Innovation Files has moved! For ITIF's quick takes, quips, and commentary on the latest in tech policy, go to

All posts by Joe Kennedy

Why Europe’s Apple Decision is Misguided and What It Means for Ireland, Tech Companies, and the Future of Global Tax Reform

Last week, the European Commission ruled that Ireland hasn’t been taxing Apple enough and declared the company should pay back $14.5 billion more than Ireland thinks it owes. This underscores the degree to which European officials, having created a regulatory and economic environment that deters innovation and rapid growth, increasingly resent the competitive success of tech companies such as Apple, Amazon, Google, and Facebook. The large benefits these companies deliver to European consumers are seen not as welcome relief amidst an otherwise dreary economic picture, but as an indication of undue power that needs to be brought to heel. So an ongoing series of official investigations and regulatory actions has pried into not just tax practices, but also antitrust issues, privacy concerns, and business model restrictions.

Although the final ruling has not been published, European Competition Commissioner Margrethe Vestager’s decision almost certainly exceeds the Commission’s powers and provides clear evidence of this European animus toward U.S. companies. The decision is misguided and is going to have serious impact on Ireland’s economic competiveness, deter other innovative companies from expanding in Europe, and put into question the future of global tax reform.

Read the rest

Don’t Block Geoblocking

One reason information technologies have delivered huge benefits to the world—and promise even greater gains in the future—is that they lower the cost of producing high-value, information-driven products and services, from movies and games to software tools. Yet, because these information products are fundamentally different from physical goods or services, their pricing models have often led to confusion. An example of this is the current debate in Australia about geoblocking, the practice of varying the availability or price of a digital good or service, market by market, depending upon the location of the purchaser.

A recent draft report by the Australian Government’s Productivity Commission renewed longstanding complaints against geoblocking. Citing a previous report by the Australian House of Representatives, plus pricing data from 2012, the report found that Australians paid an average of 50 percent more for digital goods than did Americans. In response to this perceived unfairness, the commission urged copyright holders to provide more timely and less costly access to digital works. It also encouraged the government to affirm that consumers may use software that circumvents geoblocking technology without violating Australian copyright laws.

Such a policy could reduce

Read the rest

New Research Sheds Light on How U.S. Labor Market is Evolving

Although the American labor market is evolving, a scarcity of data has often made it difficult to know exactly what is going on and what to make of it. Having a better understanding of how the nature of work is changing would help individuals prepare for their role in it. It would also help policymakers pass appropriate laws that promote competition, protect workers, and encourage investment in both human and physical capital.

One of the leading academics in this field has been Alan Krueger, former chairman of President Obama’s Council of Economic Advisers. Dr. Krueger has coauthored two recent studies that provide policymakers with a better understanding of how labor markets are evolving on both the macro and micro levels.

Our understanding of macro changes to the labor market is limited by the fact that, because of funding limitations, the Bureau of Labor Statistics (BLS) last conducted its Contingent Worker Survey, which gathers data on people who have contingent and alternative work arrangements, in 2005. In a recent paper, Lawrence Katz, a Harvard economist, and Dr. Krueger included a version of this survey in the RAND American Life Panel,

Read the rest

Labor Law and the Gig Economy: Why Stick with an Antiquated System?

The rapid growth of the gig economy—workers using Internet platforms to deliver personal services such as rides, legal services, and plumbing to consumers—has sparked a discussion on their impact and relationship to current law. A major topic in this debate has been whether gig workers should be classified as employees or as independent workers. On March 15, Ross Eisenbrey and Lawrence Mishel of the Economic Policy Institute criticized an earlier paper that Seth Harris and Alan Krueger had written for the Hamilton Project at the Brookings Institution. The Harris and Krueger paper recommended establishing a third legal category for gig workers. But Eisenbrey and Mishel’s assertion that current law can handle gig marketplaces misses the central point. The real question is not whether a centuries-old distinction can be contrived to apply to the gig economy. It is whether doing so is in the best interest of society.

Eisenbrey and Mishel primarily focus on the case of Uber. This is unfortunate because Uber probably represents the closest case to an employer-employee relationship. But even in this case the authors acknowledge that courts have given different opinions. The waters are muddied even

Read the rest

Increase Competitiveness and Progressivity by Taxing Individuals Instead of Corporations

A recent proposal by two noted tax experts—“Shifting the Burden of Taxation from the Corporate to the Individual Level and Getting the Corporate Tax Rate Down to 15 Percent” by Harry Grubert of the Office of Tax Analysis in the Department of the Treasury and Rosanne Altshuler of Rutgers University—promises to lower the federal corporate tax rate to 15 percent. Much of the revenue loss would be made up by eliminating lower individual taxes on capital gains and dividends. The proposal solves many of the political problems plaguing corporate tax reform and deserves serious consideration.

