Data tax: Regulating how the technology industry profits off the data of others

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  Quantumrun Foresight
• May 6, 2022

Insight summary

A proposed data tax on the earnings derived from citizens' data by large tech companies is stirring discussions on its potential to reshape industry practices and fuel public services. The initiative, which encourages a more responsible and sustainable approach to data handling, could spur governments to consider similar strategies. While aiming to enhance public infrastructure and education through the generated revenue, this data tax may also pose challenges in maintaining a competitive technology sector.

Data tax context

Some experts believe a tax should be paid by companies that are collecting data for commercial purposes, the dollar amount based on the quantity of data collected. With numerous businesses highly reliant upon collecting data for their business models, such a tax can lead to significant financial implications.

According to The Wall Street Journal, the aggregate stock market valuation of the five largest internet and technology firms in the US rose to USD $8 trillion in 2020. Their total revenues jumped by 20 percent, while profits climbed by 24 percent over the year. Although New York state is not the first state to introduce data privacy legislation, the tax floated by lawmakers in May 2021 would be the first that accrued revenue from multinational internet companies that profit from the sale of citizens' private information.

The Data Economy Labor Compensation and Accountability Act proposed a 2 percent tax on yearly earnings derived from New York citizens' data. If enacted, the bill would establish an Office of Consumer Data Protection, which would be responsible for implementing the levy and other laws and regulations focused on protecting the public’s data. To achieve state compliance standards, the agency would require all data controllers and processors to register annually. The result of non-compliance would be the imposition of fines. In addition, the initiative focuses on levying fees on social media firms that benefit from selling private information to investors without user authorization, including targeted advertisements, a key source of user revenue for technology companies.

Disruptive impact

By levying taxes on the use of personal data, governments can generate funds that can be channeled into vital public services such as infrastructure development and educational programs. This financial injection could foster enhanced societal well-being by potentially benefiting a large swath of the population. Moreover, the proposition of such a tax has already expanded the scope of policy discussions, paving the way for future politicians to consider similar revenue-generating strategies, even if the current proposals do not pass.

A ripple effect of the data tax could be a significant shift in the operational focus of technology companies, steering them towards a more sustainable and environmentally conscious approach. Company management might be prompted to revisit and possibly alter their existing policies to prioritize environmental, sustainability, and governance (ESG) factors more heavily. This shift could foster a more responsible use of data, with companies potentially changing their revenue models to be less reliant on the exploitation of personal data. 

As governments globally observe the outcomes of a data tax, it may become an attractive option for other states and nations to adopt, especially if it proves successful in achieving its objectives. This kind of tax could encourage behavioral changes within the technology industry, nudging companies to innovate in ways that are both profitable and ethical. However, it is essential for governments to strike a balance to prevent stifling innovation while promoting corporate responsibility. 

Implications of data tax

Wider implications of data tax may include:

• Governments utilizing the additional revenue from data tax to finance infrastructure and job programs, fostering economic growth and potentially reducing unemployment rates in their jurisdictions.
• The onset of a competitive environment where states and countries vie to become the preferred base for technology companies, potentially leading to a geographical redistribution of these firms and influencing regional economies and labor markets.
• A surge in public education campaigns, enhancing awareness among individuals regarding the collection and utilization of their personal data.
• Companies possibly exploring alternative revenue models, such as subscription-based services, to reduce reliance on data-centric revenues, potentially offering consumers more privacy-focused options in the digital marketplace.
• The potential for governments to allocate funds towards the modernization of data collection, usage, and regulation mechanisms.
• Policymakers facing the complex task of crafting laws that balance the need for revenue generation through data tax with the imperative to maintain a vibrant and competitive technology sector.
• A potential increase in collaborative efforts between governments and technology companies to develop standards and norms for data usage, fostering a culture of mutual respect and understanding, which might influence the political discourse around technology and privacy.
• The emergence of new startups that prioritize privacy and security from the outset, potentially offering services that do not rely on extensive data collection.

Questions to consider

• Do you think that such a tax is viable? Would more governments consider it in the future?
• What is a justifiable percentage of tax that the government should consider imposing when seeking to tax technology companies and how they use data?