The Digital Economy: It’s the Economy Stupid
The Digital Economy is The Economy as everything we do is digitised and everything will
soon be connected to everything else. Technology is vital to "Creating Better Ways of
Working Learning and Living" but technology is not sufficient. The connected economy will
not achieve its full potential without better ways of organising and managing people and
Technology has always fascinated mankind. In 2001: A Space Odyssey Stanley Kubrick
began with that memorable opening image of the primitive club in the hand of the apes and
then sent a chill down our spines as Dave Bowman asked the computer HAL:
“Open the pod bay doors, HAL”
And HAL replies
“I’m sorry Dave, I can’t do that”.
Growing up in the 60’s the Jetsons created for me an expectation of personal air travel
vehicles and then Maxwell Smart introduced me to the mobile phone. Being connected and
having intelligent useful devices was our expectation.
Our challenge today is to realise that vision. In this election year we need to hear from our
political leaders about how they will help us realise this vision for the connected economy.
Such a vision requires more than technology it requires systems that build trust in data,
applications and people, frictionless payment systems, online security so that people and
communities feel safe, new legislation to ensure that intellectual property rights work in this
connected economy and root and branch taxation reform of the global and national taxation
systems to meet the demands of the connected economy.
It will be the success of the Australian economy over the next 30 years and the quality of our
lives that will determine the real return we get from our investment in the NBN.
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The Emerging Connected Economy
It is often felt that we are at a dawn of a new age, that this moment has significance unlike
most others. Tom Stoppard wrote in Arcadia “A door like this has cracked open five or six
times since we got up on our hind legs” and goes on to highlight that relativity and quantum
mechanics has yet to provide A theory for Everything.
Yet even with Stoppard’s warning the impact of a truly connected world built on an internet
connecting billions of people and trillions of things does feel like a momentous, epic
achievement that will impact humanity for eons.
How will connecting billions of people and trillions of things benefit our world? What will we
achieve with our NBN at 1GB? With instantaneous access to all digitised content ever
created, in an interoperable world where everything we think of can be stored, shared and
reused, where existing data and applications can be mashed together so that you never
have to reinvent the wheel again. How will that change our lives?
The Internet of Things, sensors and actuators embedded in physical objects—from
roadways to pacemakers—linked through wired and wireless networks.
What we thought was for the future is here now. Pill-shaped micro-cameras already traverse
the human digestive tract to find sources of illness. Sensors on patients monitor vital signs to
avoid unplanned hospitalisations and expensive emergency care. Wireless farming
equipment linked to ground sensors, weather forecasts and expert advice will better farm the
Shazam tells us what song is playing on the radio and in two clicks you have it. Soon you will
be able to take a picture of that building in front of you, use the picture to search for its
property title, read about its heritage, identify any businesses located there and begin doing
business with them. When objects can both sense the environment and communicate,
they become tools for understanding complexity and responding to it swiftly.
Technology will extend our vision, hearing and memory, be able to provide constant health
checks and monitor our personal security.
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Soon freeways will automatically limit the speed of cars and may even be capable of
disabling errant or stolen vehicles. As proximity applications now tell us where to get a
coffee, motor vehicles will be able to warn nearby vehicles of hazards and emergencies.
Cars will be able to connect with other cars on freeways to form car fleets, much like bike
pelotons, to save 30% in fuel costs. But it will require electric cars to share the power
consumed between all the cars before anyone would take up pole position because who
would be willing to pay 30% more in fuel costs than the bunch of free loaders tailing you
down the freeway!
Zipcar provides a new business model turning a traditional car purchase into a payment for
service this time allowing you to pick up a car, the most appropriate for that journey, from the
nearest depot, use it and return it at the end of your journey.
New insurance products are emerging that require location sensors in cars so the price of
insurance is based on actual risks rather than based on proxies such as a driver’s age,
gender, or place of residence.
Smart meters will provide time-of-use pricing so people will shut down equipment during
peak charge times.
I like the way IBM puts it: Instrumented, Interconnected, Intelligent.
That is our connected economy will monitor the behaviour of people, things and data
through space and time.
Meeting Our Challenge
As I set out in my opening I see 5 major challenges:
2. Payment systems
3. Safety and security systems
4. Intellectual Property
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In 1787 the American founding fathers 1 wrote one of the most famous phrases in the English
language to identify the purpose of their nation, “Life, Liberty and the pursuit of Happiness.”
