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Ira Magaziner, a senior adviser to President Clinton for policy development, is the architect of "A Framework for Global Electronic Commerce," the U.S. government's plan for furthering business on the Internet. In recent months, Magaziner has conducted a series of digital video conferences with international journalists to elaborate on the administration's thinking. These questions and answers are an edited version of what was said in video conferences with journalists and Internet developers in Brussels, Stockholm, and Canberra.
Before joining the White House, Magaziner advised corporations and state government on strategy and policy analysis, founding two international consulting firms, SJS Inc. and Telesis. He graduated from Brown University in 1969 and attended Balliol College in Oxford, England, as a Rhodes Scholar.
Q: Is electronic commerce increasing in the United States? Is it an important part of the telecommunications revolution?
A: We're finding in the United States that information technology industries and electronic commerce are growing even much faster than we had anticipated. We believe now that the information technology industry itself — the building out of the Internet — is accounting for over one-third of the real growth of the U.S. economy in the past few years. We believe that the better-than-expected performance of the U.S. economy this past year is in part due to the growth of the information technology industry and its positive effects on productivity.
We're finding a very, very rapid growth now of commerce on the Internet, particularly in the area of businesses working with other businesses. Many businesses are beginning to put their purchasing, supply chain management, inventory control, customer relations, and logistics, on the Internet. And we think there will be over $300 billion [thousand million] of business-to-business commerce of this sort on the Internet within four years.
The companies that have begun working like this — companies like General Electric, Boeing, Cisco, Federal Express, and Wal-Mart — are experiencing very dramatic productivity improvements as a result. Cisco, the high-tech company that makes Internet routers, began to sell on the Internet only 18 months ago, and already a third of its sales, two billion [thousand million] dollars, are on the Internet.
Q: What about consumer services?
A: We're also finding that companies that serve consumers through the Internet are beginning to grow very rapidly. A new company called "Amazon.com" just began selling books on the Internet two years ago. In their first year, they sold $16 million of books. This past year they sold $150 million worth of books, and now their major competitors, traditional chains of bookstores, are going on-line.
We think that about 20 percent of all books sold in the United States next year may be sold on the Internet — up from nothing three years ago. We're seeing similar Internet sales growth in products as varied as retail banking services, airline tickets, flowers, even automobiles. So, this is an area of very rapid growth.
Q: Is electronic commerce developing at a different pace in the United States and Europe?
A: In general, we think that the Internet and electronic commerce are still developing faster in the United States than in Europe. I should say that Internet use is spreading rapidly in Europe now, but electronic commerce, we think, is for now growing faster in America. There are also major differences within Europe. From the statistics that we've seen, and from what I've learned on recent trips, a number of the Scandinavian countries, for example, are adopting the Internet and electronic commerce at about the same pace as the United States — quite rapidly. Some of them even have a higher per capita usage of the Internet than we do in the United States. I think if Europe focuses on developing the right climate for electronic commerce, it will catch up very quickly.
Q: So far, the Internet has not been heavily regulated. Do governments need to get more involved at this point?
A: The U.S. government believes that it's best for our economy and best for the development of this new digital age to try to set a predictable legal environment globally for the conduct of commerce. That means trying to agree on common frameworks for things like document authentication, digital signatures, the formation of contracts, and the protection of intellectual property.
But, in general, we think that governments should stay away from regulating, over-taxing, or censoring the Internet because we fear that if governments become too involved — if they create this as a regulated industry in some way — that will strangle the growth potential that we see.
We advocate a market-oriented approach to the development of the digital economy. We feel this approach should not be similar to the way we in the United States have historically regulated the telecommunication or broadcast industries. We believe Internet commerce should be an environment where buyers and sellers can come together free of government interference, and it should be a contract-based system. In principle these developments should be led by the private sector, and privately established codes of conduct should govern, not government regulations.
Q: Isn't there a need to enforce both customs tariffs and sales taxes or value-added taxes in the arena of global electronic commerce?
A: On these specific questions, we believe the following. Number one, we think that electronic transmissions on the Internet should continue to be free of any customs duties. We have spent more than 50 years bringing down customs duties in the physical world, and we should not introduce them to this new electronic world.
