How do you tax innovations?

Published August 31, 2021, 12:02 AM

by James Deakin


James Deakin

Eighteen months ago, Naomi, (not her real name) was living the dream. She was working as cabin crew on one of our airlines and traveling the world, putting away a little every month so she could finally afford her own condo. She had invested in a pre-sell development and was very excited about the scheduled turn over, which was pegged around July of 2020.

She was told that the lockdown would only be around two weeks. To flatten the curve, they said. But four months later, with flights grounded and the industry at its knees, the dream had turned into a nightmare and Naomi, along with many others, lost her job and could no longer afford to make her monthly installments. Also, with a balloon payment looming, property prices stagnant or dropping due to uncertainty, as well as reduced rental demand, Naomi was now facing bankruptcy.

Without a stable job, she couldn’t borrow money to pay her final lump sum payment. And with the real estate market already over saturated thanks to the pre-pandemic construction boom, she couldn’t sell the property for what she had already put into it, nor could she even rent it for enough to cover the payments. Basically, her asset had become a liability.

She tried everything from selling food online to freelance work on various sites like Fiverr, but when that just couldn’t cut it anymore, she turned to a site called OnlyFans, which is a London-based site that has been gaining popularity with adult content creators, as it allows them to monetize their content through subscription.

Robert, on the other hand, worked on a cruise ship. Like Naomi, he was also living his dream, traveling to new countries, meeting new people, learning new skills, all while being able to provide a comfortable living for his family back in Tarlac. He, too, was hit very hard by the lockdown and the cancellation of all cruises. And just like Naomi, and millions of other people in this frightening new economy, turned to various different income streams until he found an online game called Axie Infinity, which is a play-to-earn game that has exploded — especially among Filipinos —  during the pandemic.

So basically, after surviving their own emergency landings by themselves, without the assistance of their employer or government, Naomi and Robert had both effectively found an unlikely life raft in this economic storm and were clinging to it. It was nothing short of a miracle for either of them, and they realize how close they both got to drowning. But before they could even get their heads above water, both are now having to deal with someone else trying to jump into their lifeboat — the BIR.

Now let me just start off by saying, if you are earning income, you must pay taxes. Even Jesus said: “Render to Caesar the things that are Caesar’s” That is not what this is about. This is about the timing, the motivation, and the risks of becoming a purely extractive economy.

When the BIR went on a media blitz last week threatening social media influencers (including foreign influencers that film here and make money out of showing our country to their followers) as well as online sellers, play-to-earn gamers and now “Filipino sex workers” on the website Onlyfans with severe penalties and even jail time — not to mention a one million peso reward for anyone who snitches — makes them look like the school bully shaking down the new kids for their lunch money. And that is not a good look for any democratically elected government — especially one approaching another election period.

Yes we all know we must pay taxes. But governments need to  also understand that they must first allow people to innovate before they regulate. If they tax them relentlessly on the first step, we will never reach the next. And this is why so many seek a better life outside our shores because it feels like anything innovative and progressive that is not understood is either closed down or taxed to death, providing no incubation period for these innovators, or in the case Robert and Naomi, survivors.

In the book, Why Nations fail, written by Daron Acemoglu and James Robinson, it illustrates, through history, the danger of government institutions when they become extractive rather than inclusive and do not allow the free market to find its ground first before levying a tax on them.

And as we are entering a full digital economy, that is exactly what is happening here. And they need a new strategy. Instead of trying to tax online transaction, I highly recommend they read The Sovereign Individual: Mastering the Transition to the Information Age (available on kindle) as it provides a wealth of advice, not only for regulation and taxes, but more importantly, gives a snapshot of how the citizenry will interface with their governments.

“Governments will have little choice but to treat populations in territories they serve more like customers, and less in the way that organized criminals treat the victims of a shakedown racket. Because in the future, most wealth will be able to be earned from anywhere, and even spent anywhere, so governments that attempt to charge too much as the price of domicile will merely drive away their best customer,” the book said.

That is the cold, hard truth here. We are entering a new era.