Why Facebook Should Be Taxed And How To Do It

Paul De Grauwe

The new information technologies have created a whole range of companies that have become extremely profitable. The most successful ones are in the list of the top ten most valuable companies in the world. Valuable here means the monetary value of all outstanding shares of these companies; their capitalization as economists call it.

Alphabet (better known as Google), Amazon, Microsoft, Facebook, Alibaba, are each worth $ 400 billion or more in the stock markets. They produce hardly anything tangible. They “make” information. These information companies are extremely successful. They also give rise to new problems.

The most salient characteristics of information companies is that the marginal cost of the information they produce is zero. To make a YouTube movie you have some fixed costs, such as a camera, a laptop and an Internet connection. But once the video has been made, you can broadcast it without increasing costs. Whether there are 10, 100 or 100,000 viewers of the movie does not change the costs of the movie producer anymore. The marginal cost (the cost of one additional unit viewed by someone) is zero.

That’s not all. The more viewers the moviemaker reaches, the more valuable his YouTube movie becomes. If he/she reaches an audience of, say, 1 million viewers, advertisers will be interested and will be willing to pay the creator of the video for placing ads. The more viewers there are, the more the advertiser is willing to pay. The YouTube producer thus produces something that has a marginal cost equal to zero and a marginal revenue that increases with the number of viewers. The more people reached with the movie, the richer the moviemaker gets without having to do something special.

Such a business model creates a number of problems. The first one is that information companies create a lot of economic value without the use of many production factors. You hardly need employees to generate a lot of income. Facebook with a capitalization of $ 400 billion employs 21,000 people. Walmart, which has a capitalization of 220 billion, has 2.1 million employees. Thus Facebook that is almost twice as large in terms of capitalization than Walmart counts only one percent of the number of employees of the latter. This means that a very high level of economic value is distributed to very few people. An inequality time bomb.

A second problem has to do with the fact that the people who join such an information platform (for example Facebook) actually give away information about themselves for free. This information becomes more valuable as more people join the platform. The big data on private information makes it possible to place highly targeted ads. The dream of all advertisers.

So companies like Facebook produce information that generates a lot of revenue using as ”raw material” the private information that they acquire for free from their users. They are great money machines generating huge wealth that hardly has to be shared and can be kept by the happy few in these companies.

Such a situation is untenable. More and more economic value is distributed to less and less people. What can be done about this? Here is my proposal. Facebook realized $ 26 billion in advertising revenue in 2016. This revenue was actually made possible thanks to the free “raw material” of the information provided by Facebook users. The government could apply a tax of 50%, for example, assuming that at least half of that income is due to the free information. That means 13 billion dollars. There are now about 1.23 billion Facebook users. So that means (rounded) $ 10 per user and per year. That seems to me to be a good estimate of the yearly value of the information provided by the individual user to Facebook.

So my proposal becomes: a 10-dollar tax per user to be paid by Facebook. Zuckerberg will be a little less rich after this tax, but will still have a lot of money left.

There are many issues with such a proposal. It should preferably (but not necessarily) be coordinated internationally. Not an easy thing. There is also the issue of what the government should do with the revenue. One possibility would be to return 10 dollars to the Facebook users every year. Alternatively, the government could use the revenue to invest in education, the environment or sustainable energy.

I think these are separate issues that can be resolved and that do not stand in the way to tax Facebook and other information companies (e.g. Google, Amazon) that use private information freely and transform this into a fabulous money machine that benefits only a few.

The article originally appeared on the author’s blog.