24 January 2019

Data taxes will hurt consumers and local business — not large tech companies


The UK and Australia may soon press ahead with world-first digital taxes on the appropriation of user data for advertising and other services by tech giants such as Google and social media platforms like Facebook. These moves come as France’s own advertising tax on those companies begin to take effect. And, certainly, they feed into the longstanding narrative of large multinationals violating the social contract by manipulating our data and not “paying their fair share”.

But this characterisation isn’t right, for the proposed tax  is unlikely to actually punish those it’s supposed to.

The sort of data mining that’s about to be curtailed isn’t actually a problem for most users. A standard instance of this might involve an Australian who googles “hotels in Egypt” being greeted by a sponsored link to an Egyptian hotel. This he sees thanks to targeted advertising from an American company, Google, which used data mined from his search engine use.

Similarly, targeted advertising on Facebook is made possible by personal data you willingly hand over to Facebook each time you use your account — you consent to it when you agree to their terms and conditions.

Indeed, Facebook and Google get most of their money is from your user data. As things stand, tech multinationals pay no specific tax on the value of this data. But this is a cash pie that national governments like Australia’s would love to grab a slice of.

Unprecedented taxes like these ignore the overwhelming benefits that flow on from digitisation and innovation. But these benefits are either reduced or halted altogether when they’re taxed to death.

Targeted advertising is really just good economics. Economists have long understood the problem of inefficient markets due to insufficient, unreliable or missing information. The harvesting and monetisation of user data helps out markets across the world by efficiently putting consumers in touch with sellers who best cater to their desires at an agreeable price point. And, for the consumer who consents to the analysis of his user habits, this service is free.

Sellers win, too. Whether they benefit from the free service, pay a fee to advertise, or see their advertisement appear more prominently or more often, the ability to harvest user data without a tax penalty means that they either pay nothing or pay lower costs. For digital service providers like Facebook and Google, targeted advertising means that substantial costs are incurred in human resources, data infrastructure, developing complex algorithms, and administrative costs.

So a tax on digital advertising is likely to be passed on to the businesses reliant on their services. That means more expensive advertising or higher prices for goods and services for consumers.

This is nothing new. Back in 2014, when Spain imposed a ‘link tax’ on Google for using previews and links to Spanish news websites in 2014, Google simply stopped linking to these sites. It only caused a sharp decline in exposure to prospective readers and advertisers. Unsurprisingly, the link tax was hastily scrapped, and similar suggestions by the European Union today are unlikely to play out differently.

Australia’s attempt at something similar didn’t work out either. Its unilateral move to force online marketplace platforms like eBay and Amazon to collect GST on the government’s behalf this year, resulted in Australians being denied access to Amazon’s US-based international portal. Australian consumers were left with the less-equipped domestic website which offered barely one-hundredth of the main store’s product selection for months. Restrictions were only recently lifted — though Australians remain locked out of Amazon’s other international portals.

Large multinational tech companies are able to bear taxes like this without having to worry about losing their market share. They can merely pass them on to consumers and sellers using their services. However, it is the smaller and local businesses that will most suffer from higher costs.

The effects of the tax will be even worse for domestic providers of digital services who lack the leverage and resources of their multinational competitors. The incentive to move overseas to move favourable jurisdictions will be higher than ever—meaning fewer jobs, increased technical skills shortages, and, ironically, less tax revenue for the country.

Digital services, scaled across large international tech platforms, are a boon for local business and consumers across the world seeking affordable products and better living standards. By flirting with these unnecessary taxes, the UK and Australia are just anxious to be their own worst enemy.

Satyajeet Marar is a Young Voices contributor and Director of Policy at the Australian Taxpayers’ Alliance.