the byte tax

This page looks at proposals for a 'byte' tax, 'bit tax' or 'email tax'.

It covers -

• the proposals
• the European Union Report
• the United Nations report
• state of play
• other approaches

     the proposals

Those taxes would essentially involve a charge (by a national government or, in some of the more problematical proposals, by the United Nations through a new or existing body such as the ITU) on traffic over the internet.

Internet service providers and telecom carriers would collect -

• a flat user fee, or
• a charge per specific number of email messages (eg a cent per message or per 100 messages), or
• a charge per SMS message, or
• a charge by the quantity of information sent/received (eg for internet telephony and video), or even
• a charge by the value of information/sent received (eg entertainment content would be charged at a higher rate than email).

What would be charged, who would be charged (consumers in the first world but not in the third?), how the tax would be collected and how it would be spent depends on which proposal you are considering.

Broadly, proponents argue that such a tax will offset the erosion of traditional revenue collection as we all go online or that it is a new, low-impact tax that can be used for international development. Revenue would rise and fall in direct proportion to use of information & communication technologies (ICT) and in the cost of ICT related employment.

Critics argue that such taxes are regressive (ie disproportionately affect the poor), will not work without total international cooperation, will primarily benefit unresponsive global bodies - the UN, World Bank and Bank for International Settlements are among the usual suspects - and that the technology for administration does not exist or remains too expensive.

Subhajit Basu's 2004 To Tax or Not to Tax? That is the question? Overview of Options in Consumption Taxation of E-Commerce paper commented that

A distinguishing characteristic of the bit tax is that the entire burden of collecting and remitting the tax is borne by the carrier company. It can be argued that carrier companies possess the necessary technical and labour resources to effectively perform such a function. But, who, in the final analysis, will shoulder the bulk of the tax burden or incidence? Will carrier companies absorb the cost, or will they pass it onto consumers? If carriers choose to pass the costs onto consumers (a reasonable assumption it appears), will they do so in a non-neutral manner because carriers lack the means to accurately separate e-commerce from non-e-commerce data flows? With a bit tax, there could also be problems with enforcing compliance on the part of carrier companies. Without a central international regulatory agency to oversee the carriers, there would be difficulties in ensuring that companies collect the correct amount of tax and accurately allocate the funds to the designated governments.

More problematically, he comments that a bit tax fails a basic principle of taxation because

it would discourage electronic transmission of information. Economic resources would be wasted through efforts to minimize the 'bit tax'. Further, it would also be counterproductive in that it burdens e-commerce and its productivity. For example, software companies might continue to ship magnetic tapes and cartridges rather than use the more efficient method of transmitting the data electronically.

     the EU report

Although there is disagreement, the first major proposal for taxing electronic information was by Arthur Cordell in a 1994 Club of Rome report. It was further developed in a number of papers by Cordell and Ran Ide in 1995.

In Europe, the 1996 HLEG Policy Report (pdf) of the High Level Expert Group on the Social Aspects of the Information Society, chaired by Belgian economist Luc Soete, argued that the growth of electronic commerce - particularly on a cross-border basis - was seriously eroding existing tax regimes.

The report called for research into alternative revenue collection mechanisms, including a tax on every byte sent over the net. Proponents argued that a tax at a very low level per byte would be accepted by users yet would replace part of the VAT (GST) and other revenue lost to ecommerce.

In 1994 a figure of around 1 cent per megabit was proposed. That was said to be "very low" but has since been criticised as out of kilter with broadband developments (eg one Canadian estimate claims for video on demand the tax is equivalent to 2 cents per second or C$72 per hour and for speech over C$4 per hour).

The HLEG recommendations were rejected by the European Commission. The 1998 Ottawa OECD conference on e-commerce resulted in government endorsement of arguments in the Electronic Commerce: Taxation Framework report that existing taxation principles should apply to e-commerce (eg no 'byte taxes').

     1999 UN Report

In 1999 the Globalization With A Human Face (Raworth Report) report commissioned by the United Nations Development Programme included proposals for a byte tax, along with a wide-ranging review of intellectual property rights aspects of the World Trade Organization, such as the TRIPS agreement discussed in our intellectual property guide.

Revenue would be used by the UN in developing lower-income areas within nations such as the US and Australia and in addressing global development needs.

The proposal reflected suggestions by Nobel Prize economist James Tobin (1918-2002) for what's become known as the 'Tobin Tax', a user fee/gross receipts tax on international capital flows - with revenue being used to address north-south or other 'divide' issues.

