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Technology and Taxation: How New Technology is Disrupting the Nation State

Hello World! And the horse was out the stable… oh, how beautiful and powerful a horse she was. 

Old Nations, New Technologies 

Undoubtedly, developments in technology have changed the world and altered many aspects of people’s lives. Such effects vary from the direct—such as writing and receiving emails—to the indirect —the efficiency of transport communications, such as train grids, air traffic control, information flow, etc. The cumulative consequences of this are no less than revolutionary.

Perhaps the most profound change since the 1990s has been the internet, its normalization in society and permeation into almost all aspects of data interaction. Peer-to-peer communication, banking, national defense—there is no domain that has been left untouched and untransformed.

Although much has been written about the sociological effects of technological changes—i.e. changes in how people interrelate—more immediate and practical concerns about how technology affects taxation have gone relatively neglected. This is a major concern, given how current societies are organized. Nation states can broadly be taken as units of community with defined borders, in which a centralized authority (elected government, royalty, military, etc.) exercises control through a monopoly on violence and the dispensation of law. Laws are meaningful because they are enforceable—precisely because of the state’s ability to coerce through violence. Taxation is an enforceable means by which these nation states can control and garner resources, which in turn sustain the nation state itself. Effective taxation, i.e. the ability to retrieve tax from members of the community, is a foundation of the nation itself.

New technologies are eroding traditional metrics by which taxation is calculated and collected. For example, technological businesses are radically different from businesses of the past. In the past, a business could be taxed according to its location and how much space it occupied: a business on a high street was worth more than a business located away from an easily accessible location; a larger space was taxed more highly than a smaller space. Now, however, the relationship between value (and therefore tax burden) and location and space has been profoundly compromised. Most technological companies are principally based on the internet and are in no sense committed to or bound by location. For instance, Airbnb (a platform that allows people to rent private rooms) is, according to one metric, the largest hotel in the world, and yet, by another metric, is non-existent. Its existence is a matter of where the owners of Airbnb decide to legally domicile the company.

Amazon and Google, two giants of new technology, are good examples of this problem. Like Airbnb, Amazon can be said to exist in nations only insofar as there is some physical location where goods are stored and from whence they are dispensed. However, in the case of Google, there really is nothing to pin down. In all cases, various legal arrangements have been made that place the companies under the jurisdiction of nations with favorable tax arrangements, which in truth do not reflect the activities of these companies. When I Google something in London, and that data is used by Google to advertise things to me (a service Google provides to other companies), does this translate into business activity in the UK? What if my information has been stored in a server outside the UK? What if my information is stored in a cloud based system? Where, to whom and in what manner would it be possible to pinpoint a taxable activity?

Tax, as related to location, is thus becoming meaningless. Indeed, even if there were no concerns regarding where exactly the business activity of these tech companies is conducted, the nature of what constitutes business activity is itself in question. With respect to car manufacturing, in cities such as Detroit and Sunderland (UK), clear and tangible activity could be observed. During boom periods, the cities themselves enjoyed low unemployment and the cars produced sold, producing high profits for the companies concerned. Moreover, auxiliary activities were measurable: much activity followed from the manufacturing boom, because of the need for extra housing, restaurants, entertainments and amenities, and for spare parts.

With the tech companies, not only has location become less and less important, but the nature of what constitutes business activity has become opaque. Unlike the manufacturing giants, which employed hundreds of thousands of people (and were taxed accordingly), the actual number of employees at these tech giants is relativity small. By actual number, I mean the number of people directly employed by the company itself. An 2016 estimate of the number of Google employees suggested a figure of approximately 70,000. Given the nature and reach of the company, this is a tiny figure. In traditional manufacturing, a company with such capital and reach would have employed ten or twenty times more people. However, unlike manufacturing, in which it is relatively straightforward to gauge auxiliary business activity, the auxiliary business activity of these tech companies is less clear. In what way do these companies facilitate commerce? And how can one reasonably place a value upon this and thereby estimate the economic contribution they make? Taxation follows from this, as a function of value.