Second, we oppose any discriminatory taxation against the Internet, such as "bit" taxes, Internet access taxes, and Internet telephony taxes, because we think that they will only stifle the growth of this new medium. Let me emphasize that we feel that our economies, as well as our revenues, will be best served by allowing this new area to grow fast rather than stifling its growth by over-taxing it.
We think that necessary forms of existing taxation, for example, commercial sales taxes such as we have in the United States, should be applied to Internet commerce, but the key is that they be applied in a way that is neutral, simple, and uniform. That is, if I go into a store to buy something and I have a 10 percent tax when I buy it where I live, then I should have a 10 percent tax when I buy the same item on the Internet. It should be tax-neutral, whether bought on the Net or in a store.
The difference will be that the method of collection, because of the nature of the Internet, may have to be different. What will be most crucial is that Internet sales taxes be uniform because with the Internet you will have one seamless marketplace. And if every taxing jurisdiction were to have a different definition of how to impose taxation, it would be impossible to do business on the Internet.
Within the United States, we are promoting a bill now before Congress that will create a moratorium on new taxation until we can develop a uniform approach at the state and local government level. We are also promoting discussions within the OECD [Organization of Economic Cooperation and Development] at an international level to try to develop a uniform approach.
Q: Some governments are concerned that if their citizens buy goods and services through the Internet, the governments will not be able to collect the taxes that are due at the time of sales. Do you share that fear?
A: The fear you mention is legitimate, but I think that there is a solution. We are working on this problem at the state and local government level in the United States.
We don't think that every jurisdiction has to have the same tax rate. There can be different tax rates, although we think that the technical standards for the agreed-upon tax system need to be coordinated. Let me give you an example.
The difficulty with the Internet from the viewpoint of collecting taxes is that it's very hard to identify where the seller is based because a company selling on the Internet could have its file servers any place in the world. So, it's difficult to enforce the collection of the tax by the seller. If I have a company based on some island in the Caribbean, and I have my computers located in a number of places and I send music across the Internet to a purchaser in Belgium, how do you determine where I have nexus and how do you collect the taxes?
One solution that we are working on is to seek an international agreement that would base the collection of the tax on the residency of the buyer, with some international agreements about definitions of residency.
Let's say there is a 10 percent tax in Belgium. If I am a Belgian and buy something for 10 francs on the Internet — and use a "smart card" — the chip in my smart card could automatically debit the card 11 francs. Ten francs go to the seller; one franc goes to the tax authority's escrow agent.
In this case the situation of the seller would be much easier because the seller now doesn't have the liability of collecting the tax, doing all the paperwork, and forwarding the tax to whatever government it is owed. For the buyer, it's automatic. When I make my payment electronically, automatically the tax is taken out. I don't worry about it.
For the tax authority, there are three benefits to this system versus the current system. The first benefit is that there is a higher compliance rate. In the U.S. sales tax system, we get only about 60 or 70 percent compliance. Even if I — the purchaser — am making the payment electronically, of course it won't be perfect. There will be people trying to cheat, but likely there will be a higher compliance rate because the money is taken electronically at the same time as the electronic purchase is made rather than collected and forwarded later.
Second, the tax authorities get their money faster. In many sales and VAT [value-added tax] jurisdictions, it takes about three to four months to collect taxes for the government because they are first collected by the store or sales organization, then the paperwork is done, then it's withheld and forwarded.
In the theoretical case I outlined, you probably would have an escrow agent that might hold the money for a week or two to make sure that a sold product does not get returned, but then the funds can be forwarded to the tax authority within weeks instead of months. And with the money the government saves by more efficient collection, it can hire the escrow agent to do the collecting. The escrow agent might be a bank or a credit card company or a software organization.
And then, finally, it's actually easier to police tax avoidance because if there's a governmental jurisdiction somewhere in the world that is giving false residency cards, or some similar scheme, you can exclude the domain names of that place from the collection system.
This is a very simple description of something that is very complex. And there are many technical issues that have to be addressed to make a system like this work. I am merely suggesting that there are possible solutions.
