Schneier on Security

Clive Robinson • April 5, 2012 5:12 AM

There is another major reason that there is a Battle for the Internet, which to a certain extent underpins some of the four points.

It’s “the death of distance” effects on economics and the movment of money and thus tax.

As a general rule sovereign nations survive by raising tax on the movment of goods and trade etc (direct taxation on peoples income generaly is a small fraction of the tax take). Any movment of goods across their borders that is not declared for “revenue” is regarded as smuggling which in some jurisdictions still indirectly carries a death sentence without trial (that is no penalties are reserved for an excise officer carrying out their duties and defending themselves in any way they see fit or when trying to apprehend a suspect).

Now one of the axioms of traditional economics is “distance has cost” it alows for multiple players to arise and gain sufficient strength to rival others with their respective spheres of influance being limited by the “cost of distance”. Thus in any given market the players are multiple and distributed where ever the need for the goods and services of that market arise.

Now with there being near zero cost of distance on the internet the spere of influance is not restricted it’s as wide as the internet. And this has given rise to “first to market is the winner who takes all” provided they don’t either drop the ball or alow others to tread on their patch

The problem with the internet is for intangible goods and services transportation costs are so small they are effectivly irrelevant when compared to other traditional costs such as taxation and labour so two effects occure,

1, Businesses become virtual and site their head offices in low tax nations.
2, Businesses site their production sites where the labour costs are lowest.

But for sovereign nations there is a problem what if a good or service is given for free? as is the norm for the big players in social networking etc etc. That is how do you raise tax revenue on it…

Even when a service is purchased by tradition the transaction takes place not where the customer is but where the service is billed from and the tax is payed where the transaction occurs

As we move more into an information economy the tax take will decrease except in those places which have low rates of tax. Companies with virtual head offices can put them in tax havens. Many tangible goods now have the ability to be intangable, due to 3D printers. You break a plate at home, you simply “print out” or “replicate” a new one. Even where you can not “print out” a product directly the economies of mass production tied to the intangables of information for customization wins. For instance look at Signal processing on the PC you used to have to buy seperate expensive self contained items such as data and fax modems, printers etc. Now you just buy the external interface and software on the PC drives it.

As time goes on and CPU power increases more and more of a product will become software and the interface will become more and more general in nature. This can be seen with the likes of Software Defined Radio, engine managment, and many “white goods” and “domestic entertainment” systems. We already see the likes of games consoles and printers being sold for less than their production and shipping costs, with the profits comming from “consumables”, in the case of printers the consumables are tangables and the same for some games consoles as well currently but this is changing to “online”. It will not be long before the printer manufactures catch on to the idea of various levels of software you “licence” too give you extra features etc to get low tax revenue to suplement the high tax revenue of physical consumables.

The internet has the advantage of currently alowing “legal smuggling” the question is how much longer will sovereign nations continue to take the revenue hit and worse for them seeing money move from the home economy to a foreign economy. Of the two the second is the most insidious because of “churn” where every unit of currency that stays in the home economy has around ten times it’s value in economic activity thus providing more home revenue. Once exported the unit of currancy provides churn and economic activity in what is effectivly a hostile nation strengthaning their economy at the expense of the home economy.

Most traditional Western nations are already seeing the effects of this re-balancing of wealth from their economy into what where considered to be third world nations.

Some countries have woken up and realised there are three things that a nation realy needs to survive, Control of raw resources, Control of energy supply and Control of “intellectual Property” and the wealth this control supplies.

Thus control of the movment and wealth involved with Intellectual Property is going to be seen as a very high priority in nations that have squandered their raw resources and energy sources.