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Elon Musk Is Unintentionally Making the Argument for a Data Tax

May 27, 2022, 8:45 AM

The last month has been a turbulent time for Twitter and the founder of the Boring Company, Elon Musk. On paper, Musk has lost billions and consequently fallen out of the vaunted $200 billion club. Twitter has been accused of being a bunch of bots in a trench coat and has seen its shares down overall. This week, Twitter and Musk himself were sued by an investor over the takeover process.

All the same, if everything goes according to the original plan, Musk will soon close a deal to purchase Twitter for $44 billion. But what does that figure represent? The underlying technology that makes Twitter work, or the data—our data—that Twitter has aggregated? Much of the sum is attributable to the latter.

Viewed from this perspective, it seems Twitter is an entity comprised chiefly of little bits of value created by us—the users—and has just been sold to the world’s richest man without so much as a penny being tossed our way. Certainly, there will be taxes remitted on aspects of the transaction itself, but Musk will be free to hold that data and use it to acquire additional data on us. This can be resold, rented out, or used in essentially any way he or his creditors see fit.

Storing data in perpetuity is not (relatively) expensive.

Twitter is worth $44 billion not because it has a text box that asks “what’s happening?” but because that is where the conversation is and has been. A bit-by-bit duplication of the platform would not be compelling for an individual whose discourse and contacts reside on Twitter. The problem is that there is minimal cost inherent in cornering the market on data; it’s just 0s and 1s in a server farm somewhere. A tax on the revenue generated by the aggregated data would inject some small modicum of market forces into what is otherwise unreachable largess. The time to impose that tax is when said data changes hands.

The idea of a data tax is not new. It turns on two high-level justifications: first, the aforementioned “it is our data” argument. The idea here is that there is little value added by the entity that aggregates our data. Think of the value to the restaurant the rat that eats crumbs off the floor provides—not much. Twitter has built a platform for us to use, which no doubt has a value, but the value of that technology bears little resemblance to the value of the entity as a whole.

The second justification is to compel companies that use information about us as raw product for their processing to internalize that externality—in essence, compelling payment to the owners of the land that is being mined. Extending the mining metaphor, the price of gold sold at market from a mine that is operated on land not owned by the miner, and for which the owner is not compensated, does not reflect the true cost of mining said gold. The profits retained on the gold represent the depletion of the land’s value—at least in part. It is immaterial whether the owner would have mined the land themselves or has any intention of ever mining the land themselves; the value of the land in the marketplace is reduced without compensation.

It is also true with our data. We may not have a use for the disparate pieces, which is why we don’t miss it when it’s collected, but that isn’t tantamount to saying it is without value to us. It has value in it not being collected and not being used to sell us other products. Our data has value to us untapped and unrefined.

A data tax would pay society for the use of its data.

Musk should not have an issue with compensating society for its data. He has described Twitter as the de facto town square. One would expect that privatizing the town square would likely entail some form of payment being made to the public trust. Even if Twitter is viewed less as the physical town square and more of the recordings made of the goings on in the town square, the argument would stand.

But wait—what has changed? Twitter has operated this way since its inception. Musk’s bid to purchase it would just privatize it and bring it under a single owner, sort of, though Musk seems to be looking for investors and Twitter will be tied to Tesla. So why now?

Because it is administratively most tenable to compensate society for its data when an entity changes hands than at any other point. There is a value assigned to the entity—the purchase and sale price—and the purchaser has cash or credit on hand to make the purchase. If society is to be compensated for its contributions to Twitter, now is the time—not a year or two from now, when such requests are met with Musk’s outturned pockets and cries that Twitter’s revenue doesn’t even cover the service on the acquisition debt.

For a data tax, the base is key.

Individual states have proposed data taxes in the past but have tied the tax to the status or residency of the individuals contained in the data. The latest, New York’s Senate Bill 4959 in 2021, tied the tax to the number of New York residents on whom a company like Twitter collects data. This makes sense from the vantage point of an individual state. New York has little claim to tax Twitter on the information it holds on residents of other states. The shortcoming? It would incentivize a company such as Twitter to simply not retain information regarding user residency.

Revenue raised by such a tax can be put toward related initiatives such as the Affordable Connectivity Program, which provides households at or below 200% of the Federal Poverty Guidelines with assistance in paying for broadband. Additionally, a new owner such as Musk can be provided with an escape hatch: Make the aggregated data open for public use and development, in an agreed-on open standard, and receive a tax credit.

In this way, the cost of the private ownership of public data is internalized in the form of the data tax. If the data is worth more to Twitter than the credit for data tax paid, it can be retained and no refund will be received. When and if the data ceases to be worth more than the prospective credit, there will be an opportunity cost in allowing it lie fallow and entities such as Twitter will be incentivized to open up the data. The dichotomy such a system would draw is as between building on top of the public square versus monetizing the public square. The former enhances the square: aggregation of conversations, use of infrastructure, etc. The latter is simply preexisting wealth being used to privatize what was formerly public.

There remain numerous open questions: Is Twitter objectively worth $44 billion? Is it actually just a bunch of bots trying to multilevel market and politick to each other? Did Musk ever intend to buy Twitter, or was this just a marketing ploy or an attempt to get some cash out of Tesla through the back door? What is not an open question is where Twitter derives its value, such as it is: from its users. When and if the keys to the #kingdom are handed over to Musk what he will have bought is what we have wrought—and society deserves to be compensated.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Leahey is a tax and technology attorney in Pennsylvania and New Jersey.

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