Since then many nations have followed the US model benefiting from free market innovation
and inventions that increased productivity.
Whilst the US has achieved great success other very different cultures such as Japan and
Norway have been extremely economically successful proving that there is no one perfect
However it is vitally important that the common characteristics of the most successful
economies are transferred to the online economy:
1. A strong work ethic with personal accountability where everyone is responsible for
their own life and is not subject to the whim of gods or dictators.
2. A balance between optimism that improvement is possible and realism towards one's
current situation. One rule for all, openness and no free rides. Cheating is not
3. Finally encouragement for innovation and a tolerance for experimentation and
mistakes and not reinforcing orthodoxy or monopolies. A willingness to sacrifice
today for the benefit of tomorrow.
Delivering these characteristics to the connected economy will have important economic and
moral benefits. This graph maps trust against GDP per capita and is from a 1996 study that
asked "generally speaking would you say that most people can be trusted" (Zac P J 2003
Trust. The Journal of Financial Transformations CAPCO Institute 17-24)
(Franklin, Washington, Jefferson, Adams, Madison and Hamilton)
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High trust leads to economic co-operation which leads to prosperity which enhances trust in
a virtuous circle. Low trust leads to low co-operation leading to poverty and further eroding
trust – a vicious circle.
Distrustful economies in the lower left are in contrast to the successful economies in the top
right. We should all be very afraid that our economy is becoming part of the online world
which will move us down to the lower left corner; low trust and lower GDP per capita.
To protect our economy we must seriously question the fundamental lack of trust inherent in
the World Wide Web. I accept that there is a place on the Web for anonymity, freedom of
movement, freedom of speech and freedom of association but with the World Wide Web
becoming the very foundation of our connected economy there is an essential need for
identity and reputation, we need to retain the trust that has been fundamental to economic
Trust and Collaboration
Don’t be misled by the wonderful achievements of co-operation and collaboration such as
Wikipedia and others like it. These are examples where co-operation benefits everyone but
where trust is not essential for that success.
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The striking patterns in human social networks are built on how humans communicate and
behave. Social networks can use social technologies to magnify communications and
behaviours. Some people nit the people around them together to become friends others do
One pattern of carbon atoms creates graphite and another diamonds, graphite being soft
and dark and diamonds clear and hard. The differences being created by the way they are
linked together. Similarly the way people are linked together in social networks will produce
radically different outcomes. It is the ties between people that makes the whole greater than
the sum of the parts.
You can't get to know an organisation by examining just its individual parts, the individual
people; you need to study the social networks themselves.
LinkedIN and Facebook have the potential to use social technologies to establish reliable
identities and reputations for the connected economy. This has the potential to enhance
broader social trust and speed up decision making. Recruitment is an early successful
example of this with youth suicide and bullying providing negative examples resulting from
use of the same social technologies.
Just because we can is no argument that we should. James Surowiecki the well known
author and Australian mathematician revisited the six degrees of separation and the wisdom
of crowds in 2005 to show independently informed crowds are amazingly clever at predicting
outcomes, more clever than any individual member of a crowd no matter how expert that
But that does not mean groups are better at everything. Would you want everything in your
world to be designed by a committee? Too often today we give tasks to individuals when
groups would achieve more and we give tasks to groups where individuals would do better.
There is a mantra in much of the online culture that collectives make the best stuff, but that
is just patently not true. When you have everyone collaborating on everything, you generate
a dull, average outcome in all things. You don't get innovation and you never get
Do you really think that a crowd could have painted the Mona Lisa? Or composed Rhapsody
in Blue? Jazz bands benefit from individual solo performances and group collaboration.
Individuals like Lennon and McCartney, Rogers and Hammerstein worked better in pairs.
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The ubiquitous, massively connected web gives us choice and we need to get better at
making these choices.
When all creative things are subject to mass collaboration there is no accountability and no
greatness. Isolation can starve ideas. With the dictatorship of the majority there is horror.
Unfortunately today the Web is straddled with a very uncompetitive payments system
dominated by banks guarding their monopoly. We need a frictionless, ubiquitous payments
system to efficiently exchange value where there is no additional charge for moving money
internationally and no long delays in processing transactions.
