Do Taxes Fund Innovation?

Posted June 16, 2013

In Fatca, Fatca Compliance Singapore, us tax

PM Cameron had a small set back this week. Bermuda refused to sign his tax evasion deal. The PM hoped to have all British territories onside in advance of the upcoming G8 but the Bermuda Premier has made it clear that he will not sign up to the multilateral agreement on the exchange of information.

Firstly, one can understand the reluctance of certain British dependencies to go along with this initiative willingly. I remember spending time in Anguilla and a business person explained to me that the high point of the year for islanders was getting that magic number. The magic number being their annual allocation from London. An allocation which continues to decline in the light of austerity measures. Tourism is a strange and not always dependable bed fellow and for some territories it is either a junior partner to, or works synergistically with, financial services. Removal of that veil of banking secrecy goes some way to reducing the competitive advantage of some of these British dependencies in the financial services space. Times are already hard for them and now, things are apparently going to get tougher.

Secondly, while I applaud Cameron’s effort to maintain that ‘special relationship’ with the US, surely he recognizes that while a multilateral agreement on the exchange of information sounds noble in principle, it makes many of us nervous in practice. The G8 does not include China but it includes Russia. Would the US be willing to offer up banking information from US banks to Russia? DACTA or the US domestic equivalent of FATCA (where US banks will be required to give certain client information to foreign governments) will continue to face staunch resistance in the US – especially on the back of the recent allegations from Edward Snowden. So without the promise of reciprocity, it is doubtful that Cameron’s efforts will succeed.

But Cameron will at least stay on the right side of the Obama administration. Perhaps that’s the real objective? Especially given the overly enthusiastic stance of some elements of the British government against US multinationals. In recent times, brands like Starbucks and Amazon have found themselves in the firing line for their aggressive and quite effective tax avoidance strategies. Last week however, MP Margaret Hodge, the Labour Chair of the Public Accounts Committee has been seeking media attention to advance the witch-hunt against Google. Apparently, some bitter ex-employees have turned whistleblowers and contradicted the basis for Google declaring certain profits in Ireland rather than in the UK.

It took me a while, but I finally found someone who makes a compelling moral argument against large players like Google avoiding US tax. It came from Professor Mariana Mazzucato, an Italian American Economist who was speaking recently at a presentation at the London School of Economics and Political Science. Quoting from her work called ‘The Entrepreneurial State’ (http://www.demos.co.uk/files/Entrepreneurial_State_-_web.pdf) she argues that States such as the US have not just fixed certain markets but have actually created them.

Consider Google in particular. In 1994, three US Government (and thus tax payer funded) entities called the National Science Foundation (NSF), the Defense Advanced Research Projects Agency (DARPA) and NASA launched the Digital Library Initiative (DLI). One of the first six grants goes to Stanford University, where two graduate students, Larry Page and Sergey Brin, begin to develop a search engine that uses the links between Web pages as a ranking method. They will later commercialize their search engine under the name Google. So US tax payers were the first investors ($4,516,573) in Google. Ironic to say the least.

Even with the Apple iphone, Professor Mazzucato argues that aside from the design, every key piece of technology in the device owes its existence to US government funding or simply declassified military technology (e.g. the GPS). Seems like an inconvenient truth for the devotees of Ayn Rand who unquestioningly believe that the government is an obstacle to innovation rather than a facilitator. Anyway, so as Western governments cut back funding in science and research, a case may be made that future Googles are being unwittingly stifled.

Now returning to FATCA and the proposed multilateral agreement on the exchange of information, I don’t claim to have the answer to this challenging question. But I acknowledge that governments are having a harder and harder time convincing its citizenry that their very citizenship is a both a privilege and a responsibility. Maybe part of the problem is that governments themselves need to work harder to demonstrate that they are worthy custodians of our trust?