Stability as a Business Model

Google is making the news in the UK for an agreement with the government to pay an additional £130 000 000 in taxes that it allegedly owes the state for past business in this country. While the government argues that this is a great deal, the opposition criticizes the arrangement as not nearly going far enough. According to them, google owes the state a lot more money than that. Numbers up to £700 000 000 are being discussed in the media.

To anyone who understands economics, all of this is of course terrible news. This huge amount of cash is being taken away from the great entrepreneurs at google, and it is being given to the unproductive, bureaucratic hands of the state. Google could have used the money to invent the next new exciting technology or improve their already existing excellent services. The result would have been an increase in life quality for pretty much all of us. Instead, all that capital is now being allocated by unproductive central planners. That means it will at best be used very inefficiently to produce things that aren’t completely useless, like for example roads. Things that would have most likely been produced anyway, but now they are probably being produced in a very inefficient way. More realistically however a lot of that capital will simply be destroyed, meaning it will be put to no productive use whatsoever by the gigantic wealth destroying machine that is the state. The worst case scenario, but unfortunately very realistic, is that the capital will not just be destroyed, but instead it will be used to prevent a lot of other entrepreneurs from creating wealth. It will be used to distort the free market and therefore produce misallocations of privately owned capital as well. In other words, the damage that is being caused to all of us from making people pay taxes, in particular very productive companies like google, cannot be overestimated.

And yet, it is only a small minority of hardcore libertarians who seem to object. Even people who are very sympathetic to free markets nevertheless often defend the state in principle for its ‘right’ to demand taxes. The argument here goes that in return for the taxes the state provides some services that are worth paying for. And the UK, so the argument, is a particularly good service provider. That is why so many companies want to have their headquarters and/or do business here. Clearly they benefit from the UK, and in return, it is only fair if they pay some taxes.

But I am confused. What services exactly are the UK providing to companies? Maybe security? That cannot really be it. Go into any office building, and you will observe the security there being run not by the police but by private companies. It is private security men that sit at the reception. Buildings are locked and secured by privately installed security and CCTV systems, bought from other private companies. It is no secret that the private security industry employs significantly more people than the state. That is because anyone who really has something worth protecting would be outright stupid to entrust that protection to the state.

So if it is not security, then what else is the UK offering that would justify a minimum service bill of £130 000 000. Servers? A phone network? All of these are privately owned, and we know from the past, and really just from good economic theory, that they are much better off in private than in state hands. So what is it that seems to attract companies to the UK?

The answer that one often gets is that the UK provides stability. You know what you are getting. You have to pay what the law says you have to pay, not more and not less. If you have the legislature on your site, you have a good chance of having it enforced in a state court. And the state laws are fairly stable. The UK is not known for doing revolutionary legal changes. So companies know what they get and that means they can calculate with it. This stability is very important to make long term investment decisions. And in many countries you do not get this stability. In a lot of states, legal rules and even whole political systems can change over night and often they are utterly corrupt. That means that what is advertised in the state’s legislature is often not really what you are getting. If you are brave enough to build up a company in a corrupt state like say Russia for example, you may find that after you have been successful, Putin’s thugs will come in and take it away from you. If you protest against this, the government might in addition to taking your assets throw you in a Siberian jail. No wonder there aren’t any world class companies coming out of places like Russia.

So the UK is, according to many in the stability business. That however seems like a fairly odd service model to me. Usually, providing a service means to actively produce something of value to the recipient of that service. But the service of stability that the UK is providing seems to be to refrain from not hurting the customer more than already advertised. The UK does not say that it won’t hurt people doing business here. Paying £130 000 000 certainly hurts, even for a big company like google. The UK does not even say that it will hurt companies less than other countries. It is a high tax jurisdiction. All it say it that you will always know in advance how much the state is going to hurt you.

Maybe I should get into that industry. I will charge everyone coming through my street £5 for the service of not breaking their nose. I will be fair to advertise the service in advance and will make sure that it is stable. What, you thing you are getting a bad service? Think again! The guy controlling the next street is charging £10 for the same service. And in the three streets after that you never know what you get. Some people might have gotten a better deal. There have been many reports however, of people getting more than their nose broken and still being charged for it. So given that, my stable service of £5 for a not broken nose seems fair and competitive. But believe it or not I still have customers complaining. They say they would be better off without anyone providing stability services. Luckily those are only a few weirdos called libertarians.

Being a libertarian, it is mind boggling to me why people are simply excepting, even praising this anti service from the state. Certainly, in some weirdly twisted logic I can see that stability can be preferable over other thugs. However, calling that a service that justifies charging people is an additional slap in the face of the victims. That however is the moral universe of statism that we live in. Suddenly being the least bad thug is seen as a service.

The real kicker in the google case however is that the UK did not even provide the stability service. Google is not a tax protester that was breaking the law to make a point. It used completely legal loopholes in the legislature to legally get around paying taxes. In other words, google was playing by the rules. Then the government came in and said, ‘yes, you were playing by the rules, but you have to pay anyway’. So it seems that the UK is more and more desperate enough to even abandon the stability service model. And all this is happening under the cheers of the vast majority of the public. What a crazy society this is.