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19 April 2009
A Penny For Your Thoughts The Pirate Bay judgement in Sweden last week, in which the four leaders of
the download facilitation site were sentenced to one year in prison and ordered
to pay SEK30mn (USD3.56mn) in damages (they have appealed), is a victory for
the established music distribution industry, but it is just one skirmish in
a long-term war which the old-style providers cannot win. A much more significant
event during the week was the French National Assembly's rejection, against
the wishes of the government, of the 'three strikes and you're out' law which
would have required ISPs to switch off persistent download offenders. Just as
French parliamentarians refused to bow to the authoritarian agenda of the old
guard, so in New Zealand recently a popular outcry stopped the government from
bringing in a similar law.
It was time that the received wisdom of the sanctity of 'the rights of copyright
holders' received a jolt. In recent years, legislators around the world have
been gaily extending copyright periods, introducing 'droits d'auteur', slapping
fees (taxes) on the re-sale of art works and so on. These rules are anti-democratic
and anti-cultural, on a level with book-burning, and are testament to nothing
other than the lobbying power of the established publishing and distribution
industries.
Copyright and royalty laws and structures are mostly of very modern provenance,
and are a direct result and reflection of the particular distribution systems
that have grown up. Although the Romans issued copyright-style privileges to
booksellers, copyright in the written word didn't really have much of an impact
until well after the invention of printing, and composers didn't start getting
royalties until the mid-19th century. Recent as they are, however, it is absurd
to try to translate these out-dated concepts into the new world of Internet
distribution.
That is not to deny the rights of originators, and even to some extent distributors,
to be rewarded for their labours; it is just to say that the current model is
dead, and needs to be thrown out, lock, stock and barrel.
As in so many other spheres of economic activity, the Internet is disintermediating
the middle-men, giving the end-consumer direct ways of accessing and enjoying
the words and music she wants. That much is obvious: what is missing, or at
least unclear, is the mechanism by which a market discovery mechanism can be
set up through which consumers can reward originators. And originators themselves
will find that the destruction of the old models of content marketing will be
creative for them. There are substantial barriers to entry in many branches
of publishing, as anyone knows who has tried to find a publisher for a book,
or a recording company for a new group.
In the last analysis, words (literature), the graphic arts and music are types
of entertainment, and the Internet will enable direct delivery of a far greater
range of types of entertainment to users. Already in the first decade of the
21st century entertainment and sport are perceptibly merging into one another,
and this process will continue at a rapid pace during the decades to come, as
the world gets richer, and elective activities gradually come to replace more
and more of what had been known (for only 400 years after all) as 'work'.
Another notable feature of the ossification of the delivery of cultural entertainment
that has accompanied the growth of the copyright phenomenon in the last two
hundred years is the distinction between 'professional' and 'amateur'. Amateurs
might indeed sing at karaoke bars, but only professionals get paid for singing.
This distinction will break down during the next 20 years as content becomes
universally available through the Internet. Early examples of universal providers
such as YouTube have run into copyright problems, not surprisingly, but by 2020
technology will routinely enable commercial relationships to be set up between
any willing performer/consumer pair.
We can label such technology KISS (Kontent Identification and Subscription
System), which will come into universal use, even in China, with the value of
any given piece of content, regardless of its origin, calculated in real time
based on its audience, and charged to the (compulsory) account of the user.
Content providers (call them musicians, writers, artists, or whatever) will
still able to put their own price on a work, and to withhold it unless the price
was paid, but hardly anyone will do so, due to the difficulty of marketing what
cannot be seen or experienced in advance. Under the KISS system, the cost of
experiencing a piece of content is incurred incrementally during the experience,
so that if after two seconds you know you hate what you are experiencing, you
just switch it off, and it has cost you very little or even nothing.
KISS technology can be applied to all forms of entertainment, including music,
books, magazines, blogs, news, football, painting, and a range of new art-sport-forms
which will develop under the stimulus of the new media, such as virtual beach
volley-ball, which can be either watched (you pay), or participated in (you
get paid).
