January 8, 2013

No epiphany this year at the FTC. "The main thrust of [its] investigation was into how Google's search results had changed since it expanded into new search verticals", Claire Cain Miller and Nick Wingfield tell us (*). But "Jon Leibowitz, the agency's chairman [...] said [...] the evidence showed that Google doesn't violate American antitrust laws". Inaction at the FTC is no surprise. As a group, this federal organization has a long track record of neutering individual members, Jon Leibowitz included, whose qualification as wise men is manifest. But why is this so?

The FTC was following up on claims that Google "gives unfair prominence to its own services in its search results, hurting rivals in areas such as weather information, maps and comparison shopping", Richard Waters and Tim Bradshaw remind us (**). Two issues seem to have prevented the FTC in mustering this obvious fact into a successful legal prosecution.

First Google is not a perfect monopoly, with only "70 percent of all search queries in the United States", as Edward Wyatt reports (***). Second "the trade commission faced a struggle in proving malicious intent - that Google changes its search algorithm to purposely harm competitors and favor itself". Indeed, there may be "about 500 changes [...] each year", but their primary purpose is quite the opposite. Google must first defend the integrity of its algorithm against unrelenting attempts by third parties to game its results to their own benefit. Is absence of friendly fire malicious?

Whether US impotence comes from the FTC or the American antitrust laws, it stems from studied ignorance of an important fact. In the Information Age, rent seekers can better bleed the economy blind by creating and tapping conflicts of interest than iron-clad industrial monopolies.

In essence, recommending its own services puts Google in a bind by enabling it to run an insider trading ring by default. To put outsiders at par, it needs nothing short of real transparency. Yet what can prove Google search integrity will also kill it, by allowing all comers to game it. The easy way out is to buy or bully the lawmakers. Ask Eric Schmidt, Google's chairman, "a Washington insider and a close adviser to President Obama".

That laws in need of an update are sold for campaign coffer contributions is a tolerated corruption, which calls to update the US Constitution too. Beyond laws and constitution, what if the most fundamental characteristic of a state was itself under attack in the Information Age? Its borders.

It so happens that on the same day, "his friend Vladimir Putin, Russia's president, grant[ed Gérard Depardieu] Russian citizenship", per Charles Clover and Hugh Carnegy's dispatch (****) while Apple justified its American residence by claiming to be "one of the top corporate income taxpayers in the [United States], if not the largest", per Charles Duhigg and David Kocieniewski's reporting (*****).

The latter declaration would be innocuous if it were not designed to gloss over the fact "Apple was a pioneer of an accounting technique known as the "Double Irish With a Dutch Sandwich", which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean". The itinerary is enough to induce jet lag. In comparison, the French movie star appears quite pedestrian in his tax avoidance scheme, what with his stepping over the border to settle in some Walloon village, even if he dreams of roaming the steppe, in a new role as Doctor Zhivago.

Where peace prevails, porous borders seem such superfluous symbols, as illustrated by Simon Kuper's essay (******). Yet how else can a state enforce its contract of social solidarity, the very purpose of its existence? Can such a social contract be reliable when those most needed to fund it follow Apple and Depardieu to the most tempting tax paradise and those in most need of its funds break into the nearest welfare haven?

Few deny Man is a social animal which cannot live without some form of solidarity but many argue the state is the wrong framework to provide it.

Still family-based societies cannot solve inter-family disputes in a satisfactory way, witness vendettas at the local level and, on a larger scale, dynastic wars like the Hundred Years' War (1). Extended families, tribes fare little better as seen today in Libya and Somalia.

Societies based on race or religion fare far worse, which know no peace except under the name of slavery, empire and apartheid. Abhorrent is the way the Third Reich dealt with the Jews. In today's world, empires are just too expensive to run. Even the remaining solution, apartheid propped up by ethnic cleansing, is in such disrepute no contemporary society openly recognizes its existence, even while practicing such a skewed solidarity.

Geographical unit created through history, the nation state thus appears as the most efficient basis on which to set social solidarity. Repudiate the social contract and you break up the underlying state. Catalans complain because their taxes go to other Spaniards, in the same way Padania (2) advocates resent the rest of Italy. Inexistent in the latter case, language differences are but a convenient pretext for an independent Catalonia.

Justifying the state does not solve its existential issue. Can borders contain tax evasion? Start from a simple fact. Whether his green card is fake (3) or his Russian passport genuine, Depardieu must choose between avoiding French personal taxes or spending most of the year in his native land. Apple however can both legally enjoy an official American headquarter and locate foreign income where it minimizes taxes. In our Information Age, it is absurd to assimilate corporations to persons. For, unlike corporations which cannot be pinned down within borders, people are not ubiquitous.

Borders determine at any time where a private person resides and conducts transactions. It follows a state can collect taxes on every transaction involving a private person, either as a consumer or a worker. Such a tax does not have to be a sales tax. When for instance the US mandates companies to withhold part of their payroll, it taxes these transactions under the understanding that the real income tax assessment comes later.

Since computer-driven accounting makes it efficient for a company to tax a person as a state agent before a final assessment, why wouldn't a state use private persons to tax the companies they deal with? In an online economy, third parties can easily help users to discharge their duty as state agents. Yearly corporate income can be apportioned on worldwide sales, as personal income is already on personal residency.

When selling to consumers, the difficulty for a corporation to escape a legal, locatable contact was already the reason behind my privacy tax proposal. Still does it mean non consumer companies should be free to consider income taxes mere voluntary contributions, like Starbucks UK?

Not in the least. Let the United Nations Organization levy an income tax on non consumer companies through their transactions worldwide. Rabid UNO bashers in the United States could not complain. The tax loss is likely to be borne by some low-level lying islands. And, concerned by rising seas, wouldn't such fiscal tax havens gladly encourage UNO funding of forms of social solidarity too big in scale for states to tackle individually?

Conflict of interests, state borders, no familiar concept escapes unscathed the transition to the Information Age. Time for visionaries come from afar.

Philippe Coueignoux

• (*) ........... An Antitrust Master Plan, by Claire Cain Miller and Nick Wingfield (New York Times) - January 4, 2013
• (**) ......... Google's core search engine gets US all-clear, by Richard Waters and Tim Bradshaw (Financial Times) - January 4, 2013
• (***) ....... U.S. Ends Inquiry Into Way Google Sets Up Searches, by Edward Wyatt (New York Times) - January 4, 2013
• (****) ..... Depardieu stars in Russia tax blockbuster, by Charles Clover and Hugh Carnegy (Financial Times) - January 4, 2013
• (*****) ... Inquiry Into Tech Giants' Tax Strategies Nears End, by Charles Duhigg and David Kocieniewski (New York Times) - January 4, 2013
• (******) . Borderlines, by Simon Kuper (Financial Times) - January 5, 2013
• (1) for more details, see the Hundred Years War in the wikipedia
• (2) for more details, see Padania in the wikipedia
• (3) for more details, see Green Card in the wikipedia