Rethinking the Taxation Ecosystem – with a Value Cloud

Hamarz Mehmanesh, founder and CEO of mgm, was invited by the Munich Chamber of Tax Consultants to present this article as a speech to the audience at the Chamber Conference 2023 at the end of September. We’ve documented the speech here.

Short & concise

“Rethinking the taxation ecosystem” means, on the one hand, using the great advances in information technology, such as the possibilities of storing and analyzing huge amounts of data, to develop a new taxation platform. On the other hand, the functional scope of a new taxation system must be so comprehensive that there is no room left for tax data to be tapped by more comprehensive and convenient offerings from American IT giants.

We still have a realistic chance of designing future-proof digitization solutions that will lead to the long-term preservation of state sovereignty in the German tax system.

I would like to take you with on a thought experiment.

What happens if a digital group comes into possession of all accounting data of all natural persons and legal entities in the Federal Republic? To do this, let’s first take a look at where digital corporations stand today.

We live in an age in which the power of American IT giants has reached an alarming level. People shop at Amazon, “google” things and communicate via Microsoft Teams, WhatsApp and Instagram.

But how did this come about? The technological developments of the 2000s enabled the distributed storage of large amounts of data and its parallelized processing. Of outstanding importance here was the paper “MapReduce: Simplified Data Processing on Large Clusters” by Jeffrey Dean, Sanjay Ghemawat & Co. published in 2004 in San Francisco by Google at the “Operating System Design Symposium”.

Data Treasures and Technology for Real-Time Queries

With today’s advancements in storage and query technologies, 250 petabytes (i.e., 250 million gigabytes), for example, can be searched in near real-time. The wealth of digital corporations is based on their possession of unimaginably large data troves and their ability to process them highly efficiently. As of April 2, the combined market capitalization of the five American IT giants was more than 6,000 billion euros. An unimaginably high figure. The outstanding position of these corporations in the AI-based use of data is also based on these financial capabilities and the possession of huge amounts of data. Stanford University’s new AI Index Report documents that in 2022, 32 out of 35 major AI models were already conceived by digital corporations and no longer by research institutions, as was the case in the past.

Both the digital communications infrastructure and huge data treasures are now owned by Facebook, Google, Amazon, Microsoft and Co. This fact creates an immense dependence on these digital corporations, and it raises the question of whether we have not been too restrained and too passive in the past in allowing massive monopolies of power to emerge.

After all, the Bavarian constitution (Article 158) says: “Property obligates the whole. Manifest abuse of the right of ownership or possession enjoys no legal protection.”

Shouldn’t private ownership of huge amounts of valuable data and digital communications networks therefore also be regulated by public authorities?

Now, one might think that the timid application of competition law and the very cautious regulation of power accumulation in the digital space are a first start, and that there are enough historical examples of legislators cracking down after a while.

Can the power of market giants be contained?

The history of AT&T (American Telephone and Telegraph), founded in 1885, is often cited as a reassuring example. Until the 1980s, AT&T had a monopoly on telephone services in the United States. The 1982 antitrust proceedings led to the breakup of AT&T and the restoration of a healthy competitive climate.

So can we expect the committed and tough Ms. Vestager as EU Competition Commissioner to have sufficient means at her disposal to curb the power of these market giants and sufficiently protect our democracy and economy? So can we also expect IT corporations to be broken up? Will Amazon be forced to operate as either an online marketplace or a logistics company, but not both? Will the Apple Store be further regulated?

The AT&T example is not transferable to the regulation of IT giants because the framework conditions have changed radically in the as-is era. National country interests or EU or US interests can no longer be evaluated exclusively from a local perspective. Regulation of U.S. digital corporations is done with the utmost caution because even these giants are in global competition with Chinese corporations, which are also very large and in some cases even more powerful, and display even more pronounced data and power accumulation behavior that is not democratically controlled.

To make matters worse, all Chinese corporations are directly or indirectly directed by the Chinese state and act as links in a body.

The-winner-takes-it-all effect

No one wants to risk Chinese digital corporations dominating global markets and taking advantage of the “the winner takes it all” principle.

