Thursday, 19 October 2017

Why Facebook should be taxed and how to do it

The new information technologies have created a whole range of companies that have become extremely profitable. The most successful ones are in the list of the top ten most valuable companies in the world. Valuable here means the monetary value of all outstanding shares of these companies; their capitalization as economists call it.
Alphabet (better known as Google), Amazon, Microsoft, Facebook, Alibaba, are worth $ 400 billion or more in the stock markets. They produce hardly anything tangible. They "make" information. These information companies are extremely successful. They also give rise to new problems.
The most salient characteristics of information companies is that the marginal cost of the information they produce is zero. To make a YouTube movie you have some fixed costs, such as a camera, a laptop and an Internet connection. But once the video has been made, you can broadcast it without increasing costs. Whether there are 10, 100 or 100,000 viewers of the movie does not change the costs of the movie producer anymore. The marginal cost (the cost of one additional unit viewed by someone) is zero.
That’s not all. The more viewers the moviemaker reaches, the more valuable his YouTube movie becomes. If he/she reaches an audience of, say, 1 million viewers, advertisers will be interested and will be willing to pay the creator of the video for placing ads. The more viewers there are, the more the advertiser is willing to pay. The YouTube producer thus produces something that has a marginal cost equal to zero and a marginal revenue that increases with the number of viewers. The more people reached with the movie, the richer the moviemaker gets without having to do something special.
Such a business model creates a number of problems. The first one is that information companies create a lot of economic value without the use of many production factors. You hardly need employees to generate a lot of income. Facebook with a capitalization of $ 400 billion employs 21,000 people. Walmart, which has a capitalization of 220 billion, has 2.1 million employees. Thus Facebook that is almost twice as large in terms of capitalization than Walmart counts only one percent of the number of employees of the latter. This means that a very high level of economic value is distributed to very few people. An inequality time bomb.
A second problem has to do with the fact that the people who join such an information platform (for example Facebook) actually give away information about themselves for free. This information becomes more valuable as more people join the platform. The big data on private information makes it possible to place highly targeted ads. The dream of all advertisers.
So companies like Facebook produce information that generates a lot of revenue using as ”raw material” the private information that they acquire for free from their users. They are great money machines generating huge wealth that hardly has to be shared and can be kept by the happy few in these companies.
Such a situation is untenable. More and more economic value is distributed to less and less people. What can be done about this? Here is my proposal. Facebook realized $ 26 billion in advertising revenue in 2016. This revenue was actually made possible thanks to the free "raw material" of the information provided by Facebook users. The government could apply a tax of 50%, for example, assuming that at least half of that income is due to the free information. That means 13 billion dollars. There are now about 1.23 billion Facebook users. So that means (rounded) $ 10 per user and per year. That seems to me to be a good estimate of the yearly value of the information provided by the individual user to Facebook.
So my proposal becomes: a 10-dollar tax per user to be paid by Facebook. Zuckerberg will be a little less rich after this tax, but will still have a lot of money left.
There are many issues with such a proposal. It should preferably (but not necessarily) be coordinated internationally. Not an easy thing. There is also the issue of what the government should do with the revenue. One possibility would be to return 10 dollars to the Facebook users every year. Alternatively, the government could use the revenue to invest in education, the environment or sustainable energy.

I think these are separate issues that can be resolved and that do not stand in the way to tax Facebook and other information companies (e.g. Google, Amazon) that use private information freely and transform this into a fabulous money machine that benefits only a few. 

Wednesday, 4 October 2017

Catalonia and Brexit: the same nationalism

The British Prime Minister, David Cameron, will not enter the history books as an enlightened leader. However, when in 2014 he had to decide to allow the Scottish referendum, he used his brain and opened the door for the referendum. It took place on September 18, 2014. Only 45% of the Scotts voted for independence.
The contrast with the referendum in Catalonia could not be greater. The Spanish Prime Minister Rajoy stupidly decided to use violence to prevent a referendum in Catalonia, despite the fact that a peaceful referendum would most probably have led to a similar outcome as in Scotland. Spain and Catalonia are now on collision course; a situation that could have been avoided if the Spanish Prime Minister had not suffered from dogmatism and a degree of nationalism equaling in intensity the Catalan version.
The Catalan nationalists now have been given a fantastic boost thanks to Rajoy's stupidity. The TV images of Spanish robotic police officers hitting old and young to prevent them from voting create a perception of an oppressed people fighting for their freedom.
Nothing could be further from reality. The Catalans are not an oppressed people. They have a high degree of autonomy. They can organize their own education in their own language. No obstacles exist for the cultural development of Catalonia. It is the most prosperous region of Spain. Barcelona is a bustling city like no other in Spain. The Catalans are heard at the regional, national and European level. The image of an oppressed people is ludicrous.
Catalan nationalism is of the same kind as British nationalism that led to Brexit. It is based on a number of myths.
The first myth is that there is an external enemy. For the Brexiteers these are the European authorities (the European Commission, the European Court, etc.), which impose their arbitrary will on Britain. For the Catalan nationalists the enemy is the Spanish government oppressing the Catalan people.
The second myth is that the people who fight for their independence have a clearly defined identity. The task of national politicians is to listen to the will of the people. There can be only one voice. There is no room for different and opposing voices. The British government is now calling for patriotism. The opponents of Brexit are not true patriots.
The third myth is that independence will generate unsuspected economic prosperity. When the people “take back control” they will have the tools to achieve maximum economic prosperity. That is today the argument of Brexiteers like Boris Johnson. When Brexit will be realized (preferably as soon as possible), Britain will have achieved its true destiny. "Global Britain" will take over from the protectionist EU. Great Britain will merrily conclude free trade agreements with the rest of the world, which will lead to unprecedented prosperity. A similar argument of more prosperity for an independent Catalonia is heard from Catalan nationalists today.
The reality is that globalization undermines national sovereignty. This happens in many ways. One example. Large multinationals blackmail national governments in Europe, with the result that corporate taxes decline almost everywhere. In no country, however, is there a will of the people in favour of reducing these taxes. Yet this is the outcome because governments act as national entities. Were they to decide jointly on corporate taxes in Europe, multinationals would be unable to blackmail these governments and there would be no creeping decline in corporate taxes.
Another example. International trade today is not influenced so much by tariffs but by non-tariff barriers. Large countries decide about standards and the regulatory environment that will govern trade. There are now essentially three countries, the US, the EU and China that can aspire to decide about the nature of these standards and rules. The other countries play no role in this game. Thus when Great Britain exits from the EU so as to gain more sovereignty (“to take back control”), this gain is only formal. In fact its real sovereignty declines. Obviously the same holds for Catalonia.
We arrive at the following paradox in a globalized world: when nationalists pursue more formal sovereignty they achieve less real sovereignty of the people. They want to take back control and they end up with less control. That’s what Great Britain will end up with. That’s also what the Catalan nationalists will achieve if they pursue their nationalistic dreams.
This paradox has a corollary: when countries in Europe renounce formal sovereignty this leads to more real sovereignty of the peoples of Europe. 

