John FitzGerald: Digital tax is a price worth paying to regulate tech monopolies

With the rise of the modern economy our lives have come to depend on networks such as the electricity, gas and water systems. While a century ago many of these utilities began as independent companies competing for customers, this was not a sustainable model: it is costly and inefficient to install competing sets of wires on every street. The greater efficiency of having a single supplier is what makes such utilities natural monopolies.

The absence of competition is a potential challenge – a monopoly supplier can charge exceptionally high prices, which is clearly not in the public interest, especially with vital infrastructure like electricity and water.

While the classic solution to monopoly is to break up the dominant firm into businesses that compete with each other, this is not a good option for natural monopolies because multiple suppliers would be so much more inefficient and costly than a single provider.

Instead the solution in most European countries was to bring utility networks into public ownership. When the ESB was set up in 1927 it took over a number of private and local authority electricity businesses.

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However, even nationalised utilities remain monopolies. While the state can control the price these utilities charge, it has been much less effective in containing their costs. In essential services that face no direct competition costs may push upwards, for example through inefficient work practices or staffing levels.

That is why across Europe independent regulators have been created in areas like electricity, gas and water. Their job is to ensure that the price charged for the monopoly services is reasonable and that the cost base of the regulated firms is not over-inflated. In addition, competitive parts of the monopoly utility companies have been hived off.

Niche businesses

The internet has seen the growth of a new range of massive firms like Google and Facebook which have many of the characteristics of networks, and have near-monopolies in the niche businesses that they have developed.

Facebook provides a very convenient platform for friends, including those in distant places, to keep in touch. While it began in a more crowded marketplace with other apps like MySpace and Bebo, it has now come to dominate its segment of the market. It has reached a scale where most of the direct competition has faded away. Likewise Google from early on established a dominance in the field of web search. These companies are now among the biggest and most profitable on the planet.

Other tech companies or platforms like YouTube, Instagram and WhatsApp have emerged to dominate their particular segments of the market.

While the services of social media companies to some extent overlap, they each have their distinctive niche which they dominate worldwide. While this dominance could prove to be temporary, the bigger and more ubiquitous these companies become the harder it is for new entrants to take them on.

The global dominance of these firms has seen their profitability rocket. The extent of their user base and global reach, along with the data they harvest on their customers who use these services “for free”, makes them massively profitable media for targeted advertising.

National regulation

Where network services are provided on a national basis, it is national authorities that regulate them. However, because of their global nature, these new technology monopolies are not amenable to national regulation, and there is no realistic prospect of supranational regulation. As a result these firms remain hugely profitable, benefiting from their monopoly position.

This is the background to the proposals emerging across Europe to raise a special tax on the big tech firms.

There is a related political concern about the influence these companies can wield through their unique capacity to reach and target voters, as well as about their history of aggressive tax planning to minimise tax paid anywhere in the world.

How can some of these monopoly profits be captured for the public’s benefit? A useful analogy may be to look at how natural resource companies are taxed on oil or gas fields. Such companies often pay royalties or special higher rates of corporation tax to ensure that society shares the benefits.

The UK announced a tech tax this week. While this type of tax has serious defects, the move reflects a public concern felt across the EU. While the imposition of such a tax at the EU level may cost Ireland a few hundred million in lost corporation tax, it may well be sensible to sacrifice this "pawn" to maintain wider EU solidarity, a better long-term prize for Ireland.