One final word: even under such a system, a buyer could still make a purchase over the Internet and retain anonymity if he or she so preferred. The way a buyer could do that would be to go to a bank and get a digital storage card. That digital card purchased at the bank could be coded according to the tax rate of the buyer's residency. Then, if the buyer used that digital cash card to make the purchase over the Internet, the purchase could still be anonymous, but taxed at the correct rate.
Q: What forum should deal with these complex tax questions?
A: The U.S. government feels that these issues should be discussed in the OECD because the OECD, we think, has a good tax competence. And we should try to arrive at a common approach. Within the United States, we are supporting legislation that would force our states and local governments to come together to develop a common approach to the tax issue. Ultimately, we would like to have the approach agreed to by our states and local governments be coordinated with the OECD discussions, so that we have a harmonization internationally. The OECD has already begun such discussions.
Q: Do you feel that international banks are ready and willing to act as escrow agents for Internet tax collections?
A: It may be the banks, it may be credit card companies, it may be software companies that would set up businesses to do these collections. We've consulted with some American banks and credit card companies, and they'd be quite interested to set up businesses like this if they are paid by the tax authorities to do so. And the tax authorities would be able to pay out of savings because if they get money quicker, that has value to them.
Q: If taxes in electronic commerce are to be based on the residency of the buyer, can you elaborate on how that would be determined?
A: I think what we would look for is an international agreement based upon residency or citizenship. People would need to declare themselves in some way — according to some agreed-upon definition of where they really did live — as to the location of their primary residence. And if we can agree among nations on that definition, then I think we have the basis to solve the problem you describe.
Of course, people may try to cheat, as they do today, but I think the cheating won't be any greater than today, and perhaps we can make it less. I think the key is the agreement on the definition of citizenship and residency.
Q: Do you distinguish between the sale of goods or services on the Internet?
A: An excellent question. Let's say I sell a music CD [compact disc]. If I mail that CD to a customer today — that is, physically — probably you'd call that a good, not a service. But if what I do is download the music so that the music transfers across the Internet in digital form and then it's re-encoded as music and put on a disc in the home of the consumer who buys it, is that a good or is that a service? It gets confusing.
Also, consider an airline ticket. If I have an electronic ticket, is it a good or is it a service? Eventually, it may be that instead of buying a book and having it shipped to me physically, that book may be just downloaded and printed out onto my printer. Is the book then a good or a service?
So, we feel it is much simpler just to speak about electronic transmissions. Whether something is a good or a service becomes less clear when you're talking about the digital world. We don't see any usefulness in trying to invent a new set of rules for something that will be neither goods nor services.
My sense is that the countries in the European Union and the United States agree in principle with the idea of having commerce over the Internet be free of customs duties.
Q: Recently, there has been considerable discussion about the DNS — the domain name system — that underlies the Internet. It has been managed by the U.S. government, but is being turned over to the private sector. Can you discuss that issue?
A: I'm glad that you asked this question because I think there's some misunderstanding about what we are proposing to do here. For historic reasons, because the Internet was financed originally by the U.S. government, the technical management of certain aspects of the Internet is still done under contract from the U.S. government. And this includes the management of the domain name system, the Internet number address system, the registration of Internet protocols, and the management of the root server system of the Internet, the system that routes messages on the Internet.
What we are proposing to do is to privatize these technical management gatekeepers — that is, to turn them over from the U.S. government to a private, nonprofit organization that would have an international board of directors nominated by various private stakeholder organizations. We're calling for that organization to be created by the end of this summer, and we will then gradually turn over all of the authorities that the U.S. government now has in these areas to this private organization.
It would be our hope that by October this new nonprofit organization will be up and running, and that some time shortly after we will be able to transfer to it all the authority that the U.S. government now has.
Q: Where will this organization be based?
A: The organization needs to be based some place, and we think that the United States, for a variety of reasons, is a good place to base it. The competence and expertise and the people that have been doing this work up until now are based here. But, we want to make sure that European law and other laws can obtain in the way the system is organized. So, we don't have the intention to try to make this organization only something that is in the jurisdiction of the United States.