One useful by-product of KISS will be the creation of an objective measure
of an individual's 'contribution' to the common weal; and if couch potatoes
come under attack in due course in the way that first smokers and now drinkers
and fatties are being ostracized, it will be those individuals with high KISS
ratings who get the best treatment in society and privileged access to the scarce
resources of our threatened planet. Scary? Not really: it's just a way of redefining
money for the coming post-capitalist world.
You have been
reading an entry on the following blog:
UK Chancellor George Osborne has unveiled plans for a new Office of Tax Simplification.
The UK tax code - a somewhat amorphous concept since what is included depends
on what you choose to call a tax - is said to be around 30,000 pages long. Again
that begs the question of what you call a page, what size type, how many lines
etc etc. Anyway, no-one questions that there is too much tax legislation, and
every annual Finance Act adds another thousand pages or so. Even tax practitioners,
who you would think might benefit from complex tax legislation, are complaining
that it has become impossible to answer straightforward questions from their
clients. And the Inland Revenue has taken to making up the rules as it goes
along, for instance on tax residence, probably thinking to itself that since
no-one knows what the law actually says any more, it may as well use whatever
interpretation suits its purposes, which, surprise, surprise, is usually to
extract more tax.
The UK is not alone in having an overgrown tax code. In the USA, no-one even
seems to know how long the Tax Code really is. It has capital letters because
unlike in the UK, there is something called the Tax Code, and you can even buy
a printed copy of it from the government for a mere thousand dollars. President
George W Bush said: "The tax code is a complicated mess. You realize, it's
a million pages long." Most estimates though are down in the tens of thousands
of pages. One of the problems in the United States is that Congress quite frequently
tacks tax legislation on to other bills, being very often the only way of getting
it through. Then of course there is State-level tax legislation as well.
For there to be any chance of simplifying and shortening the tax code in an
advanced country like the US, the UK, France or Germany, you would first of
all have to understand why tax legislation grows like Topsy, and the answer,
inconveniently, lies in the word 'Democracy', ably assisted by public choice
theory. Getting and keeping political power nowadays means taking the part of
the innumerable groups, factions and interests that make up your constituency,
whether that be a small patch of countryside (for a local councillor) or a whole
nation (for the leader of a national political party). And the first thing that
any group wants from its politicians is to pay less tax, whether the group is
the motoring public, cyclists, commuters, train motormen (sorry, motorpersons),
car manufacturers, gas station operators or bus companies.
And in that microcosm of just one part of human life (getting to work) you
can immediately see the problem: these seven constituencies have conflicting
interests from a fiscal perspective. Some people belong to more than one of
those groups, as well. It's impossible to optimize a tax system to please everyone
all the time; the best you can do is to please some of the people some of the
time. But that doesn't stop politicians from trying. In the USA, where the system
is best developed (and the tax code is longest) the game is famously played
with 'pork', or 'earmarks', the little add-ons to a bill in progress that secure
the votes of enough legislators to get the bill through. Then it has to go to
the other House, and perhaps back again, each time gaining more weight. Certainly
you could never have a saying in the USA that 'a rolling bill gathers no pork'.
What is to be done, then? Abolish democracy? As Winston Churchill said: 'Democracy
is a very bad system. But all the others are worse.' No, we can't do that. So
what we do is to invent new quangos called The Office of Tax Simplification
or similar. Both Bush presidents did it; so did Bill Clinton. The only reason
that President Obama hasn't done it yet is that he has been too busy making
the Tax Code longer. Just give him time.
Reducing the number of countries would work, in terms of reducing the total
amount of tax legislation, and possibly the total number of tax lawyers. The
Romans proved that; but empire-building has become unfashionable lately. In
fact it's going in the opposite direction: in the UK, regions like Scotland,
Wales and Northern Ireland are all becoming more rather than less independent,
and along with that independence goes tax-raising and spending power, with,
yes, you guessed it, brand new regional tax codes.
