A groundbreaking new privacy tax could stem companies abuse of consumer privacy, argues a report commissioned by the French government.
The proposal, detailed in a report issued by the French Ministry of Finance on Friday, has been compared to a carbon tax designed to dissuade polluters, as envisioned at the Kyoto conference in 1997 that set global emissions caps.
The French study recommends that companies which misuse or fail to protect consumers' data would have to pay a punitive new tax, with the rate rising along with the severity of the misstep. It also provides incentives to firms that exceed current regulations to protect consumers' information.
The idea has met with both curiosity and pessimism.
It's a very revolutionary and interesting proposal, but it would be hugely difficult in France, let alone around the world, to implement," said Winston Maxwell, a privacy lawyer based in France. Maxwell wrote about the proposal for at the Chronicle of Data Protection blog, published by his law firm, Hogan Lovells.
Sin taxes have long been used to discourage behaviors that governments deem legal but undesirable -- tobacco taxes, for example. The report itself compares this new privacy tax to the concept of a carbon tax, which grew out of the 1997 Kyoto Protocol on climate change. Carbon taxes and credits are included in the agreement as a means creating market pressures to incentivize companies to reduce greenhouse emissions.
The report argues that Google and other companies acquire consumers' personal information essentially for free, and use it to make a profit. This creation of value creates the authority to tax, the report argues.
"The reports authors analogize the tracking of personal behavior on the Internet to the creation of value using unpaid labor provided by Internet users in France," Maxwell said.
The idea of the privacy tax arrives as French authorities have publicly bemoaned their inability to effectively tax technology companies like Google. But the report says revenue collection is secondary to protecting consumers.
Larry Ponemon, a privacy expert who runs The Ponemon Institute, called the French approach novel and compared personal information to a natural resource.
"Right now, companies are benefitting from their ability to exploit people's privacy, the way some companies exploit the environment and make money," he said. "Right now they can get and use that information, essentially for free."
There are myriad problems with creation of a privacy tax, however. It's hard to imagine a government agency could adequately rule which companies were effectively protecting privacy and which were exploiting it. Doing so might itself involve a privacy invasion, Maxwell noted.
"The tax administration may have to use invasive technology to monitor what firms are doing on the Internet and determine if a tax is due. Ironically, the technology itself could pose a threat to privacy," he said.
Conceding the many issues with implementation, the report recommends that initially, the government would tax firms that track Internet users in France.
Christopher Wolf, also a lawyer at Hogan Lovells, said he knows of no similar proposal in the U.S., but Ponemon said he's heard privacy advocates discuss the idea informally.
Privacy regulations in Europe are far more consumer friendly than in the U.S. For example, in Europe, personal information is considered property that is owned by the consumer and lent to companies for temporary use; firms must destroy such information in a timely manner. In the U.S., firms own the data they collect.
While generally supportive of the French proposal, Ponemon cautioned that it would be both ineffective and damaging to France if the nation tried to unilaterally impose such a tax.
"If you were to stop Google, you would be stopping an economic engine that's had a major effect on economy of a country," he said.
Even consumers might protest such a privacy tax, and the idea behind it, he said. Why should government benefit from what is deemed an abuse of consumers personal information?
"People will think the individuals should benefit, not the government. They'll want to be paid directly," he said.
If you arent paying for the product, you are the product.
Internet users know this implicitly; there are no free apps, no free search engines. Instead, users trade their information in exchange for some service, vaguely aware that the companys side of the bargain is free access to data it can turn into profit. Some consumers get angry at the notion they provide free labor and raw materials to some of the worlds largest and richest companies, but Nicolas Colin thinks people should be a whole lot angrier. In fact, he believes that software is eating the world.
Colin, a tax inspector for the Ministry of the Economy and Finance in France, believes that corporations have turned the Digital Age into a massive tax haven which dwarfs anything high-priced accountants have ever pulled off in places like the Cayman Islands. His beef: Corporations dont pay a penny in taxes on all that free labor. In other words, not only are you are the product, but youre also paying for all the roads, fiber-optic lines and airports that digitally dependent corporations need to get rich.
Colin caused a stir last month when he co-authored a report for the French government recommending what some have called a privacy tax essentially a mechanism to punish companies that profit from misuse of consumer data. The idea of a new tax based on something seemingly so vague went over like a lead balloon in many quarters.
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But Colins idea is far broader, and has wide multinational implications. He wants to change the fundamentals of how taxes are levied, a step every bit as radical as the invention of income or sales taxes.
He wants to tax data.
While new taxes arent exactly popular these days, the Red Tape Chronicles decided to hear him out.
Colins proposal begins with the notion that, like it or not, we are all part of the supply chain now.
What we do leaves traces, generates data. This data can be leveraged to create value, he told NBC News during an extended interview via email. "If you want to create value, you can either hire employees, contract on the market or design an application that will attract millions of users and will turn their activity into economic value -- make them part of the supply chain.
In a strange reversal of fortune resulting from this new business model, Colin said, labor now happens in rich, giant Western nations while profits are counted in smaller, tax-friendly places.