We oppose the idea of an intergovernmental organization being involved because we think that government organizations inherently move too slowly and too bureaucratically for the Internet. Consequently, we would be strongly opposed to the notion of creating some intergovernmental organization to coordinate these functions. What we do support and would welcome are suggestions from Europe or elsewhere about how to ensure that this not-for-profit truly has international representation because that's our intention.
We think it's important, for example, that there be an internationally representative board from the private sector. And we think it's important that in areas like trademark that there be the potential for rights holders to bring suits in different jurisdictions, not just one jurisdiction. So, we are welcoming comments from other nations about how to ensure that this new Internet organization can be a truly international organization.
Q: How do you deal with the presence of objectionable or obscene material on the Internet, whether for commercial purposes or otherwise? And what are your plans to protect the privacy of individual citizens who use the Internet for commerce?
A: We don't yet have a satisfactory system. But the industry is working very hard to develop a system, and we're hoping to have certain codes of conduct in place within the next year.
These are two separate issues: content and privacy. In the case of content, we believe that when parents sign up with an Internet service provider, they should get a system with simple boxes on the screen that they can click on, and those boxes will be filtering software developed by software companies in conjunction with various private groups that reflect the societal values of those groups.
So, for example, you might have a box developed by a group like the Christian Coalition, or you might have a Children's Television Network box, or something like this. So that each parent, according to their own value system, can check a box and say, okay, if the Christian Coalition has developed or approved this filtering system, then I'm comfortable with this configuration of filters. It should be very simple, so that if you're the type of parent who's afraid of the Internet, afraid your children understand it better than you do, and you're not sure what to do, you can have a simple device you rely on to protect your house against whatever content you choose.
If you merely wish to set up filters for your own use, then in your browser software or your search engine software should be the ability to do your own filtering. If, for example, you're not bothered by violence, but you dislike explicit sexual material, you should be able to filter out what you don't want.
The tools are being developed to allow this kind of system to be put in place. There are already filtering softwares. They're not as good yet as we would like to see them, but they are becoming better. So, we believe that within this year, we should have a system like I'm describing in place in the United States, and hopefully it can be extended internationally.
Q: What about individual privacy?
A: The question of privacy is developing differently. The way that may come to work on the Internet is by private codes of conduct based on OECD privacy principles. That is, a seller should notify a potential buyer, "Here's what I'm going to do with information that you give me about yourself." The buyer can then say, "No, I don't want to do business with you," or "No, I don't want you do to that." They can say no. And if they say no, then even the fact that they visited the Web site gets wiped out so that there's privacy protection.
If the buyer says yes, he or she may say, "Okay, you can use this information you are obtaining about me as a result of this transaction but only inside your company," or they may say, "You may sell the information." The buyer would place whatever conditions he or she wants on the use of personal information. The buyer and seller essentially would form a contract where the buyer agrees to what can be done with information. The buyer has control.
Any organization doing business on the Internet that complied with a privacy code of conduct could then have a seal put on its Web site to attest that it followed this agreed-upon code of conduct in respect to privacy issues. The organization would enforce this code of conduct. This organization would audit Web sites regularly to make sure that all the Web sites that display the seal are following the code of conduct. Also, it would take complaints from consumers and follow up on them.
This system would mean that government and industry could go to consumers with education campaigns and say, "Look, as a consumer, you're free to go any place on the Net you want. It's a free medium. You can buy any place you want. But be careful. If you go to a Web site that doesn't have one of these particular seals, your privacy may not be protected."
If consumers are well-educated in this respect, there will be a market incentive so that if I'm a company wanting to start a business on the Internet, I'm going to go try to seek the seal because if I don't have such a seal, I'm going to limit my marketplace. Many people will refuse to visit or shop at my site.
So we create a market incentive for businesses to seek out a seal assuring that privacy will be protected if they engage in electronic commerce. We think that type of system works more effectively than government regulation, which would be inherently difficult to enforce.
Of course, if the monitoring organization finds that there's fraud being committed in regard to privacy, then the case can be referred to the appropriate government agency under existing antifraud laws. The reason we favor this type of approach is that, even if we were to pass a thousand pages of federal legislation to protect the consumer's privacy, we couldn't enforce it because there are tens of thousands of Web sites that form every week on the Internet. No government agency can monitor all those Web sites. So, instead, what we're trying to do is to empower people to protect themselves by creating an environment with the seals where they can have control of their own data.