The banks and credit card companies have spent 50 years building a proprietary, locked-
down system that handles roughly $2 trillion in credit card transactions and another $1.3
trillion in debit card transactions every year. When you swipe your card in a shop you begin
a transaction that takes between 1 and 3 days for the merchant to get their money, and the
banks rake off 3.5 percent of almost every dollar in the retail economy.
But increasingly retailers are screaming at the high fees because we all know the costs are
plummeting. Late last year Best Buy in the US cancelled Visa’s payWave contactless
technology in protest to their fee structure.
New Payments Systems Much Lower Fees
I am here to cheer on the army of software engineers and entrepreneurs developing around
companies like PayPal hoping they do to the payment world what has been done elsewhere
on the Internet.
ClickandBuy is transferring money directly between Facebook friends, processing more than
€1 billion last year.
Twitpay is tweeting money taking only a $0.05 commission.
My iPhone PayPal app allows me to pay anyone with an email address or split a restaurant
Daniel Roth at Wired recently stated "it’s safe to say that the payment industry is going to
change dramatically. As money becomes completely digitised, infinitely transferable, and
friction-free, it will again revolutionise how we think about our economy."
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Importance of Trust
Credit cards are fundamentally insecure. Nowhere is this better illustrated than with
numerous scams surrounding the process to obtain a visa waiver to enter the US. These
scams have shown how easy it is to con 1,000s of cautious people to pay for a free service
and in the process provide very dubious people with their full credit card details as well as
their date of birth and passport number!
People expect Governments to protect consumers with a sound and just legal system. The
19th century scammers and snake oil salesman were slowly shut down by consumer
protection legislation and the system continues to work today because offenders can be
exposed by the trashy but popular current affairs programs. Whilst most of our economy was
not conducted online we might have tolerated an unregulated, unenforceable, buyer beware
online commercial environment but not now!
Importance of Ease and Reliability
Not only must a payments system be safe, secure and trusted it must also be extremely
easy to use. Digital payments need to use a device I’m already carrying; a smart card that
replaces all my credit cards or my mobile phone.
Security of Payment Systems
Online security for payments differs all around the world. In Hong Kong a transaction with a
credit card issued from a local bank requires an SMS of the transaction details. In
Singapore, a payment instruction from a customer needs a second form of verification. But in
Australia banks make good all losses rather than invest in prevention.
Public-key cryptography has developed commercial systems where it is extremely difficult,
nearly impossible, to determine the original information starting the transaction. Today credit
cards could display a number that changes every 30 seconds so that your credit card identity
can never be stolen. Effective online consumer protection is available now but it may take
government regulation to make the banks responsible for protection of transactions and the
identity of their customers.
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The growth of the connected economy has certainly increased the level of fraudulent activity.
John Du Bois the CEO of Senetas, a leading encryption company based in Melbourne has
numerous stories relating to the loss of data from insecure networks, stories such as the
ATM networks in Dubai that went down for weeks, or the brute force attack in Estonia, where
the whole country came to a halt for three weeks.
Botnets are well established and powerful tools for criminal activity. Some Botnets have
taken control of more than 100,000 drone PCs. When one of these Botnets woke up earlier
this year spam rocketed from 500 million per day to 3 Billion per day! These slumbering
Botnets have the potential to shut down countries and hold governments to ransom. This is
Cybercriminals attack organisations by penetrating firewalls and attacking the
communications links between data centres and disaster recovery centres.
You have heard of software as a service well here comes “Crimewave-as-a-Service” where
online toolkits are sold to automate the theft of any information that could produce an easy
What does cybercrime cost? In 2009 RBS WorldPay reported their payroll system was
hacked providing clone cards to hit ATMs across the US, Canada, Russia and Hong Kong
extracting $US9 million – in only 30 minutes! A Government Accountability Office report
estimated the total U.S. business losses due to cyber attacks was $67.2 billion in 2005 and
exceed $117 billion per year just two years later.
The Federal Government is rightly fixated on protecting Australians from dangerous and
illegal material however their filtering solution addresses the symptom not cause of this
problem. The real cause is the lack of any identity system on the Web. An identity system
would avoid the major objection to the Filter - Government censorship.
You must identify yourself before you can drive a car on a public road, travel by air, buy
shares, start a company or to do almost everything of substance.
