Major internet-based platforms like Facebook, Amazon, Apple, Netflix, and Google (FAANG) command monopolies allowing them to charge well beyond their costs. (The House Antitrust Subcommittee determined in October 2020 that Facebook wields monopoly powers in social network and has maintained its position by acquiring, copying or killing its competitors.) The portion of FAANG’s profits that lie above the cost of production are unearned, are economic rent, and should rightfully accrue to the greater community.
In the business world there are two distinct revenue streams: earned profit and windfall profits. Most businesses collect some of both. Earned revenue is generated by making a product or providing a service while unearned income results from a land, location, resource or market monopoly.
Oil companies, for example, generate revenue by pumping fossil energy out of the ground and distributing it to consumers. They add greatly to their profits by holding long term leases on oil and gas fields, often keeping oil out of production to force prices to rise. Oil field speculation revenue has no cost of production.
Similarly, housing developers hold development land out of use until land values rise, then quickly build houses and realize massive profits well above the cost of construction. For developers, building houses is actually a sideline to their main business model of land speculation.
A clear sign that the FAANGs are capturing significant amounts of economic rent is their ability to vacuum up competition. Google acquired YouTube in 2006 for $1.65 billion. Microsoft bought Skype in May 2011 for $8.5 billion. Companies dependent on producing goods or services rarely realize profits above 5%, not the kind of cash needed to buy up competing businesses.
Facebook is now worth $650 billion, with annual revenue of $70 billion. Google is worth nearly $1 trillion, with annual revenue of $160 billion. These revenue streams are the result of scalable technology – because the medium is electronic, relatively low development costs can be leveraged into stratospheric profits. Once a platform is built, it can add an infinite number of paying users with little marginal cost.
The internet is part of the commons, like water, like air, like the EM spectrum, like resources, like land. Compare Amazon to a brick and mortar store. Your local retailers face competition, collect only earned income, pay taxes, and are labor intensive. But, Amazon is internet-based, it maintains relatively few employees or buildings, and thus doesn’t pay anywhere near its fair share of taxes relative to profits.
Monopolies pocket revenue that is stolen from the commons — revenue without a corresponding cost of production, wealth that rightfully belongs to the community. The difficulty is how to tax the internet commons without discouraging economic activity.
A “link tax” or copyright fee would mandate licensing of links to news articles on social-media sites such as Facebook, but to do so would diminish news distribution. Governments could tax Skype and Zoom on the minutes of airtime used, but this also would be counterproductive to economic productivity. Likewise, taxing internet providers (IP) for internet access is retrograde. IPs already pay tax for brick and mortar, salaries, electricity, and bandwidth. The Internet Tax Freedom Act is on the right track.
The Internet Tax Freedom Act (ITFA) — passed in 1998 — imposed a moratorium preventing state and local governments from taxing internet access. In July, the Permanent Internet Tax Freedom Act (PITFA) was to be fully implemented nationwide, causing the last few grandfathered states allowed to tax internet service providers to lose an estimated $1 billion in combined annual revenue.
C02 taxes reflect the externalized cost of pollution, land value taxes and resource royalties acknowledge that those who use the gifts of nature should compensate the community for the privilege. Similarly, companies who extract windfall profits from the internet commons should compensate citizens as additional government services or as dividends (like The Alaska Permanent Fund).
Assessors, skilled at estimating the value of land and resources, could readily determine the cost of production of internet-based businesses. Once assessed, governments could decide if all or some percentage of the unearned wealth would be shared with the true owners of the commons, the citizenry.
Rent capture would deliver a level playing field between large and smaller platforms by reducing the capacity for leveraged buyouts by the giants. Internet-based businesses are slippery, they can operate in remote markets without local infrastructure, so rent capture should be global, supported by all OEDC countries.
It is unjust that wealthy people and businesses are allowed to loot the internet commons without creating value. It is past time that global governments break internet monopolies and properly reward innovation, new market development, and wealth creation.
500 characters is a bit difficult to put a meaningful comment in. I’ll wait till I’m home and blog about this…