Tuesday, 28 March 2017

Brexit creates window of opportunities for the EU

The British government has officially started the "divorce" procedure from the European Union. This procedure must be completed within two years. In April 2019 the UK will cease to be a member of the EU.
Most divorces are painful affairs mainly because an agreement has to be found on who pays whom. The same will be true for the divorce of Great Britain and the European Union. The European Union intends to present a stiff bill to the British Government. According to some estimates this could go up to 60 billion euros. The hard line in the Conservative government of Theresa May does not want to pay a cent. These are the people who during the referendum campaign promised that Brexit would create massive budgetary means to be used to save the National Health Service from bankruptcy.
Between 0 and 60 billion there are many numbers waiting for a possible compromise. But the latter will be very difficult because the hard camp in the British government considers each number above 0 as an act of treason to the British people.
The Brexit Ministers continue to repeat that a new trade agreement between the UK and the EU is easy stuff and can be completed in two years, at least if the Europeans are "reasonable". If they are, they will see that it is in their own interest to meet British demands. If they don’t it will be proof of their vindictiveness.
The British demands are derived from the very successful referendum slogan: "to take back control of our borders, our laws and our money." This means full control over immigration; the end of the jurisdiction of the European Court of Justice on British soil; and not a penny more for Europe. The prime minister has made it clear that the first two demands cannot be negotiated away. About the third one a compromise is possible but no one knows how much negotiating space the British prime minister has.
These UK demands imply that the UK excludes itself from the internal market. The UK government, as the representative of a fully sovereign nation, will therefore have to negotiate a new trade agreement. And like any trade agreement this will drag on for years. As a result, one can say with great certainty that in April 2019 there will be no trade agreement between the UK and the EU.
What is striking in this drama is that under the spell of nationalism the British government has based its policies on a big illusion. It is the illusion that, as in the past when Britain ruled the waves, it can be fully sovereign and freely trade with the rest of the world without having to accept rules that are decided elsewhere. This was possible when Britain was the master of the world and decided about the rules that the other nations would have to accept to trade. Today, however, Britain is a small country. Its GDP is only 15% of the EU’s GDP. If this small country wants to trade with the European Union it will have to accept the rules that are decided on the European continent, not in Britain. If it wants to trade with the rest of the world, it will also have to accept rules drawn up elsewhere. It will be a painful awakening for the British who have been misled by their government into believing that they can have free trade and full sovereignty.
For the EU Brexit creates a window of opportunities. When the British joined the European Community in 1974 their intention was not to make Europe stronger. On the contrary, the British strategy was to weaken the European integration effort from inside. Since their accession the British governments have opposed attempts to apply majority rule in the union, and instead have tried to force an inter-governmental approach where each country maintains a veto power. The British entered the European house not to strengthen it, but to halt its further construction and even to deconstruct it.
The fact that Britain now leaves the house creates new possibilities to take steps towards further integration. In the tax field, for example. This is an area where,  at the insistence of Britain (but not only Britain), veto power of national governments has been maintained. As a result, multinational companies have exploited the lack of coordination in setting corporate income taxes to blackmail individual governments. This has led to a race to the bottom where major multinationals pay almost no taxes, although they profit from public goods provided by European governments. This problem can only be solved by jointly deciding about corporate income taxes. This will not be easy, as there are other countries that benefit from not having a common approach to taxation (Ireland, Luxembourg). But at least the major obstacle to a common policy will have been removed.
Thus the decision by the UK government to leave the European house should be welcomed by EU-member states instead of being deplored. It creates a window of opportunities for further integration on the European continent. This window of opportunities, however, can only be exploited if the EU makes her negotiating position clear. This should be one in which the EU recognizes that the UK wants to be fully sovereign. The EU therefore should make it clear that this makes UK access to the internal market impossible. This is not a choice of the EU but the logical consequence of the UK’s quest for full sovereignty.
Business lobbies both in the UK and the EU will push for a different outcome. One in which the UK will be allowed to enjoy exceptions to the rules governing the internal market while maintaining access to it. The EU should resist these lobbying efforts. Failing to do so will open the door for other nations to do similar “cherry-picking”. This would undermine the integrity of the union and would contribute to its disintegration.