The Victorian education department has built a walled garden where students, teachers and
parents are accurately identified. Online walled gardens should be built for all services that
need identity so that a user knows that they are dealing with a specific organisation,
company, person or service. If we are going to connect billions of people and trillions of
devices to the internet it is madness to allow existing safe guards in our traditional economy
to be removed just because we are moving online.
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Just as child protection laws provide safety for children and consumer protection laws create
a safe and reliable place for commerce we should look to our governments to provide the
same in the online space.
At the very centre of this problem is the Windows operating system. Windows is flexible
Windows is ubiquitous but it is notoriously insecure. To fix this problem Microsoft must
rearchitect the central kernel to Windows, if it is to rearchitect to fix Windows Windows can
no longer be backwards compatible. This would then require billions and billions of dollars of
re-engineering of all those Windows applications to operate on the new operating system.
It’s just not going to happen.
If it’s not going to happen then we must create secure walled gardens with their own identity
system. Such identity systems will need a strict link between official information and the
identity of the participant. For example being linked to FaceBook or LinkedIN will provide
access to the persona created over a long period of time.
Use of these trusted and well branded identity sites will provide access to other 3rd party
sites. Without a substantial identity you will be less able to operate online.
Creating personas will take considerable time and illegitimate or criminal acts will reduce
your ability to link to other reputed sources of identity. Backed by effective global and nation
state laws eBay, FaceBook and LinkedIN will be able to shut down scammers and criminals,
whilst people unjustly removed will be able to be reinstated by legal appeals but such an
approach will ensure that eventually scammers and criminals will be unable to fool anyone.
Our copyright laws are a mess
Having addressed the importance of trust, payments systems and security I now turn to the
most fundamental challenge of the digital world – copyright. In a recent discussion I was
told “Copyright is dead, it’s an outmoded concept destroyed by students all over the world
who refuse to pay for any digital content, especially music.” The conclusion to the discussion
was “like drug laws copyright laws just turn students into criminals, and won’t stop
downloading so they are irrelevant and should be abolished.” This expresses a widely held
view but as I have shown this attacks the fundamental and essential core of any successful
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In the US in the 20s there was a wide spread disrespect for the law because of the failure of
prohibition. Literature of the time, including The Great Gatsby celebrated economic
predators. Similarly today we all know a significant number of people who illegally download
copyrighted entertainment and there is a wide spread disrespect for copyright law.
When US legislation provides for greater damages for downloading two songs in breach of
copyright than it does for the medical negligence by a surgeon who removes the wrong limb
in an operation it is easy to argue that copyright laws are inequitable.
When the Recording Industry Association of America can sue Jesse Jordan a freshman
university student for $15 million dollars because his search engine technology enabled
other students to illegally download music files and his lawyers had to advise him to settle
because if he won, he would not recover any of his estimated $250,000 legal expenses.
When the chance of a moral victory is coupled with sending your family bankrupt then US
copyright legislation is unconscionable. The tragedy for us is that since we signed the US
Australia Free Trade Agreement US copyright laws are effectively Australian copyright laws.
These cases are not an argument for or an incitement to break the law they are remarkable
evidence that these inequitable and unconscionable laws must be fixed.
Whilst we have been ripping off music and cheering as software and news became free, the
work we were doing every day increasingly relied upon respect for and valuing of intellectual
property. But as free software, music and news have undermined the value of intellectual
property we have undermined the very basis for our emerging knowledge economy.
When the advertising revenue streams for our major newspapers are taken by Google
because they can freely place their ads alongside any newspaper content then who will be
paying the salary of the investigative journalist working on the next Watergate break in? It is
not the sensational story that is important it is the constant enquiry into the power and
politics of every nation that keeps our institutions honest and operating with some level of
accountability to the people. That’s what is important.
Chris Anderson the great advocate of “Free” argues in his book that “Everyone can use a
Free business model, but concedes all too typically only the number one company can get
really rich with it.” It is not surprising that the two major advocates for free; Google and Apple
are also the most guarded and proprietary about their core revenue generating digital assets
and benefit greatly from others providing their digital assets free.
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This is not a formula for an NBN enabled economy to create better ways of working learning
and living for all Australians. It is a formula for turning us all into digitally enabled itinerant
workers never achieving Jefferson’s dream of “life, liberty and the pursuit of happiness”.
