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Business modeling for states

mardi 26 mars 2013, par Philippe Coueignoux

March 26, 2013

Ideally states, corporations and people are linked into a series of virtuous exchanges. States provide their legal framework to corporations and social solidarity to people, corporations economic prosperity for both people and states and people the justification and the means behind both states and corporations. To say the least, the reality of our global economy makes for more contentious relations.

Both states and corporations gang on people to strip them of privacy. Both corporations and people go to great lengths to escape all forms of taxation as if states could offer their services for free. Corporations come up on top by making both states and people compete for their favors.

State funding relies on two business models, the exploitation of concentrated natural resources or the taxation of decentralized economic flows (1). Roula Khalaf smartly sums up the sustainability of the former in her essay on Irak (*). Leaving "a former senior official" to conclude "because [the state] is rich in oil, no one feels the need to reform it", she implies the Gulf war may have led to little more than a personnel rotation at the top, however radical. The sustainability of the latter, more inclusive model, is sharply disputed by Pierre Collin and Nicolas Colin in a recent report (2).

Their analysis highlights three facts. Small states sell themselves as tax havens to corporations, an easy goal to reach given the intangible nature of value creation in the Age of Information. Beyond such location arbitrage, Information Age new barbarians also subject their users to data serfdom. Finally they further depress prices by enabling consumers to compete with traditional professionals in offering goods and services. Leave these trends undisturbed and the French tax base will either escape to foreign lands or evaporate into unmonetized, unaccounted for, nontaxable value.

The authors’ mission was to show how to update the French state business model by taxing the new decentralized flows of the digital economy. As, to be adopted, any tax must respect internationally agreed upon principles and, to be successful, be fair and general enough to survive the rapid evolution of technologies and corporate business models, Pierre Collin and Nicolas Colin expertly demonstrate the difficulty of their task.

Their proposal rests on two observations. Most of the added value created by the digital economy outside of the reach of the taxman is traceable to what they call "the regular and systematic recording of user behavior". On the other hand international tax authorities recognize some rights to the country where consumers have their residence. Couple the two observations together and you have a likely line of attack.

Similar observations being behind my privacy tax, I dubbed the authors’ plan with the same name. The title should not be misinterpreted. Neither the authors nor I believe privacy can be the primary point of a new tax, only that the latter can favor privacy by making it less costly than pure piracy.

Add the fact that the authors put forward the tactical value of pragmatic experiments and stress the need to win the European Union to their side and it is natural I recommend their report to my regular readers. The clarity of their well researched diagnostic and the broad agreement between our two independent perspectives make it all the more imperative to focus on what I believe to be a fatal flaw in the authors’ conclusions.

How can a state verifiably quantify "the regular and systematic recording of user behavior" by a corporation on its residents ? The authors themselves acknowledge the collection of user data from outside the borders makes this impossible without deep packet inspection (3). They admit the latter can only be a "last resort". Imagine indeed the outcry which would ensue, the state once more the most obvious, the most pernicious, the most egregious threat to their citizens’ privacy. Yet can unilaterally creating a tax focused on francophile companies be the sustainable solution they seek ?

True, without any need for invasive, unpalatable measures, Facebook arguably falls under the authors’ definition. But this only shows the relative weakness of social networks compared to sneakier ways of tracking unwitting users, from smart cookies to already mentioned deep packet inspection. Once again such a result would fly in the face of the authors’ own criterion, neutrality relative to corporate business models (4).

Pierre Collin and Nicolas Colin mirror the mistake I made in the past. I thought individuals strong enough to seek privacy. They think states powerful enough to tax the new economy. I have come however to realize only an alliance of the two can overcome the might of global corporations.

In order to align the interests of states and their residents, one must first shed two potential prejudices. Money is always bad, Big Data always good.

In the case of the former, the authors state the reluctance of some "to subject internet users to market pressures toward data valuation and monetization" (5). Yet how else can one stop new added value from evaporating, a worse outcome than when it simply jumps the border ?

In the case of the latter, they themselves write "France must not impede but rather encourage data collection" (6). One should not confuse the use of personal data, which should indeed be promoted, with its covert aggregation by anyone other than the users themselves, an ever mounting threat to eprivacy ? Today is but a warm up. Chris Nuttal timely warns us about "the wave of data soon to be unleashed by wearable computers" (**).

Free to face our Information Age, one can sketch a technically viable solution (7). Philippe Marini was right to focus on online advertising (8). Behind the bulk of revenues derived from data collection, it has the unique advantage of coming by construction as singular, user visible events, taxable as such, like financial transactions. What precludes taxing it according to how many and how deep personal profiles have been aggregated to target it (9) ? What prevents an international agreement to transform the levy into an income tax apportioned by total sales per country ?

As Eric Pfanner and Nicola Clark report, "one service provider, Free, temporarily blocked users from seeing advertising sold by Google" (***). In the name of net neutrality, Mme Fleur Pellerin forbade Free to do so. As "the French minister overseeing the digital economy", who among others mandated the authors’ report, she can release a similar user application for the sake of social solidarity. Let it delete any ad unless its source is duly registered and acquits a tax computed according to the "conformance" grid suggested by the report (10), for instance following my formula (9).

Instead of remaining user neutral, such a tax app should be user friendly. Why not extend taxable events to all recommendations, the true font of value in the Information Age (11), while privileging those made by the users themselves and lead to actual sales ? Why not in this case compensate registered consumers for their tax collector role ? What advertiser spurns a tool against ad click abuse ? Who forgoes a profitable sale because it is taxed ? Pierre Collin and Nicolas Colin rightfully fear Google will force advertisers to bear the cost of the tax. But with an nineteenfold tax burden on its ad network over single profile self aggregation (9), even Google becomes but a bloated incumbent. Ask venture capitalists.

States should turn corporate taxation into a game users can play and which further enables them to monetize their personal data in total privacy.

Philippe Coueignoux

  • (*) ......... Irak : 10 years on, by Roula Khalaf (Financial Times) - March 16, 2013
  • (**) ....... Smartwear, by Chris Nuttall (Financial Times) - March 22, 2013
  • (***) ..... France Proposes New Rules to Guarantee Equal Access to the Internet, by Eric Pfanner and Nicola Clark (New York Times) - March 13, 2013
  • (1) I acknowledge my debt here to Daron Acemoglu and James Robinson
  • (2) Taxation of the digital economy, by Pierre Collin and Nicolas Colin - Jan 2013 - in French (English executive summary)
  • (3) p 141, 142 in the report above mentioned (2)
  • (4) p 130 in the report above mentioned (2)
  • (5) p 135 in the report above mentioned (2)
  • (6) p 138 in the report above mentioned (2)
  • (7) for more details, see US Patents Number 6,092,197 and 7,945,954 and US Patent Application 2009/0076914
  • (8) Stepping stones to a neutral and fair taxation of [the] digital economy, by French Senator Philippe Marini - 27 June 2012 - in French and English
  • (9) e.g. a tax proportional to 1 + log10(np**2), where np is the number of profiles aggregated, from 1 for user self aggregation to 19 for a billion user network.
  • (10) p 131 in the report above mentioned (2)
  • (11) p 17 in the report above mentioned (2)
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