Monday, August 11, 2014

The Libertarian Case for BEPS

Ajay Gupta writes:
At the turn of this century, Friedman was especially optimistic about the prospects of rolling back the Leviathan state—not because he believed his ideas of individual liberty, personal responsibility, and limited government would prevail over those championing an ever-expanding welfare state, but because he could foresee the impact on the fisc of the emerging Internet-enabled economy: “The Internet is going to make it harder and harder to collect taxes….Because you will be able to evade taxes. You will be able to do your deals in the Cayman Islands.”

Friedman was, of course, wrong about the size of the federal government shrinking between 1999 and 2009. In fact, it expanded significantly. Total outlays went up, way up—from $2.19 trillion in 1999 to $3.52 trillion in 2009, in constant 2009 dollars. As a percentage of GDP, outlays increased from 17.9 percent in 1999 to 24.4 percent in 2009.

What happened? Friedman himself never tired of warning us that governments will spend all they can collect plus whatever else they think they can get away with. It turns out that between the Afghanistan and Iraq wars and the largest stimulus in galactic history, the last two administrations figured out they could get away with a lot, as they worked hard to convert a surplus of $161.7 billion in 1999 to a deficit of $1.41 trillion in 2009, in constant 2009 dollars.
Gupta then discusses how the trend could be reversed:
As foreseen by Friedman, a business’s ability to assign profits to almost any geographic location has allowed for the creation of both “stateless income” and “statefully taxless income.” The result has been a loosening of the state’s grip on returns to enterprise. Yet, almost no one, save perhaps the anarcho-capitalists, seems to have welcomed these developments. To the contrary, populist fervor has aligned itself alongside tax administrators in denouncing “base erosion and profit shifting.”

The reasons are not difficult to find. Most of the gains from BEPS are currently being reaped by large multinationals. And through most of modern history, multinational enterprises have usually been considered creatures of the state—from the British East India Company to Halliburton, many MNEs have marched abroad under the flags and protection of their national armies. It is no surprise, then, that as MNEs exploit the attributes of a digital economy to shield their income from taxation, by for example claiming virtual assets in tax havens, most individuals view the outcomes as unjust rather than liberating.

This may be a transient phenomenon. The Internet’s fiscal disruptions may eventually evolve to serve... libertarian ends... For that to happen, however, base erosion would have to be “commoditized.” In other words, it is not enough that Google can deduct royalty payments to an Irish subsidiary that supposedly holds valuable intellectual property; the bootstrapped start-up in San Jose, California, should also be able to set up such offshore intangible holding companies and claim deductions. Similarly, it is not enough that Medtronic can invert offshore to engage in earnings stripping; the family-run pharmacy in Peoria, Illinois, should also be able to do that. We could be headed in that direction, as the costs of professional services required for base-eroding arrangements come down, thanks in large part to the disruptive technologies of the Internet, which make available an ever-increasing pool of professionals worldwide at decreasing fees.

BEPS could indeed become an essential element of an entrepreneur’s business plan, along with marketing, financial, and personnel strategies. If an entrepreneur could choose BEPS as easily as he chooses a business name, a domain name, or a website, Friedman’s prophecy of an Internet-driven downsizing of the state would finally come to fruition.


  1. Oh the irony. Gupta wraps an old idea (corporate tax avoidance) in a new package (the internet) and believes Milton (payroll tax) Friedman may have been correct about the internet helping to reduce the size of government. Gupta is apparently unaware that Friedman proposed the payroll tax which is perhaps the single most powerful tool in the advancement of Big Government. And has lead us to our current sorry state. Not to mention Friedman's proposal for a fixed rate of growth for the money supply which served only to legitimize the counterfeiting by the FED. BEPS with beget government anti-BEPS and governments will continue to band together to fleece the productive. Its important to remember the order of things. Technology does not create freedom, freedom creates technology.

  2. Would this not be a good business idea? For a fee help small businesses in the US acquire an overseas franchise and then use the same rules to help them avoid taxes. Anything that starves the beast is good

  3. See the original post. It discusses Friedman's monetary policy recommendations.