Daniel Brockman

Intellectual Property and The King of Denmark’s Rule

CONTENTS

PART 1 - CENTRAL ISSUES
PART 2 -  IPR INTELLECTUAL PROPERTY RIGHTS CONTROVERSY
PART 3 - PROPOSED TAX ON IPRS
APPENDIX 1 - THE ORESUND SOUND DUES
APPENDIX 2 - WHY ETHERNET BEAT TOKEN RING
SOURCES


PART 1 - CENTRAL ISSUES

The King of Denmark’s Rule

Image: Oresund map,
Public Domain,
https://commons.wikimedia.org/w/index.php?curid=25944

The tax on the cargo is 1% of value, as assessed by the master of the vessel. The King’s agent may choose either to accept the tax payment or to buy the cargo at the assessed value.

If we disregard the possible collusions between the master and the agent to cheat the King, the master has incentive to assess the value fairly. If the master assesses a low value, then the agent may refuse the tax and buy the cargo. If the master assesses a high value, then he pays more tax than the law requires. (See Appendix)

Incomes Disparity, or Income Inequality

To the extent that politically knowledgeable people vote their pocketbooks, one can imagine without difficulty that a wealthy person in the United States would have different opinion from a poor person on nearly every significant political issue.

Senator Bernie Sanders was one of the two most significant contenders for the 2016 nomination for President of the United States by the Democratic Party. He focused on income and wealth inequality as the most important political problem in the United States. Seeking to persuade some of Bernie’s enthusiastic following, other candidates echoed Bernie in advocating for their own policies.

IPRs Intellectual Property Rights

Economist Joseph Stiglitz wrote in “Rewriting the Rules” that some persons seek IPR monopolies to secure market power. (Some have criticized use of the word “monopoly” as pejorative in discussing the privilege granted by an IPR. But we note that IPR does grant the owner the exclusive right to sell or license or use the products embedding the IP patent or copyright. The condition in which only one seller can sell a product in a market is a monopoly, by definition. We regard IPRs as grants of monopoly by governments.) Stiglitz calls for revising IP laws for better balance of the rewards of innovation with the societal usefulness of innovation.

Economists Michele Boldrin and David Levine wrote of IPRs that “this cancer is attacking the most vital centers of our economy: metastasis is near and so it is time to face the intellectual monopoly threat squarely, and to take action.”

The first laws governing IPRs in the United States were copyright and patent acts of Congress that became law in 1790. Each act granted 14 years of IPR protection to writers and authors. In our age, IP consists of four categories: patent, copyright, trademark, and trade secrets.

PART 2 -  IPR INTELLECTUAL PROPERTY RIGHTS CONTROVERSY

With large amounts of money at stake in some IPRs, the governing laws have spirited advocates and opponents.

WIPO World IP Organization, part of the United Nations organization, generally advocates for the positive value of IPRs. Advocates often claim that increasing counts of numbers of patents granted and growth of GDP show that IPRs stimulate imagination and GDP growth, much as does Kamil Idris in his “Intellectual Property: A Power Tool”, and that IPRs attract investment.

Alan Greenspan, former chairman of the Federal Reserve Board advocated for IPRs. In 2003, he attributed only a small part of US GDP growth in the last decades of the twentieth century to physical materials, with the accelerating large part of the growth coming from IP.

James Madison argued for IPRs. Discussing the powers accorded to Congress by the US Constitution, and the right to grant IPRs, specifically, he wrote “The utility of this power will scarcely be questioned.“

Idris also argues that IPRs attract capital investment. Clearly, they do so in a world in which IPRs exist. Idris doesn’t show that capital investment in ideas wouldn’t occur in a world without IPRs. Nor does he answer whether IPRs distort capital allocation from superior ideas and projects.

International payments for the use of IPRs were $350b worldwide in 2015, per the World Bank, using data from the International Monetary Fund.

International payments for use of IPRs. Source: World Bank.

Source: Emmanuel Saez (2014)

While coincident graphs don’t imply causation, we can’t but notice a resemblance in the growth of IPR payments with the growth of the highest 1% of US incomes, per Emmanuel Saez.

I’ve not found criticisms of IPRs in his writings, but Stiglitz does identify IPRs as a rule that contributes to deep US disparities of incomes.

Opponents of IPRs often claim that IPRs stifle invention, discovery and manifestation of creativity. For example, Michael W. Carroll, in his “Intellectual Property and Related Rights in Climate Data”, describes how IPRs can interfere with climate change research, which requires fairly open access to diverse data sources.

Thomas Jefferson, often quoted by IPR opponents, wrote “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” Jefferson did note the rush of inventors and writers to apply for copyrights and patents. And ultimately, he was persuaded (allegedly by Madison) that IPRs strictly limited in duration would have some value.