Although it is difficult to gauge their auxiliary activities, such activities are significant and widespread. The tech companies’ ability to provide access to services, goods and (most importantly) information in such an easy, accessible and efficient fashion is transformative. This has led to burgeoning business activities among companies who make use of this facility. This certainly adds value to a said community’s business activity, and the question is simply how this value is reflected in these companies’ contribution to the community.

One way to look at this is to suggest that the value added is so significant that the need for immediate taxation is non-existent. These companies generate profits—and could only do so with the permissions and infrastructure that nations have in place. However, the auxiliary activities that they stimulate add so much value that taxing these companies is pointless and may even disincentivize them and thereby restrict or retard the auxiliary activities which add so much value.

New technologies may be viewed as inherently value adding, where value is equated with economic output. Where traditional taxation is concerned, one central factor is that, in order to engage in any sort of business activity, a number of conditions have to be met. These include safety (I need to feel safe in order to think about business and go about my business without fear of being robbed, etc.) and stability (the knowledge that the community will not collapse at any moment, that laws are enforced fairly, etc.). All companies, including tech companies, require these conditions to be met and the principal means by which this is realized is through the centralized authority and monopoly on violence of the state, ergo taxation is key. Tech companies are as reliant upon these notions of the Good—safety and stability—as any others and therefore we might argue that, no matter how much value they add in terms of economic activity, they must contribute through direct taxation in order to help secure the basic conditions under which they can exist.

Indeed, some argue that, even if the value added by these companies is vast, they nonetheless rely on traditional models of the nation (which provides and satisfies the conditions within which any business can be conducted) and must therefore be taxed accordingly. This does not answer the question of how and in what way business activity can be calculated and thereby taxed in particular dominions. (A question beyond the scope of this article).

Social Disturbances

So far, we have assumed that technologies add economic value and, indeed, there are good reasons to think this is the case. However, there are also strong reasons to believe that, although these technologies may increase economic activity on a macro level, they profoundly disturb and even destroy economic activity on a micro level. This is problematic, as great disturbances on the micro level (i.e. labor markets, civic consciousness, income tax, welfare, etc.) will have knock-on effects at the level of the state and of collective society.

We can restate the notion of the nation (a large community collective) in terms of the Good. The community at large accepts the nation for reasons of safety and stability, in order that they may live specific lives. In other words, the notions of safety and stability are conditions of the Good, rather than the Good itself, while notions of the Good are encapsulated by certain ideas (such as liberty). Conditions are met, and thereby humans can live and exercise their choices, according to their opportunities. Currently, the conditions of safety and stability allow them the opportunity to exist without existential fear, and thereby engage in economic (value-adding) activity. This activity is facilitated and rewarded through money, a tangible value arbiter. Some may consider this an end in itself: i.e. they believe acquiring money is a value in itself. However, most people view the value of money as instrumental, a means to some other valued end. Either way, the nation can be seen largely as a structural projection of commerce facilitated by money, access to and distribution of which allows the members of the community to access various personal notions of the Good. Taxation is therefore a circular contribution: members of the community secure the conditions of their access to the Good by ensuring the basic conditions are met.

Technological innovations, and the technological companies they are rooted within, have already begun to erode this relationship. With respect to auxiliary business activity, one way to look at technological innovation is to think of it as replacing an item or industry. For example, the proliferation of mobile phones has left landline-based companies with little to none of the market share of audio communication, a branch they once dominated. Most people do not much care about this change, as it has introduced a superior item and therefore the change is good (value adding). Another way to think of these innovations is to consider the companies concerned as service providers: these companies make economic activity easier, they are a means to extreme efficiency in action. For example, Uber has made access to a cab extremely easy and efficient (anyone who has called traditional minicabs knows this); Google has made finding locations and learning of transport delays quick and easy. The companies simply facilitate and thereby increase efficiency (which may be considered an economic good). By these lights, the losers will be companies that do not make use of these technologies, as these technologies are simply superior from the perspective of the user (i.e. market driven).