Marc Kowalsky, a Swiss journalist in Switzerland’s Handelsblatt, commented:

“In the digital world, the strongest always win, because the costs of creating and operating a software grow only moderately with the number of users of this software. Therefore, economies of scale are even more pronounced here. And network effects are even more important, because if all my friends are on one platform, then that’s where I want to be. Professor Boris Beaude of the University of Lausanne says: ‘With every click, the strongest becomes stronger’. That’s why there’s only one dominant payment platform on the Internet (PayPal), only one dominant ride-hailing company (Uber), only one dominant auction platform per country (Ricardo in Switzerland, eBay in the rest of the world) – it’s what’s called the-winner-takes-it-all effect.”

It is therefore of fundamental importance that digital corporations do not get the chance to set up even more data and infrastructure monopolies. What role does the tax administration, the tax system, play in this?

Tax deals with participation in legal and economic transactions via transport taxes, consumption via excise taxes and ownership via taxes on income and assets. All tax bases, i.e. any turnover, any acquisition, any consumption, any income and any property, are stored as information in accounting records and are accessible to the tax administration.

This information can also be called “values”. The tax administration can obtain knowledge of all the tax bases or values that exist in a country and regulates the correct classification of these tax bases in a category scheme in order to standardize them on a monetary value scale for the purpose of taxation. For example, it can issue regulations on any type of acquisition transaction and has information on ownership and transfer of possession in many areas. It has the task of designing a “value system” and mapping “the goods” of the real and digital worlds onto it.

Surprisingly, this value data or information is not yet in the possession of the IT giants. They are known to the tax administration on an accrual basis, are located in accounting systems of private individuals and companies, and in administrative systems of tax law firms. Up to now, this data has been very scattered and is only used to record taxes and to prepare legally required, standardized and comprehensible reports, such as the annual financial statements of companies.

Problematic: shifting a lot of data to the cloud

So we are in the situation where there is a huge treasure trove of data that has not yet been aggregated and lifted for further aggregation and utilization!

With the advances made in cloud computing, it is now possible to avoid local data repositories and build management systems that manage the data of all customers in the cloud. Local installations on scattered servers are thus no longer necessary. Many providers of business applications or management systems are currently pushing to replace customer-local data stores and system installations with the cloud-based services they have made available. With their use, the data of these applications migrate to the clouds of software providers, i.e. IT companies that provide these management programs.

Why is this problematic? It’s only a matter of time before these IT companies realize the immense value of this data and the power its ownership represents to them. Of course, these companies guarantee that they will not access this data. Nevertheless, they will gradually make highly attractive offers, but you can only take advantage of them if you agree to a certain exploitation of your data.

Here are some examples of what kind of offers can be expected:

  • “We can reduce their electricity bill by up to 40% if we are allowed to review their monthly costs.”
  • “We guarantee 5% better lease terms on their company cars if we can compare your purchasing terms.”
  • “Bakeries that make twice as much revenue as you do buy flour for 20 cents per kilo. May we optimize your purchasing conditions?”

Gradually, this data will then be exploited by third parties, just as it already is with data on our purchasing behavior, vacation patterns, traffic movements, etc. If we consider what profitable business models the possession and exploitation of value data will allow, then we can assume that the IT giants of our time will also position themselves in this area in order to dominate the market with intuitive, cost-effective and comprehensive management solutions. If this succeeds, then digital corporations will possess the knowledge of who owns what and who consumes what goods in a given time interval.

By possessing this information, digital corporations can handle buying and selling transactions via their own platforms and fully exploit their already existing global digital network. The digital corporation thus mutates into an unbeatable global middleman with comprehensive information about goods, consumption, and buying and selling conditions.

This would take the power of these corporations to a new dimension.

Regulating the “values of this world” with a value cloud

We must consider how to regulate the ownership of the immense amount of data about the “values of this world” in the future in the interest of the “totality”. Fortunately, this area of data is not yet cloudified and monopolized, which will not remain so for much longer.

As an IT company, we know about the danger of data misuse and, as already outlined, we also have no confidence that the application of antitrust law will prevent the formation of further power monopolies. Therefore, urgent and serious consideration should be given to whether and in what way a state alternative, a state “value management cloud”, hereinafter referred to as “value cloud”, can be established. With a state solution, we could effectively counter the progressive takeover of the sovereignty to shape the reality of our lives by a few digital corporations.

