Copyright was designed around a particular copying technology – the printing press – just over three hundred years ago, and the technological change of the digital revolution means that it no longer works. It’s going to need to be completely replaced by a new mechanism by which creators get paid from those who benefit from their creations.
Copyright started in Britain – just after the Act of Union between England and Scotland, the Copyright Act 1710 (the Statute of 8 Anne c.19). In the seventeenth century, printing had been heavily restricted through guilds that prevented poaching of books from one printer to the other. An author would contract with a printer and the guild (the Stationers’ Company in London, for example) would ensure that no other printer could produce an unauthorised edition of the book.
However, the Stationers’ Company’s legal monopoly was abolished in 1695. For fifteen years, any printer could legally print any book they wanted. Authors petitioned Parliament to redress the grievance that once their book was published, a second printer could produce an unauthorised edition without paying the author. After the Act of Union, Parliament had jurisdiction over the printers in Edinburgh as well as London and brought in the first copyright –that no book could be printed without the author’s consent for 14 years after first publication, renewable for a further 14 years provided the author was still alive at that point.
Copyright was based on the fact that printing presses were big physical objects, and that printing books was something only done by large, commercial businesses. Indeed, in 1710, copyright only restricted the reproduction of copies of a book through a printing press; a handwritten copy was not prohibited. The fact was that when a reader bought a book, some part of that price went to the author; this provided the great advantage that no particular regulation was in respect of the readers.
Until the 1970s, the same general principle worked well. Copyright was extended from just books to include sheet music, photography, other visual arts, dramatic works, sound recordings, computer software, and so on.
In all of these cases, the great strength of copyright law was that the only people with the ability to produce a significant number of copies were large commercial enterprises. Indeed, where small-scale copying was possible by ordinary consumers, it was usually either formally legal (e.g. hand-written copies from books), or the law was completely ignored and creators did not sue. For example, the playing of music in a public performance is an activity restricted by copyright law, but traditional pubs have had folk songs played on a “Joanna” (piano) for decades, until PRS started chasing them for licensing fees.
There were a small number of problematic cases, but most of those were more problematic in terms of permission than payment. The most obvious in that respect is radio play of recorded music. If each radio station were obliged to contract separately with every recording artist and every songwriter for permission to play their music on the radio, then very little music would be played on the radio. Governments worldwide, including in the UK, stepped in and set up a mandatory licensing regime for music on the radio, so the radio station simply records the songs they played and sends off a cheque to the PRS and PPL and performers and songwriters collect those cheques. The amount paid per song is on a standardised scale, rather than individual negotiations. Even then, consumers still didn’t have to concern themselves with copyright; the people who did were large concerns for whom copyright represented a major part of their business.
At this point – let’s say 1970 – there was a reasonably consensual way that copyright worked; large operations, such as publishers, printers, record companies, radio stations, concert halls, theatres, cinemas, TV stations, etc would negotiate with individual creators to buy a licence to that creator’s work; the large operations would then licence to each other as necessary. Small businesses, consumers, and even large businesses for whom copyright was not a major part of their business did not pay any attention to the laws; if they were infringing (e.g. a restaurant playing music to their customers) then blind eyes were often turned.
Then, in the seventies, along came two innovations that started the breakdown of this consensus. Both were about ten years old in 1970, but neither was all that common until the seventies. The two innovations were the compact cassette and the photocopier. Many of us remember the “Home Taping is Killing Music” campaigns of the early eighties. That was the very first time that ordinary people were accused of copyright infringement – and even that, we were being asked to buy the album out of our commitment to music, not because it was illegal to copy it for free (the “and it’s illegal”) was tiny by comparison.
Fewer people will remember the campaigns by book and journal publishers aimed at photocopiers, as they were mostly aimed at librarians, school secretaries, teachers and academics – but they were no less intense, and much more inclined to refer to the legal angle than to the appeal to one’s love of the creators.
As early as the late seventies, both of these technical innovations were being used to repurpose creative works beyond the original creator’s intent – mix tapes and photocopier anthologies are directly analogous, both illegal, and both formed part of the culture in the eighties.
The digital era of consumer copyright infringement is much better known that this earlier period. I don’t think I need do much more than mention the major names – Napster, DeCSS, DMCA, The Pirate Bay – in file sharing.
Over the same period, copyright holders have become much more rigid about enforcing their rights. Because they were enforcing directly against consumers, in home-taping and file-sharing cases, they came to regard the reputational damage from enforcing against small non-copyright businesses as being acceptable, which is why hairdressers’ who play radio or CDs to customers are expected to pay for PRS and PPL licences now, where they weren’t before.