These two views can be denoted as either replacement of an item (with something new) or replacement of a service (by something more efficient). In both cases, the change is transformative: landline to mobile, paper map to app, minicab number to cab-on-location. There are winners and losers, but the basic framework remains the community-nation: activity in the form of value exchange through money. Taxation must simply keep up with these changes.

An additional way to think about tech innovation is as labor destruction, i.e. a job may be replaced or destroyed by some technological innovation. One trivial example of this is the directory call center. In the past, you had to call a number (directory enquiries) and be charged to find the contact details of a particular shop or person. Now you can simply search for these details yourself, thereby rendering the job at the directory null. A more significant example is automation in the car manufacturing industry. Where a person once stood, a machine now stands. Automation here has created a machine that can replace a human being without creating an additional human job elsewhere. We can denote this view as labor destruction.

It is unclear how these three views interrelate (because, of course, they do). For instance, does replacement of an item create or compensate for the jobs lost by the destruction of labor? In the case of the phone, millions of jobs have been created by the production of, and auxiliary companies associated with, mobile phones. These are jobs that did not exist and now do. Moreover, the technology itself continues to generate jobs. To what extent are these new jobs replacing jobs lost to automation?

The Balance of Things

The key factor here is the relationship between labor creation and labor destruction. This is complicated by issues towards which technology is neutral. For instance, although vast numbers of jobs may be created in one domain (i.e. location), vast numbers may be lost in another. Even if jobs created exceed those destroyed, if those jobs are concentrated in a particular domain, there is no meaningful equilibrium. Technology is transnational in a world that is still fundamentally organized around nation states. Shifts in manufacturing from West to East have recently occurred, primarily due to differential labor costs. This is a win-lose scenario. With respect to automation, if labor destruction exceeds job creation then from the standpoint of labor itself (considered here as a global market), the situation is lose-lose.

The nation (here understood in terms of the state) is therefore potentially compromised, and as such, heavy taxation— a means to sustain the nation—would be required, to compensate for potential labor destruction by technological development. An alternative response might be for certain nation states to ban certain technology companies outright. Various cases have been filed against Uber, which may lead to bans [Uber has already been banned in Argentina—The Ed.], and Airbnb is banned in Barcelona, to prevent rooms from being rented at a premium, rather than let to long-term local tenants at a reasonable price. Notice here how crude the response is: a straightforward ban. This is indicative of how disruptive these technological companies and innovations can be. Considered from the standpoint of the free market, such actions are anathema and reactionary. Considered from the standpoint of the public good, these actions are necessary.

By community, in the context of a nation, we mean people. The community is not the sum total of wealth, or the strength of some metric, such as GDP. Fundamentally, the community is organized in the form of the nation state, because this is mostly beneficial to members of the community. Importantly, even if one thinks the nation state emerged through historical accident—and is thereby liable to accidental historical decline—the factors which resulted in the current nation state system still exist. These factors include the moral evolution of society—social, sexual, racial and economic emancipation; the de-legitimization of the rule of the monarch; and, perhaps most importantly, the emergence of the merchant classes. As to the latter, they are economically active agents who place demands upon the community, primarily demands for legal equality. These have been translated and transformed into the conditions of today (see Habermas).

The destruction of labor and the subsequent loss of wages and thereby taxation threatens the basic goods of the nation state. The reasons for the emergence and sustainability of the state—namely safety and stability—are compromised.

Automation

Indeed, it is likely that modes of automation will destroy labor without creating new forms of labor. The first wave of this will probably take the form of driverless vehicles. This technology is applicable to taxis, cargo, public transport, delivery of parcels, etc.—all of which currently require a person. These jobs will go without an immediate replacement in sight.