I would like to briefly elaborate on this idea in the following.

The idea would be that an organization as powerful as the federally structured German tax administration would be given the task of rethinking the taxation system. In doing so, the tax administration should think and act like a powerful digital corporation in fulfilling this task. This means that it will exploit its expertise, capabilities and existing IT experience, not only to fulfill its tasks, but also to become the biggest “player” in the digital space in this country. After all, digital corporations know the data economy and the power of the-winner-takes-it-all effect. So how would such an entrepreneur think and act?

The digital entrepreneur would pursue the goal of mapping all fiscally relevant values in the value cloud, managing and processing them there. Every thing of value from the real world is given an identification and thus becomes available under its identification key in the value cloud. For example, when a BMW 3-series comes off the production line today, a unique identification key is already generated for this car at the factory, which is used to identify the car until it is scrapped. This key should then also be able to be stored in the value cloud.

So as soon as a tax-relevant entity is created in the real world, its digital image is also created in the value cloud.

The same applies to all life events such as buying and selling events. The ownership history of values and their “wear and tear” or “appreciation” would thus be available without gaps in the value cloud. If these values can be identified, then they can be automatically posted to the accounts of the various legal entities and individuals. On the basis of the values cloud, the tax administration could also offer every natural person and legal entity the scope of services of a current accounting system as a service. This means that a company like mgm, for example, would no longer necessarily need its own accounting system; it could use the services of the value clouds for daily, monthly and annual work. The annual financial statements would then also already be available in the tax administration system. All invoices, all payments, all write-offs, all financial movements would already be available in the value cloud of the tax administration anyway.

Are the prerequisites in place? – Yes!

Not only as a technician one immediately asks oneself whether the prerequisites for the creation of such a system are already given.

As already explained, these prerequisites are certainly given from a technical point of view. But what about the technical prerequisites? Is the professionalism so well specified that it can be digitized?

Personally, I have always been fascinated by the conversations with our tax consultant. It’s unbelievable, but she can usually answer any question, no matter how peculiar, from financial laymen like me immediately or in the shortest possible time with the help of a thick red book.

You know what I’m getting at: there is no other subject matter that I know of that is as accurately and comprehensively specified as tax law. Translated into IT language, this means that there is a perfect specification and that there are highly professional processes to keep this specification up to date. Technical experts refer to this as legislation and enforcement.

Since we are meeting in Munich today, I would like to point out that the Bavarian tax administration has been successfully advancing the digitization of enforcement for years as part of the ELSTER project.

If technology and expertise are right, then “only” the legal framework conditions for the conception of a value cloud need to be created.

I, too, am fully aware that many very critical political and legal aspects would have to be taken into account in the “only thing left to do” that I have just mentioned. But I am very sure of one thing: the major digital companies will find their ways to get their solution for a value cloud off the ground under existing legislation. Neither Amazon nor music streaming services waited for “permission.” They simply created facts. Why shouldn’t they create the same in this field?

Why should the state own all this data and not two or three digital corporations? Why should we trust the state more? Isn’t the state more dangerous? My answer is: No! The German state is not more dangerous. Why is that?

For centuries, we have focused on limiting the fullness of power of the state as a whole and on the optimal distribution of power within the institutions of the state. As early as the 17th century, John Locke, often referred to as the father of liberalism, published the idea of the separation of powers and laid the foundation for the separation of the legislative and executive branches. And it was precisely the Federal Republic that, after the Second World War, based on the Basic Law, built up a truly remarkable system of state and society, which to this day is the guarantor of safeguarding the fundamental pillars of our democracy.

Personally, I believe that we can only prevent the misuse of a value cloud if it is in the hands of the state. This will not succeed if the values cloud is in the hands of international IT giants.

We now have a unique opportunity to put this treasure trove of data under social control – or to leave it forever to the individual conscience of a Mark Zuckerberg or Elon Musk.

But what about feasibility? Isn’t it too difficult and unrealistic for a governmental organization to create and operate such a system?

Please allow me to conclude by answering this question with Seneca:

“It is not because it is so difficult that we dare not do it. It is because we dare not that it is so hard.”

Photos: Munich Chamber of Tax Consultants, Studio Mayer / Ulrich Mayer