Flat taxes work, too, and are even efficient at optimizing tax-gathering; but
they are a non-starter in advanced democracies. The new, Eastern European members
of the European Union got away with introducing them ten years ago because clever
Harvard-trained economists slipped them through before domestic politicians
had cottoned on to the usefulness of a bulky tax code. They are learning quickly,
now, and one by one the countries with flat taxes are undermining or abandoning
them.
So there it is: fat tax codes go along with fat people as shining achievements
of our civilization. You'll just have to learn to love them.
So here I am, in January 2011, the 25-year-old scion of an august European banking
family based in London, fresh out of Harvard Business School, and my Dad, who
is still Chairman, wants me to get some hands-on experience of actually running
a business before he steps down in a few years' time. So he's putting up USD100m
as start-up capital and he is suggesting I specialize in family offices (that's
the name given to investment management partnerships which look after the wealth
of individual families). It's an area we've never majored in, and Dad thinks
we ought to get it going. I can't disagree with that; it's probably been the
fastest-growing sector of wealth management in the last ten years, and we're
missing out big time.
Although the firm has its HQ in London, we also have substantial capital and
offices in New York and Zurich, and of course we have branches all over the
place. So Dad's first question to me (and my first
question to myself) is: "Where are you going to put the firm?"
The criteria must include:
Good communications, not just in terms of telecoms, but also good airline
connections, because clients are going to want to visit us.
Availability of qualified staff.
A good tax environment for investment purposes; we aim to have at least
several billion under management within a few years.
Now of course we could separate the sales side, the meeting and greeting, from
the investment management. But clients don't like that very much: they want
to look into the eyes of the person they are going to trust with half a billion
dollars of their wealth. So in the end, the choice of HQ cities is quite limited.
London, and New York, perfect as they are for meeting clients (and I would
have all the advantages of our existing offices and support services) can be
ruled out straightaway. The US Restoring American Financial Stability Act has put
a strait-jacket around banking operations and staff remuneration, and in Europe
the Capital Requirements Directive is even worse. No-one wants to work under
those sorts of rules, and no bank would willingly submit itself to legislation
which will double or treble the amount of capital you have to hold. Dad says
that if he wasn't already near retirement he'd move the whole operation lock,
stock and barrel to Hong Kong or possibly Zurich. And he says that there isn't
a senior banker in Europe or America who isn't asking himself the same questions.
Zurich is possible. The problem is that Switzerland is locked into a deadly
embrace with the EU, and little by little all its financial freedoms are being
whittled away. After what happened with UBS and its US clients it's a tough
sell to persuade clients into Zurich if they're not already there, and then
they're probably locked up with someone else.
So, a bit reluctantly, because of the life-style, I have to decide against
Europe. There are one or two outliers, Canada for instance, which hasn't (yet)
given in to the G20's demands. Toronto isn't a bad place to be. Then there are
the big International Financial Centres (not allowed to call them 'offshore'
any more!) like Panama, Cayman and Jersey. We'll use them, of course, for fund
management, but the skill pools are quite limited and they are ruled out on
travel grounds. They have something called fog in Jersey, and you've got the
EU breathing down your neck.
So in the end it's a no-brainer, and it's called Hong Kong. Low or no tax,
plenty of banking professionals, good connections, and right next door to the
biggest source of new wealth that there is.
"Of course," said Dad. "I knew that would be the answer, but
you had to think it through for yourself." He reflected a moment: "It's
a pity the European Parliament and the Congress didn't go through the same thought
process. As it is, they've signed a collective death warrant for their financial
sectors. Politicians!"
As he talked, I was looking for Mandarin lessons on my Blackberry.
Penelope Wise
Penny Wise but not Pound Foolish! But remember: I am not offering investment advice. My comments are just for your general information; I do not recommend investments, and you should take professional advice before entering any investment contract.
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