This combination is a fundamental change to the whole nature of copyright enforcement. Before about 1970, copyright enforcement was primarily against businesses for whom copyright was a major part of their business – like radio stations. Everyone else did not have to take it seriously. By, say, 2000, most ordinary people and ordinary businesses had to deal with copyright seriously; computer software licensing, copy-restrictions on CDs and DVDs, Napster being sued to stop filesharing; all of these meant that copyright mattered to consumers, really for the first time in the three centuries of copyright.
There used to be a bottleneck in the bulk production of copies – you needed large-scale equipment, which usually meant a large business that concentrated on that activity, at which point it was comparatively easy to clamp down on infringement. Copyright infringement cases were suing rich businesses for lots of money.
The seventies innovations of music cassette and photocopier made it possible to create large numbers of copies one at a time, but only by copying from a friend. The nineties innovation of anonymous file-sharing made it possible to create copies from anyone else who had a copy and was prepared to share it – so once one person anywhere in the world who had bought a copy decided to share to, anyone could get a copy that way without having to go to a bulk copy production business.
Now, for copyright law to be enforced, it’s no longer sufficient to enforce it against a relatively small number of wealthy businesses that regard copying as their principal business – but to enforce it against the great bulk of citizens, for whom copying is an incidental part of their lives.
Moreover, merely using digital data requires copying it, so abiding by the law is not as simple as never making a copy; if you never made a copy, then no portable digital music player would ever work – so that’s the end to the iPod. Without making a copy, you can’t install software; without making a copy, you can’t read a website, without making a copy, you can’t use any of the modern digital systems.
The Digital Economy Act 2010, with its clauses to kick people off the internet who share copyright files without a license, is an attempt to halt this flood, but the problem is that the bottleneck is gone – that the point of making a copy is no longer the right place at which to apply a law.
Copyright – requiring anyone who makes a copy to obtain a license to do so from the original copyright holder – is utterly impractical. Software comes with End User Licence Agreements (EULAs) which almost everyone accepts unread – the problem there is that most of us assume that all of the EULAs are more or less the same, so consumers get very offended when they discover something unusual in the EULA. When you buy a CD, you don’t sign a licence agreement; but there’s an implicit licence to make a backup copy and to transfer it to an iPod (other portable digital music players are available). What this shows is that the concept of copyright – that copying is something done by big publishers – is wrong in the modern era. We need to rip up the whole concept and start again.
I don’t have a replacement for copyright. A replacement is needed to restore the social contract that creators should be paid by those who enjoy their creations, but copyright is not it. We’ve had one good idea on this subject in 300 years – an idea so good it lasted 250 years before it started to break down. It’s time we had a new one.
Tax simplification
The GOM did quite a bit of work on simplifying taxes - cutting income tax and (more importantly) slashing customs duties and other such taxes.
We currently have a hugely complicated tax system in the UK; much of the complications are attributable to trying to address the deficiencies of Income Tax.
The problem with Income Tax is that it's only a tax on income and it assumes that income can be attributed to a particular point in time. That is, I get a payslip once a month and the income on that slip can be attributed to that month - and therefore taxed on that basis. This works well for people whose primary or sole source of income is a salary or wages from employment. It works much less well for people who earn money on a contract-to-contract basis, and starts to break down completely when we get to business owners and especially people with substantial capital assets.
Take the buy-to-let movement here in the UK. The core theory was that you could borrow money on a mortgage to buy a house, then the rental income from letting it would cover the interest aspect of the mortgage and that you could then sell the house and profit from the rise in prices.
If you treated the sale as income and the purchase as negative income (ie a tax deduction) then you get a nonsensical position where there is a huge tax liability at the end and much more deduction than you can usefully use at the purchase stage. For example, you earn £50,000 a year and buy a BTL house for £100,000 - congratulations, you earned -£50,000 that year, but you can't pay negative tax on your negative income, so you just pay zero (saving you about £10,000 in tax). A few years later, you sell the house for £110,000 and now you have to pay income tax at 40% on the £110,000, ie £44,000. You can't go back and pick up that £50,000 loss from the past to offset against the tax, so your profit of £10,000 results in a net increase in tax of £34,000, or a net loss of £24,000. So that doesn't work.
If you regard the change in capital values as not being income at all, then it's tax free. But you have created an enormous tax loophole as it's pretty straightforward with investments to convert between income and capital gain1.
So, of course, the Government creates another tax - Capital Gains Tax, which taxes the capital gain, ie the difference between the purchase price and the sale price. In the example from before you pay your standard £10,000 income tax on your £50,000 income each year, and you pay 25% CGT on the £10,000 profit when you sell, ie £2,500.
