Free Software vs. the Tax Man

by on May 5, 2008 · 30 comments

Slashdot recently linked to this comparison of the cost of Windows in Brazil and the US. This brings to mind a point I think I’ve seen Mike make: beyond the general point that libertarians should celebrate free software because it’s an example of non-coercive production of public goods, libertarians also have reasons to like free software because it’s more resistant to the coercive power of the state. When software is produced by a commercial company and sold in the marketplace, it’s relatively easy for the state to tax and regulate it. Commercial companies tend to be reflexively law-abiding, and they can afford the lawyers necessary to collect taxes or comply with complex regulatory schemes.

In contrast, free software will prove strongly resistant to state interference. Because virtually everyone associated with a free software project is a volunteer, the state cannot easily compel them to participate in tax and regulatory schemes. Such projects are likely to react to any attempt to tax or regulate them is likely to be met with passive resistance: people will stop contributing entirely rather than waste time dealing with the government.

Hence, free software thus has the salutary effect of depriving the state of tax revenue. But even better, free software is likely to prove extremely resistant to state efforts to build privacy-violating features into software systems. CALEA requires telecom infrastructure to include hooks for eavesdropping by government officials, but it will prove extremely difficult to get similar hooks added to free software. No one is likely to volunteer to add such a “feature”, and even if the state added it itself, it wouldn’t have any realistic way to force people to use its version.

  • http://duartes.org/gustavo/blog Gustavo Duarte

    That’s a good point, and one that a lot of people missed because they were too wrapped up into whether the cost of licenses was “Microsoft’s fault” (which is both irrelevant and also not something I said).

    Especially in country with a punitive tax burden like Brazil (revolting really), FOSS works around the issue beautifully.

    Anti-piracy organizations sometimes quote the “benefits to the economy” that massive license purchases would generate by citing the increase in tax revenues. This is such a ludicrous argument – it is equivalent to raising taxes on the most productive sectors of the economy on top of an already crushing tax rates.

    Anyhow, I actually do hope that MS succeeds in competition and that we end up with a good mix of FOSS/MS/Google and other players.

    cheers

  • http://duartes.org/gustavo/blog Gustavo Duarte

    That’s a good point, and one that a lot of people missed because they were too wrapped up into whether the cost of licenses was “Microsoft’s fault” (which is both irrelevant and also not something I said).

    Especially in country with a punitive tax burden like Brazil (revolting really), FOSS works around the issue beautifully.

    Anti-piracy organizations sometimes quote the “benefits to the economy” that massive license purchases would generate by citing the increase in tax revenues. This is such a ludicrous argument – it is equivalent to raising taxes on the most productive sectors of the economy on top of an already crushing tax rates.

    Anyhow, I actually do hope that MS succeeds in competition and that we end up with a good mix of FOSS/MS/Google and other players.

    cheers

  • http://libregamewiki.org Kiba

    I don’t think characterizing free software as public good is accurate.

    You could convince the maintainers of free software to write features, however you’re really convincing them to modify their own copy that will later be distributed to you.

    It is like convincing some company to change the recipes of their coffee and then distributing the results to you,

    You own free software and you can exclude people from using your copy of that software just like you own that coffee you got for free and can exclude people from drinking that coffee. However if you let other guys use it, you can’t use it at the same time. Thus it make softwares a rivalrous and excludable private goods.

    But since it is so easy to copy, there’s really no problem like there’s no problem that the guy next to me drinking the same brand of coffee because he got his own.

    With the magic of infinite goods, the problem of private goods become non-existence.

  • Tim Lee

    Kiba, I think our disagreement might just be a semantic issue. My point was simply that software is non-rivalrous and (once it’s been distributed) non-excludable, and as a consequence some economic models predict it would be under-produced by the market. The free software community is one example of how this potential problem can be overcome without government involvement.

  • http://bennett.com/blog Richard Bennett

    Given that free software has value to the user, it’s not inconceivable that the IRS could make you pay a tax on it, much like baseball players now have to pay income tax on the free tickets given them.

    Wouldn’t that be a chuckle?

  • http://libregamewiki.org Kiba

    I don’t think characterizing free software as public good is accurate.

    You could convince the maintainers of free software to write features, however you’re really convincing them to modify their own copy that will later be distributed to you.

    It is like convincing some company to change the recipes of their coffee and then distributing the results to you,

    You own free software and you can exclude people from using your copy of that software just like you own that coffee you got for free and can exclude people from drinking that coffee. However if you let other guys use it, you can’t use it at the same time. Thus it make softwares a rivalrous and excludable private goods.

    But since it is so easy to copy, there’s really no problem like there’s no problem that the guy next to me drinking the same brand of coffee because he got his own.

    With the magic of infinite goods, the problem of private goods become non-existence.

  • Tim Lee

    Kiba, I think our disagreement might just be a semantic issue. My point was simply that software is non-rivalrous and (once it’s been distributed) non-excludable, and as a consequence some economic models predict it would be under-produced by the market. The free software community is one example of how this potential problem can be overcome without government involvement.

  • http://bennett.com/blog Richard Bennett

    Given that free software has value to the user, it’s not inconceivable that the IRS could make you pay a tax on it, much like baseball players now have to pay income tax on the free tickets given them.