This demonetised result for most digitised ideas will render the inventor the poorer. There
are only a tiny handful of writers and musicians who actually make a decent living in the new
It is blindingly obvious to me that a knowledge based economy must protect intellectual
property and build an efficient value exchange system for earning money from our ideas and
inventions because in the longer term technology will just get better and better.
The advertising model is effective when a 3rd party is prepared to pay for advertising to gain
access to sell their product to your audience but it is inefficient and ineffective in many areas
particularly when the value of that access is low or when such access distracts your
audience from the use of the product that assembled the audience in the first place.
I agree the model worked well for media and brilliantly for Google. There are also excellent
variations. Construction Data Management applied this model to the construction industry by
collecting building plans from architects without cost in exchange for providing the architects
with costing data by region and CDM in turn built a revenue stream from manufacturers by
charging them for access to information on building projects to help their sales team sell
building products to construction projects.
Contorting this model as Chris Anderson has done to apply to everything is nonsense and
will reduce economic efficiency when the total fees from the 3rd parties are less than the cost
of the products provided. Put another way the total costs within the economy have to be met
by someone and a more efficient system with lower total costs and less “wastage” will
provide a higher growth in GDP and ultimately a high standard of living for its citizens.
A summary of the arguments?
If there ever was a paradox then copyright is one. At a superficial level it is easy to agree
with both sides of this argument. When an author labours for a lifetime and produces a
substantial body of work why should the ownership of that work vaporise 70 years after their
death. If the author had chosen to apply their labour to build physical objects then their heirs
could enjoy that value for an unlimited time.
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Alternatively why should a company that freely utilised the ideas from earlier stories involving
animals and fairy tales strictly control the use of a mouse, or a rabbit or a deer in all film and
If Christopher Marlowe and Thomas Kyd had been given the same copyright protection in
the 1590’s as Disney has been given for Mickey Mouse, would the works of William
Shakespeare have achieved the same recognition 500 years later?
For in the words of Sir Isaac Newton William Shakespeare stood on the shoulders of giants
and in Shakespeare’s case the giants were Marlowe and Kyd.
If I want to quote Tom Peters from his In Search of Excellence there is no requirement to pay
a copyright fee nor do I have to ask his permission to do so. With all the multimedia tools
available today rather than quote his text it would have much greater effect if I inserted a
short video of Tom making the point.
But because I have changed technology and only because I’ve changed technology I am
not only required to pay a copyright fee I am also required to negotiate permissions first.
Why is it that a learned speech is free to quote but quoting with modern tools is now against
At the turn of the last century when the Wright Bros first flew an aeroplane American law
held that a property owner owned not just the surface of his land but all the land below to the
centre of the earth and all the space above to an indefinite extent upwards. If American
property owners where allowed by the courts to keep those rights the airline industry would
never have got off the ground.
The connected digital economy similarly requires the law to change. If it does not change the
digital inventors of the future will be grounded because they will be negotiating with every
digital property owner beneath every digital flight path they wish to take.
There are many other examples where a new technology has changed the law. If the courts
had decided that photographers required the permission of property owners to take
photographs of their property what a difference that would have made to photography?
Imagine how much music radio stations would play if they were required to request
permission from the copyright holders before they could play a song?
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The greatest advocates for the current copyright laws are the Hollywood film studios and it
was these film studios that took on iiNet in the Australian Federal Court charging iiNet with
authorising their customers’ illegal downloading of music files. One wit described this as an
argument to charge VicRoads with aiding and abetting every armed robbery because the
robbers use their roads to escape.
The irony here is Hollywood was created by film producers escaping to the West Coast of
the US to avoid paying royalties to Edison back on the East Coast because Edison held
patents on film cameras.
The even bigger irony is that the copyright police of the world, the USA itself was built on
piracy of IP from the old world.
Self interest is king and the kings of self interest have deep pockets.
We need politicians with great foresight and enormous integrity to with stand the onslaught
from those vested interests.
How the System Might be Improved?
We need to radical overhaul the copyright system for the digitally connected economies of
the 21st century. The complexity of this challenge is daunting.
We can choose to regulate our economy in many different ways but to maximise productivity
we need to take care in how those regulations impact innovation and invention because in
turn they sustain our dynamic and vibrant society.