However, there's another "trick" to apply - if you don't sell, then you don't have to pay tax at all. When you die, your inheritors get the house and don't have to pay the CGT going back to when you bought it. But when they sell, the basis price (the purchase price) is the value that the house had when they acquired it, ie the capital gain that it underwent under your possession is tax-free. So the government brings in Inheritance Tax.
And all three taxes are at different marginal rates, have different allowances, etc. And I still haven't got into National Insurance Contributions - which are a tax on earned income but not on unearned income. That is, people that work for a living pay more tax than someone who can live on a trust fund. Is it just me that thinks that should be the other way around?
The USA has, for 2010 only, abolished Inheritance Tax2. However, they've actually increased the tax take (long-term) on estates of people who die in 2010. This is because the CGT basis is not reset on inheritance - ie if you inherit something in 2010 and sell it later, you pay CGT on the increase in capital value from when it was bought, instead of the increase since your inherited it. The CGT, because there are fewer exemptions, adds up to a much bigger tax bill - it's just going to be deferred until these assets are sold. This was a result of a screw-up in 2001, but it's actually a pretty clever idea. All they need to do is to make liquid assets (cash) acquired through inheritance taxable as income (only non-liquid assets can be taxed as capital gains later on) and you've got rid of one whole tax, and simplified everyone's life. That's one swathe of tax planning lawyers and accountants out of jobs and able to do something more productive with their lives.
The next stage would be to merge CGT into income tax; not the stupid way I suggested above, but sensibly. If you sell an asset, then you should count the capital gain on that asset as income3. That would instantly remove the problem of income tax and CGT rates being different and also remove a whole swathe of tax planning and tax avoidance - if it doesn't matter whether it's income or capital gain, there's no point trying to convert one into the other. Given that capital gains come in big lumps very occasionally, whereas income tends to be more even year-to-year, you should be able to use any unused income tax allowances from all the years that you owned the asset against the tax liability - and I'd treat paying a lower rate as a kind-of allowance, ie it enables you to pay only 20% on the first £37,400 of your income, so if your (taxable) income was £17,400, but there was a capital gain made during that period then you'd be able to reduce the tax rate on £20,000 of that capital gain from 40% to 20%. Hopefully, you get the principle. The unusued allowances and unused lower-rate entitlements would need to be index-linked until they get used up.
I hasten to point out that this would be a huge change to the tax system, which you could not bring in overnight - there would need to be a very careful study of the exact impacts, especially as this would be an effective big reduction in tax allowances (remember, I've just completely scrapped the personal annual CGT allowance). Obviously there would have to be a compensatory increase in the income tax personal allowance, and probably a widening of the rate bands to prevent this being a tax increase. The net effect would be a big shift in the emphasis of taxation to wealth and away from income, especially away from earned income. That should provoke an increase in economic activity.
I'd like to study this idea in a lot more detail before even proposing it, but making taxes simpler by merging them together, and removing the incentives for accountants and lawyers to spend a lot of time and talent on shifting money from one place to another to minimise tax liabilities is something that I would hope any future Chancellor would spend a lot of time and Civil Service resources on.
1 For example, take shares. Conventionally, the dividend is income and the change in share price is capital gain. But you can create an investment trust that purchases shares with the dividend. The trust would not itself pay tax (if structured properly) but the value of the shares in the trust (which pay no dividend) would rise with the values of the underlying assets. That means that there is a capital gain in the trust which was income in the original dividend. There are plenty of other such techniques; any good tax lawyer or accountant can show you several ways to convert income into capital gain and more to do the reverse.
2 They call it Estate Tax, but it amounts to the same thing. It comes back in 2011.
3 You'd still have to keep track of the basis values, but it's still a whole lot simpler.
We currently have a hugely complicated tax system in the UK; much of the complications are attributable to trying to address the deficiencies of Income Tax.
The problem with Income Tax is that it's only a tax on income and it assumes that income can be attributed to a particular point in time. That is, I get a payslip once a month and the income on that slip can be attributed to that month - and therefore taxed on that basis. This works well for people whose primary or sole source of income is a salary or wages from employment. It works much less well for people who earn money on a contract-to-contract basis, and starts to break down completely when we get to business owners and especially people with substantial capital assets.
Take the buy-to-let movement here in the UK. The core theory was that you could borrow money on a mortgage to buy a house, then the rental income from letting it would cover the interest aspect of the mortgage and that you could then sell the house and profit from the rise in prices.
