18 March 2019

What’s the point of a social media tax?


It is possible to wonder a little about those who rule us. Occasionally they come up with ideas that leave more than a hint of a suspicion that they don’t have much of a clue.

The latest example comes from the All Party Parliamentary Group (APPG) on Social Media and Young People’s Mental Health and Wellbeing and their report on what to do about social media. Apparently a tax of 0.5 per cent of profits should be collected from those companies to pay for a bureaucracy which then oversees the effects of social media.

It’s worth pointing out what an All Party group is. It’s not some official part of Parliament nor our governing system. It’s just whichever MPs decide to get together on whatever subject — a gathering of the self-important, perhaps, but not one of any great constitutional significance, thankfully.

Still, one would hope that those who represent us would have a little more knowledge of the world they hope to influence than is on show in this report.

I had hoped that there was a misprint in the media here but no, for once the BBC has got it right. The report suggests that there should be a tax on the profits of the social media companies in order to pay for the regulator of social media companies. It’s an idea that fails in both theory and practice.

The theory is that we just don’t do hypothecation of taxes in this country. Assume for argument’s sake that social media does need more regulation. What is the connection between that need for regulatory oversight and the profits made by the companies providing it? Is Facebook more dangerous to young minds if it make oodles more profit, or less so if it falls into a loss? Obviously not.

Further, there is no connection between what a regulator might usefully or even righteously spend upon oversight and the ad rates and wage bills that lead to the profitability or not. There’s simply no logical connection whatsoever between the tax raised from this one source and what should be spent – if anything at all – on this specific problem.

This is a general point: hypothecation always suffers from this problem. That’s why we raise tax revenue where we should – on pollution say – and where we can – on incomes and so on – and then allocate the spending out of one pot.

This specific suggestion also fails in detail and practice. What is the one thing about Big Tech profits that has the world frothing at the mouth? Probably the fact that Facebook and the like never seem to record any profits in places like the UK. George Osborne tried the Diverted Profits Tax, the EU is trying to tax revenues and so on, but the basic set-up of those tech firms is that they’re not recording revenues or profits here (and nor should they).

The end effect is to funnel profits into the US where, as a result of Trump’s tax changes, they are indeed taxed, whatever their stopovers on some Caribbean island. And that is where they should be taxed. Much if not all of the economic value those firms create comes from work that’s done by engineers in California. The standard aim of corporate taxation is to tax where value is added, where the economic substance is. So if it’s the programmers creating the value then it’s where the programmers are that should be taxing that value, which is just what happens at the moment.

So, what profits is UK is going to be taxing? The British Parliament, the British system, doesn’t get to tax profits righteously allocated to and declared in the US, does it?

It’s bad enough to see politicians meddling unnecessarily in the first place. But if they are to do so, can we not hope for just a little more competence and comprehension? We can’t tax social media company profits because they, justly and correctly, don’t declare much in the way of profits here. And we shouldn’t be tying in profits to regulatory spend anyway. To link a specific tax to spending on a specific problem is hypothecation, an error which our British fiscal system works very hard not to make.

Yes, of course, politics will always be full of prodnoses but can’t we expect the possession of at least a clue?

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Tim Worstall works for the Continental Telegraph and the Adam Smith Institute.