We need to motivate those that create new things, whether that is music or memes or stories
or services by building trust and rewarding the best outcomes taken up by the society. To do
this we need to give our innovators and inventors the power to control their innovations and
inventions, to set their price and the conditions that apply to their creations. Modern
technology gives us almost unlimited choices in how we might design such a system.
In his wonderful book Free Culture Lawrence Lessig argues that creators of intellectual
property rely on the ideas and knowledge that went before them. That innovation requires
access to those ideas and knowledge in the public domain. If the Law causes or at least
permits the public domain to become barren, innovation will be diminished. Consequently
we need to protect IP to reward creation whilst building the public domain of knowledge and
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Harvard law professor William Fisher has suggested that all content capable of digital
transmission be marked with a digital watermark and governments regulate a system but
have it developed by entrepreneurs to measure usage and collect payments based on this
I see the solution as an online automated system that:
• allow digital files to be loaned as we currently loan a paper book using an
iPod/Pad/Phone or Kindle by suspending access to a file on one device for a pre-set
period while it is active on the another device
• allow digital files to be permanently transferred (sold) to another device
• to permit copyright holders to set their fees for permitting permanent transfer (selling)
or temporary transfer (lending) of files
• to set ‘fair use’ permissions for limited extracts of file content and those extracts be
secured with a digital watermark
• to set a ‘fair use’ fee structure by copyright holder at publication
• to lodge and registered a digital work so that copyright can be claimed
• to ensure the copyright owner renews their registration say every 10 years and failing
to register or renew a copyright renders that copyright to the public domain.
This system would remove the need for private detectives and large amounts of time and
money hunting down the ownership of digital assets and will remove a major barrier to
innovation and invention which is damaging to our economy.
This system would also stop the likes of Larrikin Music demanding royalties in the order of
60% of millions of dollars, already earned by the real creative people, for a 4 second rather
vague reference in a musical riff to Kookaburra sits in the old gum tree. Because a deal of
that size could never be done before a song was released.
The US Congress and other parliaments have been extending copyright protection for
authors since 1908 taking it from 14 years to an author’s lifetime plus 70 years or 95 years
for a corporation. If this continues, as it is likely to do, we are operating under permanent
copyright protection by stealth.
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To simplify the system we need to strengthen copyright. To reduce the high legal fees
involved in current copyright cases we need to make copyright narrow and clearly defined.
Derivatives from a copyright work should be separated from the rights of the work itself and
be limited to a very short term perhaps as little as 10 years.
That is where a film is made based on a book or a musical is created from music, innovators
will be free to create new works from existing works 10 years after publication but fees for
exact reuse of existing works will require payment of a fee forever. It is justified restricting
the broader rights by providing permanent copyright in exchange for the narrower rights.
In announcing the first actions taken from the Henry Tax Review the Prime Minister said
“Everybody has a stake in the tax system - a tax system where everybody pays their fair
share, so all benefit.”
My closing comments would be anyone who buys things online knows everybody who
benefits from the Australian economy does not have a stake in our tax system because
global online businesses choose where they incur their expenses and choose where they
declare their income. Why is it that Google pays most of its tax that it pays in Europe in
Ireland? Perhaps I should ask another question would anyone like to nominate the country
in Europe where you pay the least taxes?
There is a major misalignment between those who use and those who pay for publicly
provided infrastructure and services. Why should Australian taxpayers meet all the expense
for creating the public information used by Google as bait for their advertisements? It is only
right that tax is collected from those who benefit from public infrastructure when products
and services are purchased in one country and delivered in another. If we are to maximise
the potential benefit from a truly connected world a great deal of work is yet to be done in
developing appropriate taxation systems for the online world we live in.
The Way Forward
For many years the CSIRO has led the world in research connected to industry as is well
illustrated by their WIFI patents that are playing a critical role in connecting this world. NICTA
is well on its way to becoming one of the world’s foremost ICT research centres. The
Institute for a Broadband-enabled Society has been established as our first cross disciplinary
research institute dedicated to maximising the community benefits of broadband
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These 3 wonderful institutions can work with industry to fund and effectively build solutions
for the five major challenges I have outlined today; building trust across the economy,
providing frictionless payment systems, a cyber security system that protects our people and
communities, a radical improvement in the management of IP and a national and global
taxation system that is equitable and efficient.
Thank you for listening to me today.
Algonquin Investments Pty Ltd
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