Historically technology has undone the economic power it creates. IBM is a good example, still here, but living off its past and fumbling the future. Yet for the current generation of tech giants, this time may be different. It is hard to see what displaces the huge installed base that exists today for these companies. Artificial intelligence, mirror worlds, quantum computing——these will all play an important part in our future, but I am not sure they create a discontinuity. The current tech giants are already the leaders in these, across the board. So we must find ways to manage and restrain their power.
The technology giants benefit enormously from two factors. First, they have been able to largely monopolize the market for top technology talent by being able to offer above-market but below-value compensation that others cannot match, aside from potential startup unicorns. The vehicle for this has been equity-based compensation, aided and abetted by favorable tax treatment from the government along with short-term focused equity markets. Second, their key raw material, for the most part, is aggregated personally-identifiable information (PII), which they collect by offering free services. Again, the free services are above market but below value, as there is little value in one person’s data but enormous wealth in aggregating the data of many.
Thus their dominance is the result of a combination of things. There is a virtuous circle here—for them. Top talent yields good business results yields rising stock prices, which yields tax advantages and high compensation for employees.
Yet we have to find ways to level the playing field. Otherwise, this small group of vastly powerful companies will continue to amass disproportionate wealth even as they periodically wreak social havoc. Legal constraints like antitrust and conventional regulation just do not seem to work. Taxes do. We have what we have because corporate leaders optimize within the rules they are given. So we need new rules, and changing how and what we tax may be the most promising approach to genuinely-impactful positive progress.
To level the playing field, I propose five interlocking policy changes. Four of these tax changes are designed to alter behavior more than to raise revenue. The last one alters how equity compensation awards are taxed, effectively raising taxes on the tech giants but lowering them for their employees.
1. An Excise Tax on Corporate Market Value.
Here’s a strawman for this: a tax of 1% on market capitalizations over $100 billion, rising by 1% for each incremental $100 billion. Thus, a corporation valued at $300 billion would pay $3 billion annually in tax. This tax simply reflects the principle that diversity is good and increases economic robustness, but it lets the market decide what to value and who to punish. Competition is good for society and the economy. The levels and amounts of such a tax will be a political decision. This applies to all companies. The social costs of excessive market and societal power are the same regardless of industry.
2. An Excise Tax on Personally identifiable information.
PII is the core value for the tech giants, even more than their software. Just as we tax oil companies for the oil they extract from the ground, we need to tax the tech giants on the PII they collect. Since no individual’s data is very valuable on their own, but the value of large aggregated groups of such data is high, people charging for use of their own data is not realistic. But since the exact value of such data is impossible to accurately assess, despite its obvious worth, there are metrics such as petabytes accessed per month. The tax should be targeted to collect, say, an annual tax equal to 20% of the profits of Facebook. Again, the level is a political decision. It could be as low as 5% or as high as 50% or even higher. There are ways for Facebook and similar companies to avoid aggregating PII but still conduct their business.
3. An Excise Tax on Stock Trades.
This is called a “Tobin tax” after its initial developer, Nobel-prize-winner James Tobin. Essentially, it presumes that capitalism is too efficient and overweights the present. Such a tax offsets this overweighting. Such a tax would reduce the ability of managements to spike stock prices for their own advantage and focus our capital markets more on the longer term. Make it a low tax, maybe 0.5%, but even that would help refocus the market on economic rather than trading value. The goal is to change behaviors not raise revenue.
4. An Excise Tax on Stock Repurchases.
Corporate repurchases of their own stock are often motivated by the desire to increase executive pay packages which are tied to the price of the stock. So it is no surprise corporate managements favor them. There are some legitimate purposes for such repurchases, so the tax might be set relatively low, something like 5%. Again, the intent is to drive behavior, not raise revenue.
5. Tax Treatment of Equity Compensation.
The tax code encourages companies to grant stock options by giving companies a tax deduction for the actual amount received by employees after a stock has appreciated, even though they do not include that in their reported earnings. Employees pay ordinary income tax on that amount. We should tax equity compensation for employees the same way we tax carried interest for venture capitalists, at capital gains rates. But we should allow corporations to only deduct their accounting cost of these awards or maybe a multiple of that. No one would have foreseen the huge gaps we have seen. Today this is a huge tax advantage for the tech giants.
Facebook and others did no wrong. They did what our laws and courts ask them to do: maximize profits. Maybe they made business judgments that were short-term biased, but our entire capital market is focused that way. All these taxes should be phased in over time. The biggest challenge to any policy change is the enormous amount of wealth their equity represents, with all the political pressures that implies. One consequence might be that we’d have more, smaller, companies. But letting the giants divide into multiple companies may ultimately be very beneficial to their shareholders.
If we want a different outcome, we must set different rules. These tax ideas are but a start. The political reality may be that none of these are feasible, or perhaps only some. But without major systemic change in how we give companies incentives, society will remain the victim of their ever-growing power.