazing back then were railroads, wide availability of steel, communication improvements, electricity and the possibility of commercializing automobiles and flight. That was all great stuff that showered humanity with unimaginable blessings.
But in our times, our things are even more amazing. We are all using miracle technologies we keep in our pockets that presidents couldn’t have accessed 10 years ago. We have more computing power in our digital devices than existed anywhere in the world in the 1990s. The whole world is universally and instantly networked. What’s more, the prices are falling and falling for all these things.
It’s a hinge of history, a new world. You would have to try pretty hard to prevent a moment like this from giving rise to historic levels of economic growth. And it has in countries like China, India, Turkey and Ethiopia. Indeed, a quick look at World Bank charts shows that 150 nations of the world are growing at faster rates than the United States.
Where is the outrage? It is there, but it is entirely misplaced. Opinion culture is decisively in favor of even more looting of more private wealth. According to the Institute on Taxation and Economic Policy, the top 1% of earners are funding 21.6% of all taxes taken by governments at all levels. This is wildly disproportionate. Yet a dominant policy idea out there is to loot the 1% ever more, and rope the digital economy into the planning apparatus.
It is not a scandal that Google and Apple have discovered fancy ways to reduce the extent to which they are being looted by the tax state. The real scandal is that they have to spend so much money and energy finding ways to keep the money they make. They are serving us; our governments are looting them.
If we want to restore prosperity and bring to the United States some of the economic growth other countries are enjoying, a first step would be to dramatically cut corporate taxes from their current confiscatory level. If we want to avoid the injustice of double taxation (never forget that individuals are paying too!), the right level should be zero.
A change to zero corporate taxation in the United States would bring an instantaneous end to the Double Irish.