Let a thousand Chaos bloom

When Chao introduced himself to our Small Bets community I didn’t threaten to sue the poor guy.. That would be totally ridiculous, right? Instead, I gave him a warm greeting and pointed out we had the same name. He kindly adjusted his user handle and any potential conflict was amicably averted.

And yet, if I start selling a new device and call it Chao’s iPhone, I’ll probably get sued to the poor house. Again, it would be totally ridiculous for me to do that, right?

I am musing at the incongruity of these two kinds of ridiculousness.

Intellectual property is a social construct. It is basically society that bestows a monopoly to the property owner such as the exclusive use of “iPhone” for our well-loved fruit company. And it is ultimately our government's own monopoly on violence that enforces this monopoly. Given all these benefits from society, wouldn't it be fair to pay a fee to enjoy the fruits of the monopoly? 

What do an Irish Sandwich, a Singapore Sling or Swiss Cheese have in common? No, they’re not my favorite ingestibles but rather they are all colorful international tax avoidance schemes. Corporate taxes have been going down over the years, as companies have figured out how to ascribe more and more of their profits to low taxation countries¹. Low corporate tax revenues has reached such dire levels that Treasury Secretary Janet Yellen is trying to broker a minimum corporate tax rate of 15%, 2.5 times lower than the top federal income tax bracket.

Just as real estate property rights are crucial to our capitalistic society, many argue that intellectual property (hence the name) also confer similar benefits. But if intellectual property is to be treated like real property, then shouldn’t it too be taxed like real estate?

There are states with no sales tax and there are states with no income tax, but there are no states that seduce us with no property tax. This is because property taxes offer numerous advantages that can also apply to intellectual property (IP) taxation:

1. Unlike corporate income tax, IP taxation is hard to evade and offers a consistent revenue stream. (eg. Apple would continually want governments to help enforce their trademark of “iPhone”)

2. It is progressive and increases equality. Intellectual property holders, and the ones willing to pay for such protection are usually more well-off

3. It is transparent and easy to understand. Just like real estate, the state offers property holders protection and enforcement in exchange for a fee. Minimally, we need a bureaucracy, courts and law enforcement to uphold intellectual property rights.That is an easily understood and accepted narrative.

Of course, I’m not advocating that every trademark be taxed. There should be a levy only if the trademark holder chooses to enlist state protection. If something is not income producing (like my Discord handle “Chao”), surely there’s an amicable way to disambiguate or settle without the heavy hand of the state? Let a thousand Chaos bloom!

But wouldn’t an IP tax stifle innovation?

Yes, it may. Any tax has a way of reducing economic activity. But we should view this new tax as a replacement of another tax. Is IP tax more harmful than say raising corporate taxes? The arguments that IP rights promote innovation are way exaggerated (that is a long topic for another day), but I think it is least arguable that trademarks promote innovation. How does Apple having sole ownership of the term iPhone promote better living? Pay a fee or let a thousand Chaos bloom! 

Like real estate, it may be hard to assess an intellectual property’s value and thus tax rate. We could rely on professional assessments. We could also think out of the box and come up with novel strategies. For example, you’ve probably heard that the best way to divide a pie between 2 parties is to have one attempt to cut it in half, and for the other to choose their preferred “half”. We could apply this simple game theory principle and have the right holder give a valuation of their intellectual property, but allow the property to be purchased by any other party for any price above that given value. The rights holder then has to pay a tax of say 1% of the given valuation every year.

I am not a lawyer nor an economist. But experts are sometimes so polarized and ingrained in their perspectives that everything is intractable. Perhaps, it’s time to entertain left field ideas from laypeople? Let me know your favorite out of the box ideas below:

1.

Kristin’s Substack

taught me this is technically known as “transfer pricing”

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Thanks to

Advice you don't need

Principal Components

and

Chris Wong

without the encouragement and feedback, I probably wouldn’t have published this!
Photo credit: Alejandro Mallea