Editor’s Note: This is NOT an investment article. This is an article that expresses our personal opinions about social issues involving fair levels of taxation on wealth produced on the backs of users. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives, suitability requirements and risk tolerance. Macro Viewpoints & its affiliates do not have any position in stocks mentioned in this article.
We give credit where credit is due. And we give credit to Tom Friedman for triggering our thoughts below, specific credit to his lines about Twitter in Saudi Arabia:
- “Saudi Arabia alone produces almost half of all tweets in the Arab world and is among the most Twitter- and YouTube-active nations in the world.”
We didn’t know this & so it was a “wow” moment. Almost immediately it became a “hmmm” moment. Because we wondered – how does Twitter pay Saudi Arabia for the huge amount of business it gets from that country?
Think about it. When a company enters your home or office in your country, provides you products & services and benefits commercially as a result of that delivery, that company has to pay taxes in your country and your state. This is true of all global multinationals who pay taxes on products & services they deliver to people in countries around the world.
And Twitter is already a much more global company than most. Look at the distribution of Twitter users by country:
Remember – Saudi Arabians & Indonesians are not coming within the physical boundaries of America to consume Twitter services. Instead Twitter is entering the physical domains of these countries and delivering Twitter products & services to the residents of these countries in their homes & offices. In other words, Twitter is doing business in each of these countries as a commercial enterprise.
And Twitter & Twitter’s owners are making huge amounts of monies from their global operations. Twitter’s market cap is about $31 billion as of Friday, January 11. So its founders & senior management have become billionaires by doing business around the world.
So, shouldn’t Twitter pay taxes to Saudi Arabia, Indonesia, Spain, Venezuela & Argentina, to name the top 5 countries in the chart above? Each of these countries is desperate for revenue to support its social expenditures, cover its deficits, to feed their populations. So why are these countries allowing a rich fat company like Twitter to come into their countries and make huge monies on the backs of their populations.
We think this is a slam dunk case. Then why aren’t the governments of these countries thinking so? Because, with the solitary exception of China, foreign governments are stupid and in utter awe of American internet inventions, inventions whose creativity is beyond the reach of their minds.
And why is this a slam dunk case? Imagine you wake up on Monday morning to learn that foreign countries have banned Twitter from their countries for non-payments of taxes. We bet the market cap of Twitter would drop by at least 50% within a week. Because the number of Twitter users & tweets produced would drop by at least 50%. And the projected growth rate of Twitter would be lowered by more than 50%. So by any metric, the value of Twitter would drop by more than 50% and since markets over-react, the actual drop in Twitter’s share price could be even steeper. The resultant fall in the wealth of Twitter insiders & shareholders is proof enough of our case.
This may be a slam dunk case but the question is how to calculate a fair basis for taxes on Twitter.
Tax on Income, Capital Gains or Market Cap? Or a Service Fee?
Twitter does not make enough income from its services like Google makes & Facebook has begun making. So normal taxes on income produced are not a fair share of what Twitter takes away from other countries.
Twitter makes an enormous amount of money for its founders, senior management & shareholders. And this wealth is realized by these insiders selling their Twitter shares in the US stock market. So should capital gains taxes be levied on these Twitter insiders by countries which have delivered the gains to these insiders on the backs of their populations? May be fair but it may be hard to do.
Another way might be for Twitter to issue shares to governments of the countries for their contribution to Twitter market cap based on reasonable metrics – like say number of tweeter users, number of tweets produced etc. That makes taxes commensurate with the benefits produced by these countries for Twitter. And this stock issuance should be calculated and delivered every quarter. This would be fair and it would create incentives for foreign countries to increase the penetration of Twitter inside their countries – a true win-win.
However fair this might be, Twitter is unlikely to agree. And there is no way foreign governments can impose such cap gains taxes or wealth taxes on Twitter or its insiders.
So the next option is a service fee. Every government controls the Internet Service Providers (ISPs) that deliver internet access to its people. As a first step, governments should impose a tiny service fee on Twitter per Tweet delivered to or produced from their country, a tiny service fee per access to Twitter.com and per Twitter account established in their country. These governments should bill and collect payments from their own ISPs on a daily basis. Clearly, these ISPs will demand payment from Twitter for their costs and shut down Twitter access if Twitter does not pay. This will protect foreign governments from being blamed for banning “freedom of press or communication” etc.