Q: Is there any chance this will work in the real world?
A: We think that a system like this will be beginning this summer in the United States.
Q: How do you expect the Internet and the growth of electronic commerce to affect national economies and patterns of employment?
A: We think that there will be a major turnover of jobs. In the United States, we believe that millions of jobs will be lost because of the Internet in areas like retailing — or in what we call "middleman-type" areas — insurance agents, travel agents, and so on. But we think that there will be a far greater number of jobs created in the information technology industry itself and in the information gathering and marketing industries.
The good news is that the jobs that are created will have higher skill and higher wage rates than the jobs that are lost. What we find already in the United States is that information technology industry jobs pay over 60 percent more than typical jobs in the economy. One aspect of this that we think is very important is a system of retraining, so that people who are losing their jobs because of this transformation can be retrained for the new jobs that are coming. This transformation also puts great importance on the education system. People need to be educated in the new information technology industries because that's where the tremendous growth in jobs will occur.
Q: How do you see the Internet in five years' time?
A: In five years, there will be probably about 750 million people using the Internet around the world. The Internet will likely be available in some of the poorest areas of the world, because low-earth orbital telecommunications satellites will be up, and I think there will be projects through the aid organizations to build local area networks that will allow people in less developed countries to have access to the Internet.
There will be a tremendous amount of commerce on the Internet five years from now. In the United States alone, we believe there will be over 300 billion [thousand million] dollars of business done annually on the Internet by then.
In the United States, every school, every library in the country will be wired up to the Internet. And we will have gone through a number of years of extensive training programs with teachers and librarians, so that they can use the Internet and encourage students to use it. I would expect that will also happen globally.
In addition, significantly greater numbers of homes will have the Internet. It will come to them on their television set, as well as their personal computer. I think that Internet telephony will be larger than traditional telephony. That is, five years from now more telephone calls will be made using the Internet than using traditional circuit-switching technology. And it will be quite natural, when you're watching normal broadcast television, to interact with the Internet as a single medium.
So, I think that we're going to see quite a revolution, and I think that revolution is already going to be apparent in the next five years.
Q: Do you see any drawbacks with the Internet?
A: Well, like any new technologies that can advance society, there can also be drawbacks. For example, in the Industrial Revolution, which brought great progress and was by and large tremendously beneficial to people, there were also some drawbacks, and society was too slow to respond to some of these. We had child labor problems, and terrible factory working conditions, and pollution problems.
In the case of the Internet, there are some potential problems. Children could have access to material that parents feel uncomfortable with. People's privacy could be violated more easily with the Internet. If we're not careful, the Internet could be used by terrorists and those wanting to break the law to further their aims. And so, we're also working very hard to try to create capabilities within law enforcement agencies to meet those potential cyber-crimes.
We feel it is our responsibility to try to work and anticipate those drawbacks and minimize them, so that we can realize the positive benefits with as little negative fallout as possible.
Q: Is encryption one of those concerns?
A: This is perhaps the most difficult issue we've had to deal with because there are legitimate concerns of people in the commercial community that you need encryption — that is, a way of locking unauthorized users out of access to data — to help electronic commerce flourish. There are, however, competing concerns from the law enforcement community that if high-level encryption is available to international terrorists and drug dealers it will make it easier for them to do their business and harder for law enforcement to catch them.
We have been trying for a long time now to bring about some compromise between the law enforcement community and the business community on these issues. We've been trying to strike a balance that allows high levels of encryption to be used in commerce, but which also allows law enforcement to have the potential for access in cases where there is clear justification that a criminal act may be involved. And advances in technology may offer potential solutions.
Q: How about copyright protection?
A: We think copyright protection is very important. But we think that has to be balanced in terms of the way in which that gets enforced. There were some people calling for the Internet service providers and telecommunications companies to be responsible for enforcing copyrights — to be the traffic cop so to speak. But now we have new digital technology called the Digital Object Identifier System being developed. If you're a copyright holder, you will be able to, in a sense, "water-mark" or tag your product so that the owner of a piece of digital material can be quickly identified.
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