With millions of unpaid laborers around the world helping to make your product, the notion of place has become less and less important in terms of taxation, he argues
Digital technology has moved value creation from inside the factory to the customers' hands and brains, he said. Value is now co-created by companies and the people who use their applications. This has consequences on corporate tax, because it changes the geography of value creation. It's not where the factories are anymore, it's where the users are. Many authors have written on this phenomenon. Each has his own phrase to describe it : Web 2.0, co-creation, crowdsourcing, peer production, distributed capitalism, wikinomics, etc. But there's really one reality: In the digital economy, users create part of the value alongside employees, contractors, capital, and companies' assets.
Governments cant tax worker income, or levy company payroll taxes, when the workers arent paid. And they cant charge sales taxes for products which are given away for free. The situation creates quite a dilemma for taxation authorities, and it will ultimately have devastating consequences for society, Colin predicts.
Tax base erosion will happen in each sector disrupted by the digital economy, he said. Yesterday it was advertising, entertainment, retail, travel. Tomorrow it will be banking, health care, cars, telecommunications, manufacturing, higher education. The law must change quickly, because software is eating the world.
So what is to be done? Rich nations must negotiate and agree on a new concept of permanent establishment which defines where companies operate and therefore are subject to taxation, he argues.
His basic notion: There should be a permanent establishment wherever a company collects data to fuel a service provided on the same territory.
The French proposal comes amid growing frustration among French lawmakers with their inability to collect taxes from large, digital companies like Google, which generated $2 billion in advertising in France last year but paid almost no taxes there. France has already tried an ill-fated link tax in an attempt to support local publishers who fear they are losing money because of the search engines free links.
Google issued a statement last month saying it was researching the French proposal. Google did not immediately respond to requests for more information about its tax payments in France or about Colins proposal.
But last week, CEO Eric Schmidt wrote a blog post describing two new France -friendly Google initiatives.
Today I announced two new initiatives to help stimulate innovation and increase revenues for French publishers, he wrote. First, Google has agreed to create a Digital Publishing Innovation Fund to help support transformative digital publishing initiatives for French readers. Second, Google will deepen our partnership with French publishers to help increase their online revenues using our advertising technology.
Not quite the radical shift in taxation policy Colin and his supporters are looking for. He makes a forceful case for the inequity of free, and untaxed, labor online.
You can replace employees and contractors with users of an application, and these users work for pleasure, not for money, he said. So it's free -- well, almost free, because the marginal cost of a user is practically equal to zero in the digital economy. Using those applications, French people contribute to profits made by foreign companies, yet those companies don't pay the taxes necessary to cover the public expenses that help fuel this value creation.
He pointed to a popular speech made by Sen. Elizabeth Warren, D-Mass., during her campaign, making the case that companies benefit from tax-funded infrastructure, but arent paying their fair share.
Individuals become active users if they are educated, equipped, covered by social insurances, and massively connected, and all of this costs money to the government, he said.
While such a new tax regime involves a massive shift in the notion of taxation from location of production to location of data collection -- the shift wouldnt be unprecedented. He cited the creation of progressive income tax early in the last century, and the implementation of the value-added tax in the 1950s, as similar shifts.
The European valued-added tax or VAT -- requires companies to pay taxes every time they take any kind of raw material and turn it into a product that can be sold at a higher price. Data taxation grows logically from this idea, Colin believes. With data collection, under Colins scheme, companies create value when they turn consumers information into a product that can be sold. Taxing data really means taxing creation of this new value, he says.
The French are very proud to have invented the VAT in the 50s. Today it's the most neutral tax, the most widely accepted by both individuals and corporations, and the one that raises the most revenue for governments, Colin said.
He acknowledged that Americans, who have long resisted VAT taxes, will probably receive the idea of digital-age tax change with strong skepticism. But he argues that 20th century taxes distort the market and hurt the economy.
Sometimes, new taxes are good for business when they help pay down the debt and balance the budget, and above all when they replace outdated taxes that distort the market instead of supporting growth and job creation, he argued.
The privacy tax, which Colin suggested implementing as an intermediate step, has been roundly criticized, beyond the notion that any new tax is a bad idea: Critics have said it would be nearly impossible to manage, would force government bodies to make rulings on very technical matters, and that its collection could itself represent a privacy violation. But Colin argues there is already general consensus in the computer security world on best practices with consumer data. Such a tax would properly align incentives in the marketplace, the way a carbon tax might create incentives for companies to take better care of the environment.
What we recommend is to tax companies' behavior that is not in the interest of their users and not in the interest of innovation and growth, he said. The French tax on non-compliant data collection behavior can really be compared to a carbon tax: In both cases, it creates an incentive for companies to change their behavior in the public's interest -- less pollution, more data protection, user empowerment and more innovation through smart disclosure.
And while changing an entire tax regime would require international treaties, Colin argued that France could unilaterally impose privacy taxes on firms operating within its borders.
There is no way companies can avoid it, because that would mean closing the service for users based in France, he said. Is Google ready to stop operating its search engine in France? Or Facebook ready to close 20 million accounts?
http://redtape.nbcnews.com/_news/20...-case-warns-software-is-eating-the-world?lite
Intriguing idea. I like it.
