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'Privacy tax' creator makes his case, warns 'software is eating the world'

Nicolas Colin
Nicolas ColinAntoine Duhamel / www.archi-photo.fr

If you aren’t 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 company’s 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 world’s 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 don’t pay a penny in taxes on all that free labor.  In other words, not only are you are the product, but you’re 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.

But Colin’s 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 aren’t exactly popular these days, the Red Tape Chronicles decided to hear him out.

Colin’s 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 can’t tax worker income, or levy company payroll taxes, when the “workers” aren’t paid. And they can’t 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 engine’s 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 Colin’s 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 aren’t 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 wouldn’t 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 Colin’s 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?” 

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