Google Tax

The French have solved the problem of Internet piracy: tax Google. From the AP (via Yahoo):

The report, handed to Culture Minister Frederic Mitterrand on Wednesday, says Google and other Internet portals should be slapped with a new tax on their online ad revenues in France to fund the development of legal outlets for buying books, movies and especially music on the Internet.

Essentially, France wants to subsidize media purchases (read: French media purchases) with a tax on the Internet companies who provide easy access to pirated media. The idea behind this Robin Hood-esque plan is that young people would then find legal avenues to purchase this subsidized and relatively cheap media rather than use Google to find it for free (albeit, illegally). Of course, the opposition cites the parade of horribles that would result from such a tax:

'Where does it start and stop? The argument is that Google has culpability for declining music revenues because people start searches for illegal files often by Google,' said Mark Mulligan, vice president of Forrester Research. But 'what about the computers? Because without the computer people wouldn't be able to download. And then what about the electricity that powers the computer?'

There may be a hint of truth in this slippery slope. A tax on search providers (like Google) is bound to be "leaky". Essentially, if the French are only going to tax Google's French revenues, Google will simply rework its advertising contracts to other EU member states to dodge the tax (the EU is a common market, it can be pretty easy to avoid these kinds of taxes, particularly when they do not involve physical goods in the country). Google will still get its revenue and France will not collect its tax. And if you can't collect the cash from Google - well then just go after the items that cannot easily be moved (like the electricity to the computers that steal the music).

While I sincerely doubt that the French will implement an electricity tax to pay for young people's (French) music tastes, I do believe that France will ultimately set up this type of tax and subsidy scheme. The French have a habit for such interventions into the marketplace, a system affectionately known as dirigisme. But as discussed above, this tax-subsidy system will probably not work and in all likelihood, will wind up driving online advertising revenue away from France.

So why would France bother with such a potentially useless tax? Simple - because it's broke. With record deficits plaguing the developed world, new and novel taxes will begin cropping up to help contain some of the fiscal destruction. The more of a "moral" label a country can place on a tax, the more likely the tax is to be implemented. The French have found a convenient enemy in search providers: they are the gateways to broad-based theft. What better justification to tax someone than the fact that you will use the revenues to right a wrong. A little hint: with 10%+ of GDP deficits, that tax money is just going to wind up in the general fund.

I hope Congress isn't following the French news.

Next Stop: Poor House

California just can't get a break. From the LA Times:

Less than four months after California leaders stitched together a patchwork budget, a projected deficit of nearly $21 billion already looms over Sacramento, according to a report to be released today by the chief budget analyst.

Yeesh. And unlike the Federal Government, California cannot print money or use quantitative easing to deal with the shortfall. Things are so bad that California is researching ways to declare bankruptcy:

California's finances have been so bad that the governor's finance director, Mike Genest, told a budget forum in Washington last week that back in February he had combed through the U.S. Constitution to research whether California could legally declare bankruptcy -- or revert to some kind of territorial status. (Neither was realistic, he determined.)

California's fiscal implosion may end up being a con law professor's dream. Can a state declare bankruptcy (note: the current bankruptcy code only provides a reorganization option for municipalities, not states)? Can a state revert to a territory? If Californians revolt and install a dictator, would Congress enforce the guarantee clause?

Whatever the answers may be to such heady constitutional questions, the reality is that life in California is going to get a whole lot worse in the very near future.

A Current Look at the Deficit and Proposed Tax Changes

Time for an update on our nation's deficit. As you may know, the United States' total debt is limited to a statutory ceiling set by Congress. Currently, this ceiling is $12.1 trillion. As of Friday, November 13, 2009, our nation's debt stood at $11.99 trillion. At our current rate of cash burn (something like $100 billion a month), we don't have very long before we hit the ceiling. Congress will likely increase the ceiling, albeit with some huffing and puffing from deficit hawks, because a failure to do so would constitute a default by the United States and would shut down the government (that being said, such a situation happened before in 1995).

Increasing the debt ceiling may keep the wheels of government spinning, but it does nothing to fix the underlying problem: the gargantuan chasm between spending and revenue. Recognizing this, the Obama administration is floating some interesting proposals for dealing with the epic mismatch:

1) Domestic agencies will likely face a 5 percent cut or a freeze of their budgets;

2) Excess TARP money may be used to reduce the debt (somewhat circular in that TARP is all borrowed funds to begin with);

3) The roughly $47 billion a year Medicare fraud industry will (hopefully) be attacked.

Congress is also looking at ways to "generate more revenue" (read: raise taxes) to not only reduce the deficit, but also to pay for new domestic programs such as health reform. For example, the recently passed health bill contains a 5.4 percent surtax on individuals making over $500,000 and families who make over $1,000,000. Interestingly, unlike most of our tax brackets, this surtax is not indexed for inflation. That means, essentially, that more and more people are subject to the tax as their nominal incomes increase into the area covered by the bracket--a phenomenon called bracket creep.

As currently implemented, the surtax would affect 0.3 percent of taxpayers in 2011 and due to the lack of indexing, 0.5 percent of taxpayers in 2019.