When an academic paper of a certain type falls, it doesn’t make a sound. It quietly appears in a journal, is cited a few dozen times, and then, sometimes years later, it changes the law. It sounds like that’s where the growing talk about taxing technology itself instead of the people who make it is going. And the fact that serious proposals are showing up in magazines like Nature shows that the idea has moved far beyond the fringes.
The premise sounds easier than it really is. Instead of putting a lot of taxes on software engineers and data scientists’ salaries and income, governments should think about taxing the digital processes, automated transactions, and sheer computational throughput that creates a lot of value with few jobs. It’s not a new idea. The idea of a “bit tax” came up for the first time in the late 1990s, when the internet was still new. But things have changed a lot in the economy since then. Google used to make £2.5 billion in sales but only pay £6 million in UK corporation tax. Apple said in public that the US tax system hadn’t kept up with the digital world. Those weren’t radical activists who said those things. In fact, they were the companies.
Where and who are making the arguments in this wave are what make it different from the last one. Nature researchers have been looking into how green taxes encourage innovation in certain areas. The logic behind this works surprisingly well in digital economies. The idea is that if you can tax polluters to make them pay for their actions and encourage cleaner behavior, then you can tax automated processes to make them pay for retraining or public infrastructure. Panel data from Chinese provinces from 2004 to 2021 showed that green taxes had a real effect on promoting green development in those regions, but they also made it harder for some businesses to come up with new ideas. That tension—between putting resources toward a policy goal and starving everything else by accident—is exactly the kind of subtlety that makes policymakers hesitate.
That being said, the tax problem in the digital economy isn’t going away by itself. The flow of capital is smooth and very fast. National tax codes were made for a time when ships, not fiber-optic cables, were the main way that goods crossed borders. People are trying to fix a system that wasn’t meant to work for companies whose most valuable assets aren’t physical and don’t have borders. Examples include the Base Erosion and Profit Shifting project by the OECD, the push for country-by-country reporting, and the new Crypto Asset Reporting Framework. There is now some kind of country-by-country reporting in almost 100 countries. But putting something into action and making sure it’s followed are two very different things. Anyone who has seen multinational accounting in action knows how big the difference can be.
The American Bar Association put out a report with seventeen different tax code changes that could be used to regulate Big Tech. Seventeen. That doesn’t mean everyone agrees. It means everyone agrees that something needs to change but can’t agree on what. Some proposals aim to gather data. Others are interested in making decisions automatically. Some are directly aimed at making money from algorithms that work in places where the company has no physical presence at all. Harvard researchers have come up with frameworks for digital taxation that try to make income tax better for a world where making money doesn’t need to happen on a factory floor.
I get the sense that the conversation has reached a turning point. Over 70% of people surveyed by PwC say they think shareholders and regulators care about tax transparency. At the same time, countries from Australia to the UK are building formal disclosure frameworks. This makes it clear that the political landscape is changing. India collects federal taxes that are about 11% of its GDP on average. It was one of the first countries to use global information-exchange programs and has found that these have brought in billions of dollars in extra revenue. It turns out that poor countries are in even more danger than rich ones.
It is still very unclear whether the specific idea of taxing computation instead of coders will become law. It is being built up intellectually, though, one journal article at a time. It’s still possible that the engineers will get paid. Their servers, on the other hand, might not be so lucky.