    Wouldn’t that be a chuckle?

  • http://gondwanaland.com/mlog/ Mike Linksvayer

    One place, in reply to one of your posts.

    Richard, that sure would be a chuckle, but awfully hard to accomplish — gifts with individual recipients aren’t much like free software.

  • http://gondwanaland.com/mlog/ Mike Linksvayer

    One place, in reply to one of your posts.

    Richard, that sure would be a chuckle, but awfully hard to accomplish — gifts with individual recipients aren’t much like free software.

  • http://enigmafoundry.wordpress.com/2008/04/12/jerry-brito-getting-upset-at-e_f-comments/ e_f

    Well, yes it is resistant to government interference, but it is also resistant to the corporate power structure, an even greater threat to our freedoms than governments.

  • http://enigmafoundry.wordpress.com eee_eff

    Well, yes it is resistant to government interference, but it is also resistant to the corporate power structure, an even greater threat to our freedoms than governments.

  • Timon

    Richard,

    Or what if software vendors start making antitrust claims against the megacorporations giving away open source products at below cost? (Or anti-dumping!) BTW, is your networking company distributing Brainslayer’s GPL’d code? I know that has happened in the past, and I can just imagine the conversations with lawyers and marketers.

    I have always thought that the antitrust thing is likelier to work than the tax thing, because the solution to the tax collection problem is so diffuse whereas the antitrust claims could be made directly against IBM and Intel.

  • Timon

    Richard,

    Or what if software vendors start making antitrust claims against the megacorporations giving away open source products at below cost? (Or anti-dumping!) BTW, is your networking company distributing Brainslayer’s GPL’d code? I know that has happened in the past, and I can just imagine the conversations with lawyers and marketers.

    I have always thought that the antitrust thing is likelier to work than the tax thing, because the solution to the tax collection problem is so diffuse whereas the antitrust claims could be made directly against IBM and Intel.

  • http://www.codemonkeyramblings.com MikeT

    I think you severely underestimate just how easily the government can tax and regulate free software. All it has to do is pass a law assigning it a value, and then tax it. Furthemore, laws like CALEA are not inherently defeated by free software. All it would take would be additional regulations put into place.

  • http://www.codemonkeyramblings.com MikeT

    I think you severely underestimate just how easily the government can tax and regulate free software. All it has to do is pass a law assigning it a value, and then tax it. Furthemore, laws like CALEA are not inherently defeated by free software. All it would take would be additional regulations put into place.

  • http://www.allixdavis.eu Allix

    In a lot of European countries especially the Nordic countries, more tax benefits society for such things as universal health care, pensions , the education sector.

    A solution could be for free software projects and distros (which are not companies already )to set-up pay-pal or something similar accounts that go straight to the tax office.

  • http://www.allixdavis.eu Allix

    In a lot of European countries especially the Nordic countries, more tax benefits society for such things as universal health care, pensions , the education sector.

    A solution could be for free software projects and distros (which are not companies already )to set-up pay-pal or something similar accounts that go straight to the tax office.

  • http://bennett.com/blog Richard Bennett

    The anti-dumping angle is interesting, given that 70% of Linux code now comes from paid developers at HP, IBM, Sun, et. al. Seems to me that MS would have a case for attaching a price tag to it, and maybe for collusion as well.

  • http://bennett.com/blog Richard Bennett

    The anti-dumping angle is interesting, given that 70% of Linux code now comes from paid developers at HP, IBM, Sun, et. al. Seems to me that MS would have a case for attaching a price tag to it, and maybe for collusion as well.

  • Bah

    I think you severely underestimate just how easily the government can tax and regulate free software. All it has to do is pass a law assigning it a value, and then tax it.

    Seems like a free speech problem there. Code is speech.

  • http://enigmafoundry.wordpress.com/2008/03/05/rumours-of-the-death-of-the-newspaper-have-been-greatly-exaggerated/ enigma_foundry

    The anti-dumping angle is interesting, given that 70% of Linux code now comes from paid developers at HP, IBM, Sun, et. al. Seems to me that MS would have a case for attaching a price tag to it, and maybe for collusion as well.

    As regular Groklaw readers already know, some blockhead already tried that–it flopped. He even had to pay court costs, as his case was so legally unsound. It was in Indiana, I believe.

    In any case I don’t think taxing not-for-profit activity is right at all–it is interesting though, to see the depths that those who hate freedom and free software will go to try to stop what they don’t like.

  • Bah

    I think you severely underestimate just how easily the government can tax and regulate free software. All it has to do is pass a law assigning it a value, and then tax it.

    Seems like a free speech problem there. Code is speech.

  • http://enigmafoundry.wordpress.com eee_eff

    The anti-dumping angle is interesting, given that 70% of Linux code now comes from paid developers at HP, IBM, Sun, et. al. Seems to me that MS would have a case for attaching a price tag to it, and maybe for collusion as well.

    As regular Groklaw readers already know, some blockhead already tried that–it flopped. He even had to pay court costs, as his case was so legally unsound. It was in Indiana, I believe.

    In any case I don’t think taxing not-for-profit activity is right at all–it is interesting though, to see the depths that those who hate freedom and free software will go to try to stop what they don’t like.

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