If you treated the sale as income and the purchase as negative income (ie a tax deduction) then you get a nonsensical position where there is a huge tax liability at the end and much more deduction than you can usefully use at the purchase stage. For example, you earn £50,000 a year and buy a BTL house for £100,000 - congratulations, you earned -£50,000 that year, but you can't pay negative tax on your negative income, so you just pay zero (saving you about £10,000 in tax). A few years later, you sell the house for £110,000 and now you have to pay income tax at 40% on the £110,000, ie £44,000. You can't go back and pick up that £50,000 loss from the past to offset against the tax, so your profit of £10,000 results in a net increase in tax of £34,000, or a net loss of £24,000. So that doesn't work.
If you regard the change in capital values as not being income at all, then it's tax free. But you have created an enormous tax loophole as it's pretty straightforward with investments to convert between income and capital gain1.
So, of course, the Government creates another tax - Capital Gains Tax, which taxes the capital gain, ie the difference between the purchase price and the sale price. In the example from before you pay your standard £10,000 income tax on your £50,000 income each year, and you pay 25% CGT on the £10,000 profit when you sell, ie £2,500.
However, there's another "trick" to apply - if you don't sell, then you don't have to pay tax at all. When you die, your inheritors get the house and don't have to pay the CGT going back to when you bought it. But when they sell, the basis price (the purchase price) is the value that the house had when they acquired it, ie the capital gain that it underwent under your possession is tax-free. So the government brings in Inheritance Tax.
And all three taxes are at different marginal rates, have different allowances, etc. And I still haven't got into National Insurance Contributions - which are a tax on earned income but not on unearned income. That is, people that work for a living pay more tax than someone who can live on a trust fund. Is it just me that thinks that should be the other way around?
The USA has, for 2010 only, abolished Inheritance Tax2. However, they've actually increased the tax take (long-term) on estates of people who die in 2010. This is because the CGT basis is not reset on inheritance - ie if you inherit something in 2010 and sell it later, you pay CGT on the increase in capital value from when it was bought, instead of the increase since your inherited it. The CGT, because there are fewer exemptions, adds up to a much bigger tax bill - it's just going to be deferred until these assets are sold. This was a result of a screw-up in 2001, but it's actually a pretty clever idea. All they need to do is to make liquid assets (cash) acquired through inheritance taxable as income (only non-liquid assets can be taxed as capital gains later on) and you've got rid of one whole tax, and simplified everyone's life. That's one swathe of tax planning lawyers and accountants out of jobs and able to do something more productive with their lives.
The next stage would be to merge CGT into income tax; not the stupid way I suggested above, but sensibly. If you sell an asset, then you should count the capital gain on that asset as income3. That would instantly remove the problem of income tax and CGT rates being different and also remove a whole swathe of tax planning and tax avoidance - if it doesn't matter whether it's income or capital gain, there's no point trying to convert one into the other. Given that capital gains come in big lumps very occasionally, whereas income tends to be more even year-to-year, you should be able to use any unused income tax allowances from all the years that you owned the asset against the tax liability - and I'd treat paying a lower rate as a kind-of allowance, ie it enables you to pay only 20% on the first £37,400 of your income, so if your (taxable) income was £17,400, but there was a capital gain made during that period then you'd be able to reduce the tax rate on £20,000 of that capital gain from 40% to 20%. Hopefully, you get the principle. The unusued allowances and unused lower-rate entitlements would need to be index-linked until they get used up.
I hasten to point out that this would be a huge change to the tax system, which you could not bring in overnight - there would need to be a very careful study of the exact impacts, especially as this would be an effective big reduction in tax allowances (remember, I've just completely scrapped the personal annual CGT allowance). Obviously there would have to be a compensatory increase in the income tax personal allowance, and probably a widening of the rate bands to prevent this being a tax increase. The net effect would be a big shift in the emphasis of taxation to wealth and away from income, especially away from earned income. That should provoke an increase in economic activity.
I'd like to study this idea in a lot more detail before even proposing it, but making taxes simpler by merging them together, and removing the incentives for accountants and lawyers to spend a lot of time and talent on shifting money from one place to another to minimise tax liabilities is something that I would hope any future Chancellor would spend a lot of time and Civil Service resources on.
1 For example, take shares. Conventionally, the dividend is income and the change in share price is capital gain. But you can create an investment trust that purchases shares with the dividend. The trust would not itself pay tax (if structured properly) but the value of the shares in the trust (which pay no dividend) would rise with the values of the underlying assets. That means that there is a capital gain in the trust which was income in the original dividend. There are plenty of other such techniques; any good tax lawyer or accountant can show you several ways to convert income into capital gain and more to do the reverse.
2 They call it Estate Tax, but it amounts to the same thing. It comes back in 2011.
3 You'd still have to keep track of the basis values, but it's still a whole lot simpler.
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