Towards a New Tax Reality: The Digital Excise

While the rest of the world is exiting seemingly never-ending lockdowns, Australia again has nearly half its population of 25 million people at home peering out of their windows. Simultaneously, Prime Minister Scott Morrison is looking into an ever-deepening budget hole. The current Treasury forecast of $291 billion of economic aid to Covid might even grow as a further allocation of disaster payments have become necessary. Morrison and the Liberals have a problem, because their holy grail economic management policy of budget surpluses look increasingly implausible for the foreseeable future. However, it is fortuitous that many in business and the broader community are ready for a regime change to tax policy. In particular, new taxation policies perceived to be less damaging to local expenditure are emerging, along with new asset classes. It’s time to look at data as a source of new and abundant tax revenue – especially as traditional sources dry up. Increasingly, tax revenues will lean on virtual services, mirroring the emerging economy.

Evaporating Excise Revenue

It isn’t just corporate tax rates that have been in decline. Many of the traditionally lucrative forms of excise are at serious risk. Fuel, alcohol, tobacco and certain mining royalties are in terminal decline. The upside is this is good news for overall health and environment.

Fuel excise: 2020 gross revenue from fuel excise was $19.2 billion. A longer-term decline is anticipated based on improvements in car efficiency, as we transition away from the internal combustion engine (ICE). The problem our federal government will face here is that this is going to happen much more quickly than even they have predicted. Over the last seven years, global electric car sale volumes have doubled every year. In 2020, electric cars represented 4.8 per cent of all new cars sold. This has little to do with speed, performance or even clean air. Rather it has everything to do with economics. They have 90 per cent fewer moving parts and are 90 per cent cheaper to run than ICEs. If the rate of electric car sales continues and their price continues to drop, the majority of new cars sold will be electric by 2026. Unless our federal government shifts to legislating a fee per kilometre ‘excise’, they’ll have at least another $10 billion excise hole to plug.

Alcohol: While COVID gave Australians’ consumption of alcohol a temporary reprieve from perpetual decline, the long-term trajectory is healthy for our liver, if not government coffers. In the past decade, our alcohol consumption per person has declined 20 per cent. The government currently rakes in $6.9 billion of alcohol excise every year, but it’s hard to see any increases in excise filling the gaps of consumption decline. Only this year, non-alcohol beer was the fastest growing category, propelled by a 60 per cent increase in volume. Non-alcohol beer is expected to represent 20 per cent of all beer sales by 2025.

Tobacco: The job our federal government has done to reduce tobacco consumption has been rightly lauded the world over. They’ve done even better than they hoped with the shift to plain packaging. The downside of course is that this sin tax is also in decline. Pre-COVID, the government forecast to collect $16.5 billion in tobacco excise for the year 2021-22. The reality is now it expects to generate only $14.8 billion for the same period. A further excise decline of $2.4 billion is now expected in 2023.

Of course, we could add mining royalties to this problematic tax equation. In Australia, coal currently makes up 4 per cent of NSW’s state revenue and 2 per cent of Queensland's, contributing to a national total that is close to $2 billion per annum. Unfortunately, the global shift away from fossil fuels isn’t an ‘if’ – it’s more a matter of when.

In the Intergenerational Report, the Australian government expected excise revenue to grow between 2019-20 and 2024-25 and the amount of excise on tobacco, alcohol and petrol was anticipated to grow by 5.1 per cent or $1.4 billion. If their own errors of judgement from as recently as the past couple of years tell us anything, it is that they have got this number terribly wrong. This is even before we factor in other exponential technologies, the carbon taxes emerging globally and the Work From Anywhere movement.

Taxing the Pipes of Profit

As evidenced above, gathering excise has always been about taxing profit at the pipes. A long-term industrial strategy has been a valid way to fund infrastructure and ensure sovereign resources benefit the wider populace and economy. It’s time to revisit that strategy and catapult it into the digital era. If there ever was a time to do it, then post-COVID is it. The targets should be technology firms, most of which are not Australian.

We’ve heard the phrase "data is the new oil". So, let’s tax it accordingly.

Eight of the top ten biggest companies in the world are now technology firms. In the US, not a single energy company makes the list and only Saudi Aramco appears in any global list. Yet not a single national tax system in the world has recognised the power shift and taxed firms accordingly.

If taxpayers share in the sovereign wealth produced by extraction of oil, gas and other fossils from their country, then it’s time we started taxing data This is data similarly extracted, stored and refined, but with algorithms and computation.

It is currently estimated that Facebook generates around 16 petabytes of data per day, while Alphabet is around 20 petabytes. The top five technology firms of Alphabet, Microsoft, Amazon and Apple store generate approximately over 2,000 petabytes of data. What’s worth remembering is this data comes from their users’ attention, inputs and, as some technology observers put it, their ‘labour’ in generating content that produces the data and is consequently converted into profit.

Taxing the output at the pipes could and should be a new revenue model. Governments around the world should be focusing on to how fill COVID tax holes. Of course, this would require us to understand the exact numbers (note these are all estimates) of data generated by said technology firms. However, this is not as difficult as it may seem. We simply measure how much data goes through our fibre and flies through the sky to these firms’ URLs. In terms of data storage, we legally mandate that they open up their black boxes and swerver farms, the same way any factory can be inspected at any time by an OH&S officer.

Taxing how much data tech firms generate, store and use would be an incredibly effective way to claw back tax revenue. These tech firms don’t invest locally for manufacturing, they pay less in payroll tax and hence have far less staff per dollar generated. For example, Facebook generates approximately $1.8 million in revenue per staff member, compared to Woolworths generating just over half a million dollars per staff member on very skinny margins.

A New Tax Era

Multinational tax avoidance is proof that complexity favours the rich. Our tax law as written is over 10,000 pages long, making loopholes easy to find only if you have an army of tax advisors. A better idea would be to lead the world into a data tax regime that benefits Australian constituents, without hurting the local economy in the process.