Tobin argued that a global 0.5% tax on foreign exchange trading would generate revenue of US$1,500 billion (as of 1992), while significantly reducing volatility. A 1995 report for the UN by D'Orville & Najman claimed that a 0.1% tax would bring in US$56.4 billion. Other estimates range from between US$50 billion to 250 billion per year, based on tax rates of between 0.05% and 0.25%. (As a frame of reference, official aid from 21 OECD countries to developing countries in 2000 amounted to US$53.7 billion and the Bank for International Settlements estimated global daily foreign exchange turnover at US$1,490bn in 1998.)

There is a valuable critique of such claims in The Tobin Tax - Coping With Financial Volatility (New York: Oxford Uni Press 1996) edited by Mahbub ul Haq & Inge Kaul. For a more positive view see Global Finance: New Thinking on Regulating Speculative Capital Markets (London: Zed Books 2000) edited by Walden Bello, Nicola Bullard & Kamal Malhotra. A perspective is provided by Ruben Lee's What Is An Exchange: The Automation, Management & Regulation of Financial Markets (Oxford: Oxford Uni Press 2000).

The Raworth report proposed a tax of the equivalent of one US cent on every 100 emails sent by an individual. The authors claimed that such a tax would have generated US$70 billion in 1996, more than total official development assistance that year, although user costs would be negligible. Given soaring growth in email, global revenue would now be significantly higher; it is estimated that in Belgium in 1998 the tax would have yielded US$10 billion.

All well and good, but the report conceded that the UN was not in a position to enforce the tax.

The report also referred to proposals for a 'digital tariff' on transmissions, reflecting disparities in global internet traffic (eg the US is a net exporter) and ongoing discussion at the World Trade Organization.

In May 1998 the World Trade Organization's (WTO) 132 member states announced that they "will continue their current practice of not imposing customs duties on electronic transmissions".

As one might expect, the report was widely criticised as unviable: administratively impractical, politically unrealistic. It has, however, been recurrently cited.

Discussions at the December 2003 World Summit on the Information Society (WSIS) for example featured suggestions that the ITU might somehow assume responsibility for a tax that would fund third world telecommunication infrastructure initiatives that had failed to secure substantial support from either the UN or major governments such as the US, France, Germany and Japan.

     state of play

The EU has, in effect, officially backed away from a byte tax to fund international aid initiatives but in 2006 flirted with the idea of a tax to fund European Commission operations, reflecting estimates that West Europeans spent around US$19 billion sending 157 billion SMS messages in 2005.

French MEP Alain Lamassoure for example gained international media attention over a proposal for a €0.015 tax on SMS messages and a €0.0001 tax on each email sent. He commented that

This is peanuts, but given the billions of transactions every day, this could still raise an immense income.

The WTO 'Stand-still Agreement' remains in place.

As noted earlier in this guide, in the US the federal Advisory Commission on Electronic Commerce (ACEC) and other bodies have been holding hearings on internet-related tax proposals. Don't hold your breath for coherent, practical outcomes. The March 2000 round of consultations mainly demonstrated disagreement within the federal government, between individual states and within business groups.

Bricks-&-mortar retailers, including the International Council of Shopping Centers and International Mass Retail Association, have formed the E-Fairness Coalition, a lobby group advocating a 'level playing field' at the state and national levels. The Internet Tax Fairness Coalition (ITFC) is another lobby group.

The 1998 Ottawa OECD conference on ecommerce resulted in government endorsement of the Electronic Commerce: Taxation Framework report that argued that existing taxation principles should apply to e-commerce (eg no 'byte taxes'), there should be no discriminatory taxation, consistent standards for cross-border taxation should be developed, consumption taxes should be imposed at the place of consumption, and digitised products should not be regarded as goods for consumption tax purposes.

     other approaches

There are recurrent proposals from various sectors for a content or recording tax, variously a levy on recordable media (blank CDs, Zip disks, USB thumb drives and floppy disks) or devices (computers, PVRs) as part of a national, regional or global intellectual property regime.

A model is the US Audio Home Recording Act 1992, using a tax on DAT recorders and blank DAT media to fund royalties to authors, performers and publishers. There is similar legislation in some EU states and in Canada (with an 'mp3 tax' in place from 2003), highlighted elsewhere on this site.

In November 2005 the African ISP Association (AfrISPA) invited all ISP associations at the Tunis WSIS meeting to discuss establishment of a World ISP Association, indicating that

The main goal of the Association is to negotiate with the Entertainment industry and to get the Entertainment industry to fund the deployment of broadband around the world.

The "Entertainment industry" - and ISPs in advanced economies - have yet to express much enthusiasm for that notion.

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