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Subject: Bit tax proposal?
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Date: Sat, 11 May 1996 16:59:22 -0400 (EDT)
From: Arthur Cordell <acordell@clark.dgim.doc.ca>

   
              SCENARIOS FOR THE FUTURE: WORK AND EDUCATION


The First of Four Sessions Leading to the World Leadership Conference

                      "New Taxes for a New Economy"


                           September 14, 1995


                       Victoria University, in the
                          University of Toronto


                                       Arthur J. Cordell
                                       Special Advisor
                                       Information Technology Policy
                                       Department of Industry       
                                       Ottawa*




*The views expressed are those of the author alone and are not
necessarily those of any department or agency of government.

========================


     It's a pleasure to be part of the panel this evening.  Ran told us
about the problematique and Sally told us about one way to re-engage
people with the economy and society in general.  I am proposing one
way to get at the productivity of the new economy so that income can be
distributed to those who are no longer working.

     My talk is "New Taxes For A New Economy."  Many of the ideas
expressed by me this evening first appeared in a paper that Ran Ide and
I co-authored for a meeting of the Club of Rome last year.  Called The
New Wealth of Nations,the paper dealt with ways of getting at the
productivity of information technologies.  Creating a new source of
revenues that can be used in a variety of ways, including re-distribution
as income.
     
     First a bit of history.  As you all know in the not too distant past--
before 1900--most people worked in agriculture.  When automation of
one sort or another took place, people moved off the land to the new
jobs opening up in manufacturing.  Over the next decades automation of
one sort or another took place and people moved to the new jobs
opening up in the service sector.  Now that the service sector is itself
being automated, it is not clear where workers go.  Where do people find
work in an increasingly automated world?

     My view is that information technology is like no other.  It is
energy saving, capital saving and labour saving.  It is also distance
insensitive.  It can replace people in a great number of functions. 
Remembering, deciding, judging, estimating, counting, etc., can all be
done by information technologies, and can be done better, faster and
cheaper than by people.

     So I  think that we are going into a time of innovation and greatly
increased productivity throughout the economy.  Jobs will grow, but at a
much slower rate.  A short-hand way of saying this is that we'll be
seeing 'jobless growth.'

     Rather than seeing this as a disaster, I prefer to see it as an
opportunity.  After all the industrial revolution--the development of
steam power, electricity, the internal combustion engine--was all about
eliminating work, not creating work.  The industrial revolution was
about releasing people from dangerous, hard and mind-numbing work.

     You know in the 'old days' a job was a means to an end because
that is how people got income.  In the past few decades job creation has
become an end in itself because this is how income can be distributed. 
While there are many important social and psychological benefits in
having a job---job creation can be a very costly way to distribute income. 

     So in the debate and discussion about the future of work my
position is that the issue is income, not jobs.  

     In my view we need to get consensus on a positive vision of the
New Economy.  One possible positive vision is that the New Economy
will be one where few people work in traditional ways.  It will be an
economy that is VERY infotech intensive and highly productive--but the
new wealth created by the productivity is distributed as income in new
and novel ways.  Anything wrong with aiming toward this sort of
outcome?

     But how do we get income to people who are no longer working in
the traditional areas of society?

     I think that we have to go back and take a closer look at the tax
system.  If everything else is changing with information technologies and
the New Economy, I think the tax system itself deserves a closer look.

     Today in Canada we are wringing our hands at the lack of tax
revenues.  Some of the tax concerns pre-date the 'new economy' and
carry over from the recent past: tax breaks to small business; a growing
underground economy based on cash; transnational companies who
'transfer price' in ways so that profits are declared in low tax areas of the
world; the rise of tax havens.

     The tax base is also threatened by the labour displacing capacity of
new technologies.  More and more services are the result of people
interacting with computer-based interfaces including touch-tone phones
connected to digital networks.  As do it yourself banking, shopping,
libraries, etc., take hold, the number of people displaced increases. 
Although this adds to the over-all productivity of the system, the
workers who lose jobs no longer pay taxes, rather they make demands
on the system for income support of one kind or another.  

     What happens to the productivity gains created by digital
networks?  Some gains show up in profits, some show up in lowered
prices, some goes to domestic labour and some to domestic capital--some
is 'lost' in the networks. In some cases off-shore capital benefits from
productivity advances.

     While part of the increased productivity may show up in earnings
to firms adopting the technology, to banks, to telecom firms or other
network operators, it appears that some of the productivity gains just
disappear.  It is either a non-monetary item (eg., time saved in using
ATMs for banking) or the productivity is diffused over so many
domestic and foreign players that it is not appropriated effectively, if at
all.  

     The challenge is to access the new productivity.  There is a strong
case to be made that government has not fully accessed the new wealth. 
That government has not yet realized where and how wealth creation is
taking place.  That government has not yet figured out a way to tax and
re-distribute some of the new wealth created by global digital networks. 

     By viewing the new economy through the prism and mindset of
the old economy we are unable to see just how wealthy and productive
the economy has truly become. Outdated ways of looking at the
economy have led us to neglect the new wealth.  We are neglecting the
new productive capacity created by and carried on global networks. 
Digital networks that provide so much of the new wealth also provide a
way for us, through our governments, to get at some of the productive
potential of a knowledge-based economy.  

     Over two hundred years ago Adam Smith wrote about the Wealth
of Nations.  He concluded that wealth was based on the division of
labour and the extent of the market.  Today we can add something else
to society's production function: knowledge, information and
communications.  

