Is digital taxation tariffs or dividends?

G20 Meeting of Finance Ministers and Central Bank Governors agreed to aim at introducing digital international taxation by 2020. The corporates tax revenues from digital businesses without physical hubs, such as branches and factories, are allocated to service consuming countries.

The British and French governments have already decided to introduce digital service tax on sales such as advertising fees. Since it is a sales tax or a consumption tax, there is a problem of double taxation. Giant IT companies offer free services to consumers and receive free data from consumers, so the tax will be implicitly applied to free services.

US Treasury Secretary Mnuchin claims that discriminating tax targeted at US giant IT companies is not allowed. Gary Hafbauer, Senior Fellow, Peterson Institute for International Economics, also argues that the new tax in both the UK and France is the introduction of new tariffs which are equivalent to cash robberies; the US government should immediately apply the Section 301 of the Trade Act of 1974 and take countermeasures coupled with the appeal to the WTO, as the new tax is inconsistent with the principle of national treatment.

One of the reasons for the emergence of digital taxation issue is to stop tax evasion by giant IT companies. The other reason is deeper; it relates to the issue on the survival of digital capitalism.

Giant IT companies collect personal information and generate huge revenues from targeted advertising to individuals. Can information be used without permission just because there is a free service? There is also the view which regards today’s digital capitalism as “techno-feudalism”; a giant IT company is a lord with an individual being a data slave.

Mr. Jaron Lanier, a virtual reality technology developer, has put forward the concept of “data as labor.”; according to his view there is not enough profit return for the contribution of human labor in the collective intelligence formation process by personal data providers and the use of artificial intelligence. Ownership of personal data belongs to labor, not capital.

The decline of labor income share in developed countries is the reverse coin of an increase in the distribution to intangible assets such as AI and big data; it works to suppress wage growth. The concentration of income and wealth is expected to further increase in the future. It poses a question whether the society can tolerate the ever-decreasing labor income share with widening inequality.

The European Union’s General Data Protection Regulation is a move to restore the ownership and the use of personal data for protecting privacy. Mr. Gavin Newsam, Governor of California, argues that giant IT companies should acknowledge the labor contributions of data providers and pay dividends to individuals.

The starting point of constructing a good society in the era of digital capitalism will be to increase the controllability of data by individuals based on privacy protection and improved transparency with regard to the value of data. We should establish the “right to be forgotten” and “portability” for personal information. Moreover, it is required for individuals to actively participate in the creation of new value through the use of information banks in the process of using data and AI. The crucial question is whether we can build a system that can provide rewards that match the results of these efforts by individuals.

(The english translation of the article was published in the Nikkei morning edition 2019/06/28.)