Daniel Lacalle

The EU should support tech giants, not attack them

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The position of the European Union (Brussels) and some economic commentators on technology multinationals should not surprise us. However, it is totally wrong. It is a short-sighted view, oriented from an incorrect fiscal point of view, and it hides a bigger problem. Europe has lost the technology and innovation race, and it will not recover its position with fiscal repression.

However, using subterfuges of “tax fairness”, they try. We should remember that:

– Corporate taxes are not paid where goods are sold, but where the added value is generated. The European Union itself states that when a sale is made via e-commerce, the VAT on that product will be subject to the tax rate fixed in the country of residence of the company, not that of the consumers making the purchase. The same is true with the declaration of VAT itself. To debate now about alleged corporate tax avoidance is funny because the European Union fights tooth and nail to defend this completely logical fiscal policy for its multinationals and industrial conglomerates in their investments in emerging markets. Regardless, it attacks technological companies. Because they are not European monster dinosaur conglomerates?

When looking at the tax contribution of multinationals, using a localist vision detracts from their global benefit. For example, Google paid more than 18% in corporate tax in 2016, almost €4 billion euros, 80% in the USA, where the company is headquartered and where it generates most of the added value, its technology, and systems. However, it generates almost 38% of its total employment abroad, investing in start-ups and established businesses up to 40% of the total, which generates a multiplier effect throughout the global economy.

But, above all, this misguided attack on technology giants shows the failure of the European model, which has subsidized and perpetuated its industrial conglomerates by putting barriers to the creation, innovation, and growth of the technological sector. Now, the EU finds that it not only has no leaders in the technological race but that it did not “protect” jobs nor tax revenues.

– The EU forgets the very important positive impact on employment, quality of jobs, indirect taxes and change in the economy growth pattern that these companies create. Why? Because they are American. If they were French, German or Rent-Seeking sectors, they would be receiving tens of billions in subsidies.

It is no surprise that, according to a Linkedin ranking, the most desired companies to work are Google, Salesforce, Facebook, Apple, and Amazon. Google is a clear example, whose more than 60,000 employees enjoy a better quality and pay (more than 30% above than the average of their similar jobs in the countries where it operates). Meanwhile, some people in Brussels hope that jobs and higher wages will be achieved subsidizing unions.

The European Union spends more than 1% of its GDP on “employment policies” which include huge government spending in inefficient programs and massive subsidies to obsolete sectors. It also generates thousands of pages of regulation to “protect” its so-called “national champions”, which in turn are also accused of paying little taxes because they go from ruinous acquisition to ruinous acquisition in their empire-building quest for inorganic growth. While in the OECD, the average expenditure on active employment policies does not exceed 0.6% of GDP, and in the US it is 0.15%, in Spain it was 0.9% in 2011 and in France, it exceeded 1.5% of its gross domestic product. What if we spent less on those useless grants and subsidies that have proven to be inefficient, and started to facilitate the implementation and creation of new technology leaders?

– The EU’s short-sighted analysis of technology giants also forgets the impact of certain services that are free for users and financed with advertising. For example, a search engine. Or Google Maps. A study by Hal Varian quantifies an impact of 800 billion US dollars created by a search engine due to savings, efficiencies, possibility to compare products by consumers and choose the cheapest, as well as the impact of advertising services.

We should not only ask ourselves why does the EU put barriers to companies that create better jobs and with greater benefits, but to analyze very seriously why the error of “protecting” the so-called national champions lingers on. First, because they do not need it, they have their well-deserved niche, but they are mature businesses and, by definition, wary of change. Second, because we are suffering the consequences of rejecting investments and capital that supports a stronger growth pattern. The European Union should ask itself why Skype was created in Estonia and not in Brussels.

In addition, we forget the multiplier effect in the non-technological economy. A study by ITSOS shows that SMEs grow and create jobs up to three times more those that do not use those digital services which, in addition, are free for the user.

If we really considered the fiscal, employment and growth issues in a serious way, we would support big technology companies, letting them grow in our countries because the tax effect in corporate and income taxes from their contribution to the real economy is much greater. The multiplier effect is very evident in Ireland. The country, with an attractive fiscal policy, has cut its deficit by 12 points, eliminating it, and unemployment has fallen to 6.6% with youth unemployment at 15%, the lowest since 2008. All this, without reducing public services. But, instead, Brussels thinks that the problem is that “technology companies do not pay taxes”. It is untrue, to start with. They all comply with the rules of the country. The real problem is that perpetuating obsolete dinosaurs is useless.

The European Union has a very important challenge, which is to become the engine of change and progress that it deserves to be. Because the process of the democratization of technology and the new patterns of growth is unstoppable.

Looking at multinationals from a myopic perspective, only leads us to lose the future. If we take into account the immense market that is Europe and the enormous potential of its influence in the world, we should think more about doing what the US does and less about copying Japan. Do you remember the technological “keiretsu” giants that were going to sweep the world in the early 90’s? Exactly. Neither do I.

In Europe, we need more FANG (Facebook, Amazon, Netflix and Google) and less bureaucrat-gang.

Daniel Lacalle is a PhD in Economics and author of Life In The Financial Markets, The Energy World Is Flat (Wiley) and Escape from the Central Bank Trap (BEP).

 

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