Already, people are suggesting strategies in response to this. These include the following.

  1. Retraining. The labor force should be offered education or training so they can acquire new jobs. Some concerns: given the number of people who will be left without work, how vast will this re-education program need to be and how will it be funded? How successful will it be? How feasible is it to retrain someone over forty? What areas will the re-education focus on? If there is a need for computer programmers, for example, will the education offered allow for this?
  2. Tax the automatons to compensate for the loss of taxable income. Bill Gates has suggested that robots could be taxed, as though they were producers of human labor. This would certainly plug the gap in terms of taxes, however there are real problems with how this would address people’s lack of work.
  3. As a corollary to the second suggestion, some have proposed a universal basic income. The wealth created by technology could be distributed such that the value exchange mechanism (money) that was once gained through labor would now simply be given to people. Or more precisely, a minimum could be guaranteed. People could take this money and do as they wished with it. The idea is somewhat utopian insofar as it eliminates what some consider the burden of labor.

Concerning this final point, many contentions can be raised. One is based upon the idea that labor is itself a good. It is something to be valued, as it adds meaning to a person’s life and facilitates learning and development. Even if universal basic income is conceived as a minimum sum, meaning that people would still have to work to earn money if they wished to access other non-essential things, the problem remains. To answer this, we need to flesh out theories of human motivation and anthropological assumptions and beliefs about the nature of humans. Some claim that, with a universal income, society would cease to function coherently. Only a few would dedicate their time to noble pursuits, while the majority would chase nefarious ends. There is no reason to believe that wealth without labor is a good thing, indeed, it is likely to be a very dangerous thing indeed (even if the income is kept at a minimum level). Moreover, for a universal income to really be sustainable, ever more innovations will be required and these innovations are the product of labor. To end labor would probably destroy the very possibility of universal income (this is a paradox).

Another argument is that labor is a mechanism by which the community interacts and is forced to consider civic issues, such as government policies, including modes of taxation, business friendliness, welfare provision, etc. By being in the labor force, members of the community are part of the community qua the community, in other words such economic activity is one of the foundational means by which people are forced to be conscious of their positions in the community itself. This is extremely important, since one of the conditions which must be met for the nation to sustain itself is a recognition that its members are part of a community in itself—the imagined community, the moral surplus, or the sociological citizen. Moreover, although concerns of inequality may be placated, in terms of the basic level of income, inequality in knowledge terms will be profound and dangerous. As laboring facilitates a consciousness of what is taking place at the macro levels of policy etc., universal income (as a consequence of automation) will greatly diminish, if not totally destroy, this consciousness. This means that in political—civic consciousness—terms far greater inequality is likely to emerge.

Moreover, consider the metrics by which access to labor is measured. Currently, many jobs do not require sophisticated levels of technical knowledge. A job as a courier, a cab driver, in a supermarket, etc. require licenses and basic literacy and numerical skills. When these jobs are destroyed through automation, accessing the labor market will require far greater levels of basic skills. A universal income will guarantee certain welfare conditions are met, but recipients will be alienated in civic terms and unable to access labor even if they wanted to. Again, assuming labor has value in terms of personal development, psychological health, a sense of belonging, etc., perhaps universal income would simply destroy more of the good than it can hope to address of the bad.

Nations and Technology: An Irony

An irony is worth noting. Technologies emerge out of the most advanced societies, i.e. societies which robustly satisfy the conditions of safety and stability. These societies are the most efficient at tax collection. Technology is disruptive to the nation state: therefore, the most technologically advanced societies are most likely to acutely experience compromises and disturbances to the nation state. Less advanced societies are defined as those unable to satisfy the conditions of safety and stability. These societies are the least efficient at tax collection. Technology is likely to be adopted with little disturbance to the weak nation state, therefore the less advanced societies are the least likely to be compromised by technology. The relationship is of inverse proportionality: in poorer countries there is ineffective tax collection, therefore technology may have less impact. In developed nations, the opposite applies.

