Tech giants are undercutting business - and that's a good thing

In today’s Times, consumer affairs reporter Andrew Ellson argues that “Feckless ministers have let tech giants undercut business”, but his objections are rather wrong-headed.

First, he’s concerned that Amazon will outcompete car dealers and the treasury will get less tax as a result. He writes:

“Car dealers will soon be the latest victims. After being told that they must pay an extra 15 per cent in business rates over the next five years, they now face the prospect of Amazon, which benefited from a rates cut in April, selling cars online. Expect blood on showroom floors. Car dealers are not high on anyone’s list for sympathy but they do pay a decent amount of corporation tax, which will disappear if they go bust. Last year Amazon paid only £7.4 million tax on earnings of £1.46 billion.”

Where to begin?

First, business rates aren’t a tax on business but a tax on property. They reflect property values and because of our incredibly restrictive planning system the incidence falls mostly on the landowner not the business owner. Without business rates, car dealers would simply pay higher rents. (Of course, if we fixed our godawful planning laws and let firms build then the burden would shift to business owner and it’d become a big problem, but until then…)

Second, Amazon, like other online retailers, chooses to locate its warehouses on the outskirts of cities where rent is cheaper. Ellson’s complaint is essentially that Amazon uses land more efficiently and as a result will be able to offer lower prices. A problem for car dealers not for car buyers.

Third, Ellson’s worried that Amazon outcompeting car dealers will leave a hole in the public finances. He points out “Amazon paid only £7.4 million tax on earnings of £1.46 billion” but corporation tax is levied on profits not revenues. Amazon keeps its mark-ups low and reinvests in expanding into new markets. A company abusing its monopoly to charge high mark-ups would almost certainly pay more in tax, but we’d all be worse off as a result. I doubt Ellson would praise a firm that laid off its minimum wage workers and used the savings to boost CEO pay, because it meant they paid more to the Exchequer.

Amazon isn’t the only innovative firm in Ellson’s sights.

“At every turn, technology giants using favourable tax arrangements are undercutting British businesses. Airbnb, for example, has won a huge chunk of revenue from hoteliers because its users do not have to pay VAT on their stays while hosts do not have to adhere to the same safety standards.”

Again, Ellson is misinformed on the tax front. He seems to describe Airbnb’s tax arrangements as the result of ministerial sloppiness. Airbnb does pay VAT on its cut. It’s the host that doesn’t and the reason why is simple. The threshold for registering for VAT is an annual turnover of £85,000. Few hosts will earn that. Now perhaps, we should lower that rate to take into account the rise of self-employment, but Airbnb hosts and Uber drivers wouldn’t be the only ones to pay.

Ellson also complains that Airbnbs don’t have to comply with the same safety standards of hotels. But Airbnb’s rating system corrects for safety and quality control just as well as any government bureaucrat.

Ellson believes that these ‘favourable’ tax arrangements are enabling ‘libertarian tech barons’ to ‘grow to such dominance that the economy and innovation suffers.’ He cites Google’s search dominance and Apple’s mobile dominance claiming that “one has to question whether these companies are really creating wealth or just using their market share to extract a cut of someone else’s.”

But it’s clear that Amazon, Apple and Google are creating wealth. Amazon has delivered low prices and near instant delivery, Apple’s iPhone has revolutionised the world, and Google are constantly innovating by producing driverless cars as well as the best search offering on the market. All three firms may have driven others out of business but that’s exactly the sort of market competition that delivers for consumers.