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Did Google’s tax antics kill the People’s Uber?

Imagine if someone invented a public-spirited version of Uber.

It would incorporate public transport, and exclude all the stuff that people feel bad about, like surge pricing and libertarian founders. Now imagine that this virtuous venture went bust, killed off by tax-avoiding tech giants. What a depressing tale of late capitalism that would be.

This is the gist of a thought-provoking piece by Evgeny Morozov in last Sunday’s Observer. Morozov describes the fate of Kutsuplus, a Finnish minibus-sharing scheme that was stopped in 2015 when the Helsinki Transport Authority ceased funding it.

Morozov explains Kutsuplus’s demise as follows: Companies like Google avoid their taxes. This weakens public finances and means that the state can’t invest enough in ventures like Kutsuplus to make them succeed. Meanwhile, enriched by their tax wheezes, Google and co invest the vast sums that businesses like Uber need to grow. So Uber thrives and public-spirited alternatives die. Morozov draws the wider conclusion that “a country’s technology policy is directly dependent on its economic policy”.

Now, Morozov’s broad conclusion that economics shapes technology is surely right. Technology isn’t some magic force that acts on society from outside: it’s shaped by choices that we make. And we at Nesta were big fans of Kutsuplus and other clever, public spirited innovations.

But the explanation of what killed Kutsuplus seems off base.

Part of the reason this bothers me is because Someone Is Wrong on the Internet and I’m sad/obsessive enough about innovation policy to care. But it also matters because it gives a deeply misleading impression about how public sector innovation works, and why it is difficult. Specifically, it reduces the challenge of public sector innovation to one of having enough money, which is a fairly small part of the problem. Understanding why public service innovation is hard is important if we want to see more good, pro-social innovations.

So let me offer an alternative view. I’ll begin with the problems with the “tax avoidance killed Kutsubus story” and then look at the other explanations that the Observer story overlooks.

Morozov argues that it's the unwillingness of companies like Google to pay tax and the Finnish government’s failure to scale up Kutsuplus.

To put it bluntly: the reason why Uber has so much cash is because, well, governments no longer do. Instead, this money is parked in the offshore accounts of Silicon Valley and Wall Street firms.”

This seems superficially plausible – after all, tax avoidance is bad, isn’t it? But when we look at the stats, it turns out that it’s not actually true. The total tax-take as a percentage of GDP in both the UK and Finland seems to have stayed pretty constant over the last couple of decades, tax avoidance notwithstanding. Presumably governments have so far been able to make up tax lost to tax avoiders elsewhere. This might be a problem for other reasons. But it doesn’t support the argument that tax dodging is leaving governments poorer*.

So what are the reasons why governments don’t back more radical public service innovations?

I can think of a few:

1. Radical public service innovation is hard because the cost of failure is higher. Innovation involves the risk of failure; Silicon Valley types love talking about “failing fast”, “failing forward” and so on.

If all that’s at stake is the delivery of your take-away dinner, failure can be tolerated. But if you’re looking at an area like children’s social care, bravado about failure starts to look embarrassing. This is coming home to roost for tech companies as they start to get involved in more crucial services - witness the predicament of healthtech wunderkind Theranos when its testing labs starting letting patients down. Public services are more often vital, so risky investments are harder to justify.

2. Changing public sector working practices is hard. Most technological innovations involve more than technology: you need to change working practices and organisational forms alongside them. All other things being equal, this is harder to do in more tightly regulated working environments, especially where employees’ terms and conditions are strongly protected. These sorts of working environments are more common in public services than the rest of the economy, making it marginally harder to innovate.

3. Public sector financial rules don’t help. Most innovation involves investment: spending money now and reaping the rewards in the future. But public-sector financial rules often make this difficult. Budgets that can’t be carried forward from year to year are commonplace in government. Democratic pressures also make certain types of investment difficult to make (spending on money on software, on external advice, or on back-office costs all occasionally attract public ire in the UK and are occasionally banned or officially discouraged – but all of these have a role to play in innovation).

4. Governments don’t prioritise innovation because voters don’t. Finally, it’s hard to do public service innovation because all too often there isn’t public support for it. The future has no lobbyists, as the saying goes. When it comes to public transport, for example, voters in the UK seem to be very exercised about rail fares (even though most people don’t travel on trains and those who do are relatively well-off), a bit concerned about buses, and not at all concerned about new collaborative platforms for transport. So the problem isn’t so much governments being unwilling to spend money – it’s governments spending money on things other than innovation, and voters who tell the governments to behave that way.

The point of listing these problems isn’t to knock government. There are good reasons why governments are risk-averse when dealing with life-or-death services, for why they offer reliable terms and conditions of employment, or for why they listen to voters’ demands for core services to be prioritised.

But by thinking about the barriers to public sector innovation, we can find ways to encourage more projects like Kutsuplus to spring up. Governments can talk to citizens about how innovations can serve the public good, and build support for spending money on them. They can improve their financial processes so good long-term projects have a better shot of success, and improve how they gather evidence so we can see what works. They can empower staff to lead innovative projects to mitigate the effects of rigid employment rules. And they can devote attention and political capital to innovation to make sure that projects have the greatest possible chance of success.

That’s not to say that you don’t have to spend money to innovate. But money is a necessary but not sufficient condition; indeed, it’s not even close to sufficient, and pretending that it is will not help us come up with the next Kutsuplus.

Speaking of Kutsuplus, there is at least a glimmer of a happy ending to its story. Following its acquisition by Split Technologies, there are hopes that the service will relaunch in other cities. Here’s hoping. In the mean time, getting our public sector innovation systems working as well as possible seems like a worthwhile goal.


* Thanks to tax whizz Jo Maugham for advice on the tax-take effect of tax avoidance - I highly recommend his blog for insight into tax and tax avoidance.


Stian Westlake

Stian Westlake

Stian Westlake

Executive Director of Policy and Research

Stian led Nesta's Policy and Research team. His research interests included the measurement of innovation and its effects on productivity, the role of high-growth businesses in the e...

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