If designed correctly, a form of tax paid in data could not only benefit the public sector and help improve government services, it could also stimulate a new wave of innovation.

  • Data companies are set to grow increasingly rich and powerful.
  • New-generation tech companies are particularly elusive entities to tax.
  • Movement towards partial payment of taxes in data rather than money would turn a portion of private assets into common goods, the principle of most tax systems.

The prevalence of connected devices

There are now more connected devices on this planet than there are people, each one beeping out data about how we work, live and play.

Gartner, the technology consultancy, forecasts that there will be more than 20 billion connected devices by 2020 as the Internet of Things and ambient intelligence become all-embracing realities. The companies that harvest and exploit all that data will grow increasingly rich and powerful.

Seven of the top 10 most valuable companies in the world by stock market value are already US and Chinese tech firms.

The commodity of data

Several of these companies believe their greatest asset is the data they hold on their users, invaluable for selling them more products, services or advertisements. Yet although the companies and their investors are well aware of the value of that data, it seems that accountants, regulators and governments have still to catch up with this new reality. In their different ways, they all seem far more obsessed with tangible rather than intangible assets. That makes these new generation tech companies particularly elusive entities to tax. According to the European Commission, digital businesses pay an effective tax rate of 9.5 percent compared with 23.2 percent for traditional businesses.

A new book, Reinventing Capitalism in the Age of Big Data, by Viktor Mayer-Schoenberger and Thomas Ramge, presents a powerful case that this data revolution is remaking capitalism in radical ways that we are only just beginning to understand. Their core argument is that data is replacing price as the most important organizing signal of the modern economy. This gives enormous competitive advantage to those data-rich tech companies, spelling big trouble for many traditional firms.

Whereas price is a two-dimensional signal between the producer and the consumer, data can reflect many other implicit preferences: affinity for a particular brand, quality of service, and speed and convenience of delivery, for example. All that additional customer knowledge gives online only retailers a massive edge over traditional rivals and allows them to constantly adjust their prices according to a series of dynamic factors. The potential to undermine competition and maximize profit is clear.

Payment of taxes in data

In Reinventing Capitalism in the Age of Big Data, the authors propose that governments need to understand these new economic realities and should therefore consider moving to partial payment of taxes in data rather than money. In this process, a portion of private assets could be turned into common goods, the principle of most tax systems.

For instance, car manufacturers might provide the public with anonymized sensor data helping improve traffic flow and identify accident blackspots. Data from online learning platforms could better inform decision-making in public sector education. The principle could be extended even further. Anonymized health data drawn from smart watches and other wearable devices could be pooled in public data trusts and used for research purposes.

“If taxes paid in data make huge amounts of data available to the economy and society at large, this may signal what open data proponents have long dreamed of but haven’t yet achieved,” the authors write. “The conventional conception of open data — making data held by government available to the general public — was limited by the minimal commercial and societal value of government data. The data that businesses are already transforming into value, on the other hand, may be more immediately useful.”

If designed correctly, these data taxes would not only benefit the public sector and help improve government services. They could also help stimulate a new wave of innovation by providing data to the next generation of private sector entrepreneurs and sharpen competition between the tech firms themselves.

Although it sounds radical, enforced data-sharing is not an entirely novel concept. There are already some sectors where dominant data-rich companies have been forced to share information with rivals, such as in the German motor insurance market.

Mayer-Schoenberger and Ramge’s book feels like an early iteration of an evolving argument. There are many, and obvious, practical difficulties to overcome before data taxes became a reality. Who, for example, would value the data? That is a trickier issue than it at first appears given the differential value such data may have for different users. After all, the value of data most often depends on its contextualization.

Gaining political momentum

Nevertheless, the argument for data taxes is beginning to acquire some political momentum, particularly in Europe. There appears to be a growing feeling that the tech companies are profiting at our societal expense and need to pay more back in return. The European Commission is already proposing a new Digital Services Tax. Data taxes may become a new weapon in their armory.

Although the companies and their investors are well aware of the value of data, it seems that accountants, regulators and governments have still to catch up with this new reality.

At a conference in Berlin on May 28, Angela Merkel, Germany’s chancellor, called on researchers to devise new ways of valuing data and taxing it just like tangible products. She said that it was unjust that consumers handed over their data for free to giant tech companies that then turned around and monetized it.

“The pricing of data, especially that of consumers, is in my opinion the central problem of fairness of the future,” she said. When a politician as habitually cautious as Mrs. Merkel advocates such a radical proposal, then it is fair to assume that a groundswell of public opinion is already building on the issue.

Download the full "What to Tax?' publication here.