The Dissolution of the Nation State?

Tech companies’ hostility to the nation state is most apparent in their aggressive tax avoidance, however there are also philosophical reasons for this hostility. Tech sycophants, such as Elon Musk, have argued against the state. They claim that the state stands in the way of innovation and technological advancement. All major innovations have come from people venturing, risking, investing and seeking new possibilities and alternatives. These people are self-starters, who do not rely on the state. In this view, the best thing the state can do is get out of their way. There are historical examples of how state-driven programs have produced great innovations, often through militarized research programs. But the main problem with this train of thought is that these technologies—including the companies Musk himself has invested in and set up—have been made possible because of how advanced the nation state of the United States is.

Consider what would happen if some thugs tried to smash up SpaceX or some other tech company’s research and development location. Musk would be the first to call upon the state, in the form of the police and army, to offer protection. If he had recourse to private mercenaries or security, this could easily result in problems, such as extortion by those very mercenaries. If we follow this to its logical conclusion, either any semblance of a civilized society will soon cease to exist, or an oligocracy will emerge with the likes of Musk at the helm. Both outcomes are clearly undesirable.

It is important to evaluate what a good is within this context. The nation state is sustained by the goods which are conditional on safety and stability. These conditions allow for wealth creation, here defined in terms of money, where money is a means of value exchange. The medium of money allows members of the community to do as they please in terms of exchange of value. The irony mentioned above has implications for technological adoption and acquisition. If the system is working, i.e. value can be exchanged and goods accessed, then hostility towards disruptive technologies will probably emerge. However, if there are systemic problems—for example, no rule of law, corruption, etc.—within the exchange mechanism, then technologies that are seemingly disruptive in advanced nations are likely to be readily adopted.

Value Exchange: Gold and Crypto

At the level of value exchange, new technologies are having a profoundly disruptive effect. The emergence and growth of cryptocurrencies has presented a means by which value can be exchanged without the need for a central, third party, trusted authority. Value exchange through currency, at its core, is a constructed means by which exchange can occur over periods of time. If I possess a surplus of apples, and someone else desires those apples, then I am prepared to exchange my apples for something that I value. The person desiring my apples must provide me with something of exchange value—oranges, for example. However, perhaps these oranges will only become available in a few weeks’ time. A system may develop through which I am prepared to exchange my apples for a currency to which all parties subscribe, a currency which holds exchange value over time. This time dependence is problematic if there is a significant probability that the currency will, in time, no longer be recognized, or significantly decline in value. By using the state as a central guarantor, we hope to ensure that the currency can remain a secure means of value exchange.

Of course, there are no real guarantees. The state may collapse, wars and other major catastrophic events may engender wild fluctuations in the currency. All such events may in effect destroy the stability of a currency guaranteed by a nation over time. Indeed, there are plentiful examples of such things occurring over the course of history. At base, mechanisms of value exchange have to do with trust—and trust is a judgment. By judgment, I mean a propositional assent towards a claim such as the Queen is moral, gold is of high value, or the dollar is stable over time. These are beliefs which can be held for a host of reasons that people may judge to be good or bad.

Take gold, for instance. The value of gold is the value that people propositionally invest in it—it is a product of belief. As an element, it is a good conductor, forms strong solids, has a high melting point, etc., but the value ascribed to it is largely to do with the fact that people ascribe value to it. This is a belief, a judgment, which, when enough people hold it, causes the value to become stable and exchangeable. There is something strikingly arbitrary about this. The value exchange mechanism, something which simply reflects what enough people invest trust in or value, can be illustrated by the example of Idi Amin’s destruction of Uganda’s economy. The mechanism of value exchange, in large parts of the country, became coffee beans. As corruption and authoritarianism dominated the state, the national currency, as underpinned by the state, became worthless. People could no longer trust the issuing central authority, and therefore ceased to believe that the currency had any semblance of functioning as a stable value exchange over time. As a result, coffee beans became a means of value exchange, and an entire black market emerged based on this currency. Coffee beans preserve their value over time—roasting means that physical compromise is not an issue. Moreover, the coffee beans could be sold in neighboring countries for substantial amounts, which served as a kind of third-party guarantor, or gold standard.