     The new wealth of nations is to be found in the trillions of digital
bits of information pulsing through global networks.  These are the
physical/electronic manifestation of the many transactions, conversations,
voice and video messages and programs that, taken together record the
process of production, distribution and consumption in the new
economy.  

     Digital flows are the new element of production whether in the
form of entertainment such as movies and video games; or, in the form
of financial management such as electronic commerce for business and
automatic tellers for the average citizen; or, in systems designed to
control aircraft traffic in the skies and baggage distribution on the
ground below; or, in managing the maze of telephone calls, faxes, e-mail
and charge card accounts that characterize life in this latter part of the
twentieth century.

     The suggested new tax is a turnover tax on interactive digital traffic. 
This new tax would be similar to a gasoline tax or paying a toll on a
bridge or toll road or having a license plate on a car.  These current
excise and indirect taxes apply by weight of truck, by amount of gas
used, not on the value of the commodity carried by the truck. Moving
from the old highway to the metaphor of the new highway,  my
proposal is to tax the digital traffic on the Information Highway.  

     Proposed is an easily administered tax on each digital bit of
information.  A 'bit tax.'  Whether the digital bit is part of a foreign
exchange transaction, a business teleconference, an Internet e-mail or file
transfer, electronic check clearance or an ATM transaction, each bit is a
physical manifestation of the new economy at work.  Whether the tax is
levied on the traffic carried by a fibre optic cable or on micro-wave or
whether the tax is levied on interactive satellite traffic, the bit tax
presents a way of accessing the  new wealth being created by the New
Economy.  
 
     The bit tax would be applied to value added interactive digital
transactions.  Interactivity makes the transaction valuable.  A broadcast
message may or may not add value, that is if it is heard.  An interactive
transaction: a conversation, data search, accessing an ATM--is an activity
you choose to do because it does something for you.  You get something
for doing it, you get something out of doing it:  otherwise you wouldn't
be do doing it.   It is this new value, this new productivity that is
creating so much new wealth in networks.

     All interactive digital information would be subject to the new tax. 
Thus digital broadcast and digital radio (all 'one to many' broadcasts)
would be exempted from the tax.  Digital broadcasts of one to few eg.,
TV broadcast to a few stations for later rebroadcast, or newspaper
transmission by satellite to remote printing plants are interactive (because
they are 'addressable') and would be subject to the bit tax.

     The bit tax would not be a user pay tax.  Increased use by a region
would however result in higher bit taxes.  So without getting into too
complex a discussion, one could imagine that at the local level an
average of digital traffic would be measured by designated region (this
could be by area code, metro area, province or state, or nation). This
statistical average would provide the basis for the bit tax rate at the
designated local level.  Leased lines would pay some percentage of the
carrying capacity of the line while long distance public lines would be
metered by usage patterns.

      To summarize: the implementation of the tax would fit into three
broad categories:

        1.    Long-distance lines (general public), a tax directly
              proportional to digital flows between major long-distance
              nodes in the country.

        2.    Leased lines (private lines), a fixed rate dependent on the
              bit-carrying capacity of the line.

        3.    Local Traffic, a variable rated based on a statistical average
              of gross information flows captured at each local switch
              using software already in place.

        The bit tax will be transparent.  It will be something metered
'out there' and remitted to governments.  It will vary with the collective
usage of networks.  Use of the system by any one individual will not
affect the amount of taxes being collected.  So it won't be a user-pay tax. 

     At what rate should nations tax digital bits?  How would the new
taxes be collected?  For sake of argument, the bit tax could be .000001
cents per bit.  Automatically collected it would cause fewer collection
problems than most other direct or indirect taxes. Collected by the
telecom carriers, satellite networks and cable systems the revenues would
flow directly to the national revenue service of the respective country.  

        Much work has to be done on the burden or incidence of this
new tax.  Is the tax progressive or regressive?  Will it be absorbed by the
carriers or will it be passed on to consumers?  Can one nation enact a bit
tax or does it have to a collaborative venture?  Perhaps through the
OECD or the G-7 group of nations.  And what about the tax rate itself? 
Is it too high or not high enough?  If the tax of .000001 cents per bit
yields too much revenue, then it can always be adjusted.  

        The 'bit tax' is one way to begin to deal with the dilemma of
increasing productivity and declining employment.  It represents a new
tax base that is at the heart of the new economy.  It is also a new tax
base that is growing.  It is a tax base that can be easily identified, one
where collection is in few hands.  In the New Economy it would be a tax
that is difficult to avoid.

        At a European Community meeting last year, the US
Ambassador to the US mission, Stuart Eizenstat, said the issues
surrounding the quality and quantity of available jobs in the New
Economy will not be solved by a conference here or a workshop there. 
He noted that we are facing a major change in our economies. The
change will not be easy or smooth: just as the cold war took many years
to resolve peacefully, so too will the transition to the new economy take
years of discussion, dialogue and new methods of conflict resolution.
   
        So the bit tax itself is just a modest beginning.  We need to go
further: to re-think the notion of employment as a method of income
distribution; to re-think the quest for ever more energy-intensive
economic growth in a time of environmental limits.  We need to re-think
much of our economic theory.

        But as a modest beginning, the bit tax is one way for all of
society to profit and benefit from the development of new technology. 
The bit tax can help provide the new fiscal framework to distribute the
productivity of the new economy as income when the job link is
disconnected...When Jobless Growth becomes the rule.

        Thank-you for your attention. I look forward to your questions,
comments and discussion.