The Real World takes on the Digital World

For the longest time, digital citizens have escaped the two great real-world certainties: death and taxes. Digital life is eternal as long as the power flows and the backup tapes are safe. Taxes follow the flow of money; where there's no money, there’s nothing for the taxman to grasp.

You know where this is going, don’t you.

It’s no accident that the current crop of leading digital companies call the United States home. Whether it’s due to culture, politics, regulations, economics, or that-old-entrepreneurial-spirit, America has seen more than its share of digital success stories. A large measure of that success is due to a system that is generally favorable to business, investment, and risk taking. In America, you reap the rewards of hard work, a bright idea, and a little luck. But what happens if that digital business you’ve built begins to "export" to the rest of the world?

The international trade system relies on the flow of goods & services, measured in money, to fund things through taxes. It used to be that only goods were taxed, but as services became a larger part of the global system, politicians inevitably saw an opportunity to grow their own business by entering a new market.

Taxes inevitably come from only one place: the people.

So, what is being contemplated? The United Kingdom is looking at non-monetary digital services such as search, social networks, etc., and targeting the tangential real-money transactions between the digital property owners and third parties. For example, a tax proportional to platform advertising revenue, payable to the country where the eyeballs are at any given moment. Or a tax per email, perhaps based on where recipients sit, what their profiles are worth, and who uses ad blockers versus who doesn’t.

There are two fundamental problems with taxing digital services: First, the digital world is incredibly complex and does not map neatly onto the physical one; people move about, change devices, connect and reconnect, have multiple personae, and interact in thousands of different ways across multitudes of apps. Some of the interactions are purposeful, some are accidental, some are simply the result of how systems manage traffic and route messages. Figuring out the who, what, where and why of a digital interaction is amazingly complex. Perhaps too complex (and costly) to measure.

Second, the value of any single interaction is a complex equation based on timing, mood, attention, context, content, and a myriad of other factors which today no one even tries to unravel. While in the non-digital real world we force every transaction into a common measure - money - in the digital world there is no such baseline to work with. Worse still, the data that users share is infinitely replicable and reusable. This means the worth of the data itself has an array of values amongst an array of data-driven entities. Picking a single one, like advertising revenue, as a proxy would be a completely arbitrary decision. This reveals this plan for what it really is: nothing more than a quick cash grab.

This goes beyond just grousing about a tax increase, or pointing out the absurdity taxing a few named digital platform an arbitrary amount divided by a random large number which represents the unknowable value of an uncertain number of U.K. citizens. All taxes are paid by consumers. A digital tax is a consumer tax, and it will result in increased prices for things only notionally connected to the digital services that consumers use.

In the best-case scenario, services like advertising, reporting, and compliance costs more, meaning product prices must increase somewhere to compensate. If health datasets cost more, then health services will cost more as well.

In an alternative, but plausible, scenario, free services might simply no longer be free. By placing a reporting and tax burden on free services, the U.K. government is implicitly stating that free is not allowed (at least not for U.K. citizens anyways).

It’s tempting to see this as a simple tax on a few big American companies to easily bring some free money to a foreign shore. The complex reality is that the global group of shareholders, employees, and suppliers being taxed are not going to eagerly absorb the loss; they’re going to push it back to where it came from, one way or another. Just as free services must enable a digital company to generate revenue somewhere, free tax money from overseas must eventually drive cost increases at home, if for no other reason than that once one country does this, everyone will.

Put simply, a digital tax is unworkable, expensive, and inevitably leads to increased consumer costs with no net benefit to anyone but the bureaucracy it pays for. 


Bruce Headshot.png

Bruce Gustafson
President & CEO