It would be important for these governments to explain to their people the rationale for imposing taxes or service fees on Twitter. And they should ideally segregate these Tw
itter revenues and use them exclusively to provide services to the people who use Twitter. A smart solution would be to actually deliver a portion of these revenues to their people who use Twitter, a sort of frequent tweeter award to their people.
Think about it. If done on a penetration metric, the top 5 countries in the chart above would have to be given 80% of Twitter market cap in some monetary terms. So Indonesia would get 19% of 31 billion or about $6 billion. Clearly, this is not a valid metric but it serves to demonstrate the huge amounts of monies these tax-starved countries are passing up while making a few Twitter insiders insanely rich.
The reality is that foreign governments have a huge lever against Twitter et al for collecting fair amounts of revenue in exchange for allowing Twitter et al to deliver services and make money from their populations. What they lack are will, brains & a commitment to the well being of their people.
Face Book, Google et al
What about Facebook or that gorilla Google? Everybody we know in India uses GMail for their email and is an active user of You Tube. Every individual gmail contains ads, specifically tailored ads for the sender or recipient. And almost every video on You Tube comes with advertisements. These advertisements are the source of revenue for Google. So does India, one of the “fragile 5” countries in the world, tax Google for the revenues produced for Google by Indians in India? A large majority of Indians we know also use Facebook. Does the Indian Government charge Facebook for the revenues produced by Indians in India?
Google, FaceBook, Twitter form the leaders of the new generation of global corporations that reach out to people in countries around the world and make enormous amounts of revenues, capital gains and wealth by making these people customers of their products & services. But they generate very little employment in these countries and they contribute hardly any revenues to these countries.
In contrast, global multinationals like Ford, Coke, Pepsi, Kraft-Cadbury invest billions in factories in foreign countries, global multinationals like IBM hire thousands of workers in foreign countries. And these foreign countries target Ford, Kraft, Pepsi, Coke via high tax rates and stringent collection procedures.
How stupid are these foreign governments? Why don’t turn their attention to the real freeloaders of the global economy – Social Media & Internet companies? Are you listening, President Hollande, King Abdullah? You should if you want fair play for your citizens and a fair share for wealth produced on the backs of your citizens by Twitter et al.
Are you listening, Mayor de Blasio?
Mr. Mayor, look at your populist comrade, Governor Jerry Brown of California. He has forgotten more populism than you probably know, right?. He became a liberal pro-people governor of California while you were still in High School, right?
But does Governor Brown call you and offer you a share of the Twitter wealth that New Yorkers have produced? Has Governor Brown suggested that New York tax Twitter, Face Book & Google for wealth produced for California by New Yorkers who use Twitter, Face Book & Google? No. Because his populism is restricted to the people of his state, California.
What about you, Mayor de Blasio? Don’t you dedicate your populism to the benefit of New Yorkers?
Think about it. Who has generated an obscene amount of wealth in our country? Twitter, Face Book & Google insiders. And this wealth has been generated on the backs of New Yorkers and people all over America. Why are you not leading the charge for a fair share of this wealth for New York? Wouldn’t fair taxes on these Californian social media billionaires produce real revenue for New York, revenue that will fund schools & after-school programs for the needy in New York?
Look how long it took New York to begin forcing Amazon to levy sales taxes on products sold to New Yorkers? Are you going to wait that long to demand for New Yorkers a fair share of money produced for Twitter, Face Book, Google et al in & by New York?
Do you agree, Mr. Friedman?
We are basically champions of freedom of innovation, freedom of expression & free markets. But we do know & as all of us found out in 2006-2007 that unlimited license to print wealth comes from holes in regulation & from overly permissive governments. We are firm believers in wealth creation. But we also know that wealth has to be shared with those who helped produced it. Otherwise, you get slave labor. We are firm believers in low taxation. But we know that a fair level of taxation is necessary for betterment of society.
Normally, wealth is accrued as a result of income produced and saved. For this conventional generation of wealth, taxation based on income is sufficient. But for today’s social media & internet companies, huge wealth is being created without income generation and entirely on the backs of people to whom their products are delivered. Traditional income taxes are not relevant to obtain a fair share of this wealth production. Every user of Twitter adds value, monetary value, to Twitter and Twitter generates this wealth on the backs of these users in America’s states and in other countries. And Twitter collects this wealth without sharing any of it via fair taxes for the benefit of these users & their governments, whether in non-Silicon valley America or in the rest of the world.
That ain’t right. Don’t you agree, Mr. Friedman?
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