Arthur Cordell, "New Taxes for a New Economy"
Government Information in Canada/Information gouvernementale au Canada, Volume 2, number/numéro 4 (spring/printemps 1996)

New Taxes for a New Economy 1

Arthur J. Cordell 2

Information technology has contributed to a New Economy, which has increased productivity without commensurate growth in jobs. The challenge is to find new ways to distribute income resulting from this productivity. It is proposed that a "bit tax" be applied to interactive digital communication, which can provide the new fiscal framework for distribution of income when jobless growth becomes the rule.

La technologie de l'information a contribué à une nouvelle économie qui a augmenté la productivité, sans croissance proportionnelle d'emplois. Le défi est de trouver de nouvelles manières de distribuer le revenu qui résulte de cette productivité. Il est proposé qu'une «taxe bit» soit appliquée à la communication numérique interactive, ce qui pourrait fournir un nouveau cadre financier pour la distribution de revenu lorsque la croissance sans création d'emploi devient la norme.

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 redistribution 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 shorthand 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 overall 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 go to domestic labour and some to domestic capital -- some are "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 (e.g., 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 redistribute 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 microwave 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 e.g., 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 rate 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 be 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 U.S. Ambassador to the U.S. 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 rethink the notion of employment as a method of income distribution; to rethink the quest for ever more energy-intensive economic growth in a time of environmental limits. We need to rethink 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.


[1] May be cited as/On peut citer comme suit:

Arthur J. Cordell, "New Taxes for a New Economy," Government Information in Canada/Information gouvernementale au Canada, Vol. 2, No. 4.2.


Originally presented September 14, 1995 at Victoria University in the University of Toronto, before the World Leadership Conference. It was distributed on the listserv co_pub_info in May 1996.

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


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