There is wide agreement that the U.S. corporate tax laws need broad reform. Over the past decade or so, nations have become increasingly aggressive in competing for the business tax base generated by multinational companies and fast-growing start-ups. This competition includes lowering statutory tax rates, and providing incentives for investment through policies like innovation boxes and research credits. As a result, the U.S. tax rate of 35 percent is now the highest statutory rate among Organization for Economic Cooperation and Development countries, in many cases 20 percentage points higher than U.S. competitors. These rates strongly

Read the rest

The Sharing Economy Will Benefit All, But Only If We Let It

The House Energy and Commerce Committee is holding a hearing this week on “How the Sharing Economy Creates Jobs, Benefits Consumers and Raises Policy Questions.” These new Internet marketplace platforms are raising many new policy questions about U.S. labor law and competition.

A large part of the problem is that U.S. labor law remains guided by the National Labor Relations Act of 1935. A lot has changed since then. In 1935 the United States faced little international competition. The economy was dominated by large, stable companies that hired a lot of people. Many workers anticipated staying with their current employer for decades. Coincidentally, these traits also favor unionization.

Today’s global economy is characterized by international competition that we are losing in some respects. Companies are slashing fixed costs to avoid the very real threat of bankruptcy or acquisition. They can no longer make long-term commitments to their workers, who, in any case, anticipate working for many companies during their career. Labor law has strained to accommodate this.

Into this mix comes the rise of the Internet platforms that make up the sharing economy. Platforms such as Uber and

Read the rest

U.S. Companies Continue to Suffer From the High Cost of Corporate Taxation

It is common wisdom that the world economy is becoming increasingly competitive. This puts enormous pressure on U.S. companies to lower their prices. Anything that adds extra cost to the production of U.S. goods and services threatens their viability against foreign firms. It is also common knowledge that the United States has the highest corporate tax rate in the developed world. When state and local jurisdictions are added, American companies face an average statutory rate of 39.1 percent. The weighted average of other OECD countries is 29 percent and the rate in the United Kingdom, where a lot of U.S. headquarters are ending up, is 21 percent.

Some opponents of corporate rate reduction argue that this comparison is misleading, because effective tax rates, the amount of tax that companies actually pay divided by their profits, are much lower, and in some cases even negative. The implication is that U.S. companies do not suffer from a disadvantage and tax rates are not high enough to discourage economic activity.

A new study by PwC compares the effective tax rates of 320 international companies in six industries by looking at their annual reports.

Read the rest

Response to the Pope’s Encyclical on Global Warming: Markets and Technology Are the Solution, Not the Problem

It is difficult to know what to make of Pope Francis’ recent encyclical, Laudato Si’. Although formally devoted to global warming, the science and policy of climate change is mentioned only in passing. None of the encyclical’s 172 footnotes cite scientific or economic works. The facts associated with neither the immediate topic nor with broader ecological concerns are ever examined in any depth. Instead, readers are treated to a lengthy discussion of church philosophy on the relationship between man, God, and nature, illustrated by numerous quotations from past church leaders. Although critics have faulted the encyclical for many things, its language is too general and enough caveats are thrown in that such attacks seem overdone. The real problem is that, other than love each other and live more simply, it is difficult to know what Pope Francis would have us do differently.

The Pope is surely correct to point out the many instances where short-term profit for a few has produced environmental pollution whose cost is borne by the many. His criticism of materialism, defined as the love of things rather than people or values, also rings true. There is

Read the rest

Tax Proposals Attempt to Bridge the “Valley of Death” for Small Research Firms

A new coalition of trade associations, The Coalition of Small Business Innovators, has developed two innovative tax reform proposals designed to help small research companies attract more investors, even if they are many years away from profitability. These proposals would allow passive investors to take advantage of losses and research credits generated by the company and allow companies to carry net operating losses forward even when they raise new financing. The former proposal has already been included in broader bills aimed at boosting innovation and economic activity. If enacted, the proposals could increase investment in small, research-intensive firms by $14.1 billion and create 72,000 jobs in eligible companies.

Although the U.S. financial system is the most sophisticated in the world, it still contains at least one significant gap. Small, capital-intensive companies often find it very difficult to raise the additional capital needed to go from start-up through the long development phase until they are near enough to profitability to conduct an initial public offering or be attractive to a prospective buyer. This period is commonly known as the “valley of death.” Firms in this position may have a very

Read the rest

Preempting International Harmony: The New British Tax on Overseas Profits

Earlier this month, the United Kingdom announced a new “diverted profits” tax on the profits of foreign companies operating in the United Kingdom. The government’s parliamentary majority will allow the government to implement the tax with few delays. Doing so would be a mistake, however. Although the new tax tries to address a real problem with the implementation of corporate taxes in the modern economy, a new international process led by the OECD already exists to deal with exactly this kind of issue. The effort recently issued a series of major reports and is scheduled to make final recommendations next year. The British government should delay implementation of its new tax so that it can act within a multilateral context designed to deal with the larger issues involved.

The issue of tax competition, like that of inversions, has become confused recently, with both legitimate and illegitimate activity getting thrown into the same category. Despite the unease of some countries, there is nothing illegitimate about a sovereign country lowering its corporate tax rate in order to attract foreign companies. It is immaterial whether in doing so they reduce the size of

Read the rest