Forget tax bills, here's how Google is really taking us all for a ride

What's that saying about knowing the price of everything?

Analysis Here are a few predictions: Google will shrug off last week's tax scrutiny with a flick of its robotic tail; politicians and campaigners will declare this a "success"; and the much greater toll Google and other multinationals take on the global economy will be ignored.

The protestors, upset about the tiny corporation tax bills Google et al pay on their immense profits, are simply barking up the wrong tree.

How so? Well, Google has parked itself between willing buyers and willing sellers, and its giant advertising motor is blocking the driveway of commerce. They are enormously fat middlemen. This sort of thing, not tax avoidance, is how companies truly drain money from a global economy.

Google and Facebook - so-called "over the top" players who piggyback the world's expensive network infrastructures - give away their services for free. They'd prefer us to believe it's through benevolence. They like to promote the idea of a sharing hippy utopia, and slack-jawed academics applaud this. But I would argue that another motivation is that said free services are a powerful barrier to competition, and ultimately, the emergence of a real digital economy.

It's truly a new era of capitalism because instead of trying to control markets, tech giants who give away these services prevent competing, better products from being bought and sold on an open market. They're happier being big fish in a small pond. Unfortunately for us, the small pond is where many of us swim.

Because Google is parked where Google is parked, the growth of a much larger digital economy - with far greater tax revenues - is inhibited.

Don't take my word for it. Consultants at McKinsey estimate the annual consumer surplus of free services such as Facebook and Gmail at €100bn a year. That's how much money would be willingly handed over by users if they had to pay for those services, and shows how much people really value these websites.

People also value risk-free access to movies, music and porn - and it's assumed paying an ISP on a regular basis guarantees such access. A more advanced digital economy would allow you to choose between bundles of online services and pay for what you actually want and use, much as you do with cable and satellite offers today. A web video package could integrate a Netflix subscription; a gaming bundle could promise low-latency access and plug into a platform like Steam. The billing would be seamless.

Today, a working-class retiree on the state pension who exchanges a few JPEGs with her family pays the same for internet access every month as a banker in a Docklands apartment who downloads 24x7. Quite what is fair about that escapes me - although obviously the banker can be expected to be happier with the arrangement.

So with Google and friends parked in the way of a digital economy - and, it would appear, lobbying hard for a flat-rate internet and standing fast against the creation of markets - less money is going into the system.

There are two other consequences that arise from the absence of real digital markets. First, your privacy is sacrificed, and secondly, the companies offering the services are amazingly indifferent to their quality. Allow me to illustrate with the following example.

An example: Ad-backed web mail versus a paid-for rival

Imagine two Gmails. One remains free and advertising-supported, the other is available to you for 25p a year via your ISP. The designers of the latter system, let's call it "RealMoneyMail", wouldn't need to show advertisements, obviously. They would need to invest in carrying your emails efficiently rather than in a vast behaviour-processing server farm. They wouldn't need to pry. 25p isn't a lot per person, but spread over millions of users, it would be enough to run a business. And the "RealMoneyMail" team would be acutely aware that if they did a lousy job, consumers would walk: the market would shun their product. So their incentive is to make it a great one.

Meanwhile, the users of the ad-supported mail client would remain as they are at present: not customers, but merely nodes that are required to churn out data to be harvested.

The primary incentive of the producer of an ad-supported product is not to create a great product but rather to plunder the user relentlessly for information. And when resources can be deployed elsewhere, with greater harvesting potential, then that service is cast aside.

We've just seen this happen. Despite the product attracting millions of users, Google is binning Google Reader from 1 July. You get what you pay for, folks - and you were never a customer.

Take a look at Google's marathon I/O keynote session. It's an impressive list of activity, but everything seems to gravitate back to the drive for designs which harvest data.

It's not hard to argue that the vision of the internet espoused by ad-supported tech giants leads to sub-par services, indifferent customer service, the disappearance of privacy - and fewer opportunities for the taxman, too.

A tale of two economies

The Sunday Times reported that: "In 2011, the internet search provider paid just £6m in corporation tax despite its US accounts revealing that its UK turnover was £2.7bn. That year Google’s profit margin was 26 per cent, which, if applied to its British revenue, would produce profits of £676m and a corporation tax bill of more than £180m."

So over a decade, Google may be legally avoiding HRMC tax to the tune of £2bn to £4bn. Not a small sum. But bear in mind that McKinsey estimate of €100bn (£85bn) annually. A thriving digital economy would provide plenty more opportunities for the taxman to do what he likes doing best: dipping his hand in a business's pocket.

There are many interesting debates over corporation tax itself - bearing in mind 70 per cent of its cost falls on employees - something called tax incidence. It's indisputably more efficient to tax property and transactions rather than company profits, as those taxes are far harder to legally avoid. But if you're going to have a corporation tax at all, then you should be wary with your special cases.

Tax schmax - admit it, you just want to kick their axe

The trouble with the tax campaign is that the campaigners don't appear to be interested in maximising tax revenue at all - but rather in giving big business a symbolic kicking. From the reporting - and from statements by politicians such as Ed Miliband - you could be forgiven for thinking corporation tax is a revenue tax on the top line. It's not, it's a tax on the bottom line, on profits. It's gesture politics rather than real politics.

If tax campaigners are genuinely interested in increasing the tax intake fairly, they should be looking at the bigger picture, as I have described above.

So, like any good business, Google battles against market rivals, where they exist, but it also appears to be focussing on making it easier to use other people's content for free or at a low cost. The byproduct: the preemptive destruction of markets. For example, Google lobbies very successfully for measures like the "Instagram Act", which threaten primary licensing.

Google-friendly legislation destroys markets. It lobbies against any private valuation of bits, because it wants to value those bits itself.

In the long run, Google's shareholders are poorer as a result. Google would surely be a larger company in a vibrant transactional digital economy of the future. The company's scale and large systems know-how are useful assets. But for Google to win, it is not necessary that everyone else should lose.

Alas, Google seems to have convinced the political class that its short-term interest is in our best interest, too. What's good for Google is "good for us".

So here's my prediction. Because Google knows the tax campaigners are satisfied with symbolic, largely meaningless gestures - it will make a symbolic and largely meaningless gesture. It could miraculously move a few transactions which are technically completed in Ireland to the UK, bringing them within reach of Her Majesty's tax officials. It could open its new Kings Cross HQ to underprivileged children.

Yet Google would pave the way for a far higher tax contribution, by multiple companies and individuals in a flourishing competitive market - if it would change the way it does business. ®

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