> ...government will be pressured to react by introducing new legislation to remove that loophole.

That's the point right there - doing that would create more secondary effects. Let's say England says that if you have employees there, and make large profits, you have to pay high taxes.

The reason I focus on legislators is because they tend to be ignorant of secondary effects. Let's say they want Google to pay more taxes and want "close the loophole" as you say - how do they do that? There's law, they can't just write a letter to Google demanding taxes. So what will the law read? "The Fair Tax Burden in Cyberspace Act of 2010" - how would that theoretically read?

Well, maybe the first draft says that if you have staff in England over a certain amount, you have to claim corporate taxes there.

Well, maybe Google does the math, and decides it's not worth - and and lays off or transfers its English staff.

So a legislator gets furious, and writes the, "Anti-Cyber Laundering Protection Act of 2011", which mandates that if a website collects revenue from a country, it has to pay taxes, or the website is banned.

Do you see how this goes downhill really fast? Legislators don't consider that the actions they take won't always produce the results they want, and almost always have secondary consequences. Maybe this is much ado about nothing, but we could get another one of those scenarios here.

I will admit a bias though - I think Google does a better job providing for humanity and the people of England than the English government. And I say that despite the fact that I think the English government is one of the more sane and better run governments in the world - Google just does an absolutely incredibly job, they've produced far more amazing stuff in a shorter period of time than just about any government organization.

So yes, I have a bit of a bias in favor of great companies keeping their revenues instead of giving them over to bureaucracies, but that's not even the crux of this here. The crux is that by legislating, you create secondary effects, many of which are not positive, and the world would be better if legislators paid attention to that and thought things through more clearly.

I understand you completely, but you're trying to abuse game theory combined with a bunch of conjecture of what would happen to justify your pre-existing opinion where it's simply not applicable. This has nothing to do with Nash's Equilibrium at all.

Let's say a legislator writes a tax law, Google use a loophole to pay very little tax and enter the market, so the legislators amend the law to close the loophole, and Google leave the market.

Now, the way you tell the story, it's the legislators' fault for the secondary effect of amending the law causing Google to leave.

But equally, you could take the view that Google should have never entered the market relying on a tax loophole which was never supposed to be there in the first place that lawmakers were unaware of. This is especially so if legislators have external pressures since they are losing tax income from other businesses through this loophole, and that it's unfair on those businesses who aren't using it. It was Google who changed any equilibrium by using the loophole.

You can espouse the benefits of low taxation and the evils of legislators and bureaucracies and the laws of unintended consequences therein, but I don't see how game theory works in your favour in that argument.

For what it's worth, personally. I think taxation is a careful balance between maximising revenue and encouraging business and work, but this is increasingly difficult to balance with the existence of free trade agreements and the existence a global market. But whatever you think about tax policy, we should be able to agree that tax loopholes have no place in that equation, and that tax policy shouldn't be implemented via the backdoor with the benefits only available to large corporations with sufficiently clever accountants.

N.B. England doesn't have a government - it's the UK Government.

> you could take the view that Google should have never entered the market relying on a tax loophole which was never supposed to be there in the first place that lawmakers were unaware of.

If lawmakers are ignorant of the laws they make, is that Google's fault? You'd think politicians would have by now realised that laws often have unintended consequences.

Consider for a moment who writes the loopholes into laws. What a legislator might label a "bad" loophole is one exploited by a business or industry for whom the loophole was not originally, and intentionally, written.

i don't really read his posts as prescribing "fault" per se.

its pointing out the fact that the party in question, which is the government closing a loophole in this case, is actively and intentionally breaking the equilibrium, therefore bringing on the consequences (or benefits).

the example was intentionally worded as it was to show how one party won't always take other parties under consideration. a successful, deliberative decision under nash equilibrium is much more boring and not a very entertaining example.

I'm thoroughly enjoying this discussion, because it's forcing me to challenge my assumptions and think things through. Before I respond, let me clarify - there's general game theory which I'll mention, and there's my opinions on governance, and I try to keep them largely separate. Your comment mixes your thoughts on both a little bit, but I'm happy to weigh in on both topics. I'll try to note which I'm weighing in on - I mention this because game theory type analysis is less subjective than figuring out what "good governance" is, which is a lot more open to opinion and interpretation. But I enjoy both topics and am happy to weigh in on both.

> Now, the way you tell the story, it's the legislators' fault for the secondary effect of amending the law causing Google to leave.

I try not to make moral judgments when pointing out consequences - I wouldn't call it "fault", so much as simply saying it happens. I find words like fault/blame, fair/unfair, good/bad, good/evil, and so on cloud a discussion. I'm more interested in finding out what's going to happen in a given scenario first, and then once we have all the data, then come to a decision. So I wouldn't say it's a legislator's "fault", I would simply say it's an unintended consequence of their actions.

> But equally, you could take the view that Google should have never entered the market relying on a tax loophole which was never supposed to be there in the first place that lawmakers were unaware of.

Whoa, whoa, whoa - reread and think that through. You want private citizens and organizations to guess what the laws are supposed to read like and act accordingly? You want them to guess what lawmakers were aware of in the laws they wrote? Wow.

> It was Google who changed any equilibrium by using the loophole.

What if they had no operations in Europe? They certainly don't need operations on the ground in Europe. So if they had no ops and no business presence, there's no basis for taxation. What next? Block them at the ISP level China-style unless they pay taxes? And so on.

> You can espouse the benefits of low taxation and the evils of legislators and bureaucracies and the laws of unintended consequences therein, but I don't see how game theory works in your favour in that argument.

I'm a huge devotee to the "Never ascribe to malice what can be explained by incompetence" school of thought. I don't think legislators and bureaucracies are evil, trying to drive business out of their countries and hurt people. No, I think they're well-meaning but clumsy.

As for game theory, it handles situations of competition and cooperation - it covers government/business interactions decently. John Forbes Nash actually won the Nobel Prize for economics by using these ideas in market economics. So I'm both not slinging mud at governments using game theory, yet noting that game theory is very applicable for slinging mud at governments if you so choose ;)

> I think taxation is a careful balance between maximising revenue and encouraging business and work, but this is increasingly difficult to balance with the existence of free trade agreements and the existence a global market. But whatever you think about tax policy, we should be able to agree that tax loopholes have no place in that equation, and that tax policy shouldn't be implemented via the backdoor with the benefits only available to large corporations with sufficiently clever accountants.

I completely disagree. I think it's awesome that governments are being forced to compete with each other for citizens and industry. I think a lot of old world government assumptions are going to fall apart when governments are forced to compete, and we're going to be left with a much better world. But now we're totally straying from game theory and getting into governance.

> N.B. England doesn't have a government - it's the UK Government.

Cheers for that - Clumsy American that I am, I slightly tweaked a few Englishmen by calling them "British" instead of "English" when I spent time in London, so I probably go a little too far in calling everything "English" now just to be on the safe side. For anyone that knows, what's the appropriate adjective for the UK government? British government? Or would you just say UK government every time? Cheers for pointing that out, and thanks for the discussion.

> Whoa, whoa, whoa - reread and think that through. You want private citizens and organizations to guess what the laws are supposed to read like and act accordingly? You want them to guess what lawmakers were aware of in the laws they wrote? Wow.

This is commonly referred to as the "spirit" of the law and would seem to me to be an integral part of "Common Law" systems where the "spirit" may often be clarified by the building up of case law. http://en.wikipedia.org/wiki/Letter_and_spirit_of_the_law