Rethinking the Twenty-First Century Economy: A New Role for Digital Taxation

By Drzeniek-Hanouz, Margareta | The International Economy, Spring 2018 | Go to article overview

Rethinking the Twenty-First Century Economy: A New Role for Digital Taxation


Drzeniek-Hanouz, Margareta, The International Economy


Before the threat of a U.S.-China trade war arose, surging stock markets and corporate profits had obscured the fact that the global economic system is under existential stress. Global financial stability remains considerably in doubt. Indeed, as world financial leaders gathered recently for the annual IMF/World Bank spring conference in Washington, D.C., the rapid pace of technological change and rising inequality continued fueling ever louder calls for root-and-branch revision of the entire system.

For governments to cope with these mounting pressures, they will need to rethink the key policy tools on which they have relied for well over a century, starting first and foremost with taxation.

Death and taxes may have been the only certainties in the world of Benjamin Franklin two centuries or so ago; today, only death remains undeniable. With the rise of the digital economy, more and more economic value is derived from intangibles such as the data collected from digital platforms, social media, or the sharing economy. And because company headquarters can now be moved between countries with ease, governments are finding it ever harder to raise taxes. At the same time, public spending will likely have to increase to meet the demands of those left behind in the era of globalization and digital technologies.

Lawmakers have mostly sought to nurture innovation, in the hope that new industries will spur productive capacity and, in due course, fill government coffers. But digital service providers have grown larger in terms of just about everything except the taxes they pay.

That may be about to change. One idea currently gaining traction is to tax firms offering free-to-use digital services differently, so that their intangible value receives the same tax treatment as the tangible value produced by manufacturers and traditional service providers.

But taxation could be on the cusp of a much broader transformation, not limited to the digital economy. With today's businesses expected to contribute more to society than just what is on their balance sheets, there is a new impetus to base corporate taxation partly on a firm's social footprint. For example, governments could adjust tax rates according to a company's environmental stewardship or the size of its workforce.

Another idea is to tax robots and related technologies to compensate for the drift of economic rewards away from labor. In any case, broadening the tax base will require new approaches to measuring value in the economy.

Beyond the debate about how to tax today's tech giants, Western economies confront the more fundamental question of whether markets still represent the most efficient way to allocate resources. In many ways, today's transformative technologies are challenging that premise.

Modern data science, for example, is becoming so advanced that algorithms driven by existing consumer data could soon take over the task of making efficient buying decisions. …

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