Money, as fiat, is the mechanism by which value is exchanged by nations. It is guaranteed by a trusted third party—the state or the central bank. Although it can be underpinned by something else—say gold—it is fundamentally based upon a judgment people make about value. The central concern is value over time. Hence, people hold on to currencies that hold value. Gold is read as stable, and so are things like the dollar and sterling. In nations where the currency fluctuates a lot, the national currency quickly becomes worthless—typically dollarization then occurs (as in Lebanon, for example). This is an important point, as we can connect this phenomenon to the conditional goods that the nation state provides, namely safety and stability. The mechanism of value exchange is in many ways the greatest signifier—perhaps the signifier—of the metrics of stable and safe.

Privacy and Tax: The Cost of Fiat

With respect to the fiat system, there are of course some costs involved in having to trust a third party. These include:

  1. Having to trust in the first place (maintaining a belief that may prove false is required).
  2. Forfeiting private information. As banks are the facilitators of the central authority, information such as who has how much money will always be known. Additional information is also unwittingly forfeited, such as spending habits, etc.
  3. A barrier exists to the accessing of one’s own wealth. In other words, a bank is an intermediary between a person and his own wealth, and this may be experienced as invasive.

These costs—in particular the forfeiting of information—also make it extremely easy for the state to collect taxes. Reliable information is available, allowing tax to be calculated and deducted. Moreover, the money itself is still in banks and as such, if illegal activity or tax evasion occurs, the state has legal mechanisms of recourse.

Cryptocurrencies accurately identify and address these costs. They allow for complete anonymity. This value can be read in terms of civil liberties, i.e. privacy from state intrusion. However, this value is also cherished by criminals, as it makes it possible to commit financial crimes, such as tax evasion and laundering. Another value is that cryptocurrencies allow for value exchange, without any barrier to entry. People can invest their money without paying a broker or having to invest at a particular threshold.

Decentralized blockchain technology has many uses and includes supposed built-in safety mechanisms. With both Bitcoin and Ethereum, hostile attacks by hackers are disincentivised by the fact that the computing resources needed to hack them (which has a diminishing probability of success over time) could simply be used to mine (or be part of the sustenance of the blockchain) for a guaranteed reward. The principle behind this is that it makes no sense to attempt hacks, and therefore the technology is safe. The problem is that there are many reasons for attacks, which are not always financially driven: subversive acts by hostile actors with vast resources, for the sake of simple disruption, rather than financial gain, are plausible. This is a translation of hard war to cyber warfare.

There are no guarantees. All that exists are tables of values, which are valued according to human belief and traded against one another. The cost of cryptocurrencies is taxation and thereby a stable and safe nation—which is, surely, one of the highest values. The irony inherent in technological acquisition is apparent once more: people in poor countries will not care as much about the values of the nation because they lack the goods of safety and stability in the first place.

A New World

An odd world picture is emerging. One in which advanced nations—efficient in their tax collection—are hostile to various technological advances, advances that are most likely to have originated in such nations. A world in which technological acquisition is rampant in less developed nations. A wild wild west infused with technological enthusiasm and flourishing. In this context, the poorer nations, the weak states, are likely to become even weaker and perhaps cease to exist. As history has taught, new forces often emerge through innovations in technology: perhaps the dissolution of the weak nations will enhance and cause to proliferate non-state actors, endowed with technological advances, which they may use to form new types of political economies. Perhaps such state actors will create new, utopian worlds. Perhaps they will turn hostile towards the states that survive.

Whatever the outcome of modern technological advances, notions of taxation will have to be reconsidered—and with them the values which birthed the modern world and the current nation state system.

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