In the development of computer networks, two comparable and competitive ideas, token ring and ethernet, competed in the 1970s and 1980s. Ethernet was not protected, but Olof Soderblom required a royalty of 2 percent for each node of his patented token ring. Ethernet flourished with rapid innovations increasing speeds and reducing costs. People also invented enhancements for token ring, but the patent impaired development and distribution. Eventually, ethernet deployments dominated. It became the ubiquitous protocol underlying the Internet. Token ring survives in isolated specialized applications. (See Appendix)

Aristotle.
After Lysippos, Public Domain,
https://commons.wikimedia.org/w/index.php?curid=1359807

James Watt spent the latter part of his life actively defending his steam engine patents and suppressing even some superior designs offered by potential competitors. Boldrin and Levine describe James Watt’s career as an exemplary case, along with numerous others. They conclude IPRs aren’t needed for innovation, and more likely hurt, more than help, innovation and growth. IPRs promote socially costly rent seeking.

Benjamin Franklin, Jonas Salk, Aristotle, Luther Burbank, Rene Descartes, Charles Dickens and Alexander Fleming, among many others, either had no access to IPRs, or they declined to use them.  Further, each of us has creative thoughts and ideas, for which we never have IPRs. Arguably, people have good ideas because it’s fun to discover and create things. Clearly, IPRs aren’t required for people to have good ideas.

PART 3 - PROPOSED TAX ON IPRS

IPRs, by their existence, attract capital to finance development of ideas and production of useful products and works of art. At the same time, they create monopolies that encourage rent seeking and diminish innovation and the availability of useful ideas. Further, the existing legal structure of IPRs facilitates intense concentration of immense wealth and disparities of incomes. We propose a new US tax on IPRs, modeled after the King of Denmark’s Rule, and some minor modifications of existing law. Further, we propose uses of the tax revenue to encourage inventions, authorship, fine and useful arts and science.

The IPR tax

First, the IPR tax law will overlay, not replace, existing law, except in cases of direct conflict. No existing or new IPR will continue in effect beyond 100 years under any circumstances. New IPRs, coming into existence after enactment of the enabling IPR tax, will have a maximum term of 14 years.

The tax will apply to both new and existing IPRs. Upon enactment, the tax will apply to existing IPRs 3 years after enactment of the law. The tax will apply to each new IPR 3 years after the IPR comes into existence. The tax will apply to any IPR having a value of more than $500,000, adjusted for future inflation. The tax will not apply to any IPR of lesser value.

Annually, within 60 days of the anniversary date, the holder of each IPR will file a statement of value with the IPR Tax Office. If the holder doesn’t file the statement on the 3rd anniversary of the IPR and thereafter, then the IPR passes permanently into the public domain. The statement will explicitly state the value in dollars of the IPR, with appropriate documentation, and a payment of the tax due. The Tax Officer may ask for clarification of the statement, and the holder will answer within 30 days. The Tax Officer may accept the payment rendered, allowing the holder continued ownership of the IPR. If the Tax Officer acts within 60 days of receiving the statement, then the Tax Officer may return the payment rendered, and pay the holder’s stated value (but not less than $400,000) to the holder as compensation, and take possession of the IPR, and the IPR will pass permanently and immediately into the public domain. If the Tax Officer doesn’t act within 60 days, then the holder continues to own the IPR.

The tax won’t be due before the end of the 3rd year of the term of the IPR. The following table provides the tax rates applying.

Anniversary of creation of the IPR	Tax as a percent of holder’s stated value
0	0
1	0
2	0
3	1
4	2
5	4
6	8
7	16
8	32
9	64
Thereafter	64

We suggest the revenues from the tax will be distributed by the Department of Commerce as grants to qualifying scientists, inventors, artists, writers and similar persons who apply for project funding and to arts and research organizations such as the National Institutes of Health, the National Gallery, the Smithsonian Institution, the National Aeronautics and Space Agency, and others.

APPENDIX 1 - THE ORESUND SOUND DUES

Coat of Arms of Erik de Pomeranie. Image by
A.T. [CC BY-SA 3.0
(http://creativecommons.org/licenses/by-sa/3.0)],
via Wikimedia Commons

In 1857, the US treated with Denmark to pay a small sum to the King of Denmark to relinquish all rights to the “Sound Dues”, a source of revenue for the Crown for centuries. The major governments of Europe had similarly concluded the tax on passage through the Oresund, the strait between Denmark and Sweden, in 1855 and earlier in some cases.

The tax and its predecessors had existed for centuries, with some evidentiary documents dating from the 14th century. The Sound Dues were regularized and made permanent by Eric of Pomerania, King of Denmark, Norway and Sweden, in 1429.

The Sound Dues had applied to merchant cargoes (and sometimes to hulls) passing through the straits. Masters of the vessels were required to stop at Helsingor (a.k.a. Elsinore) or suffer cannon fire from shore. The master would provide a manifest and valuation, and pay a tax of about one percent of the value, varying somewhat from year to year, and depending somewhat on the type of cargo, ownership, the flag of the ship, origin, destination, and the particular royal agent collecting. Or the agent would pay the master’s valuation to the master, and take possession for the crown.

APPENDIX 2 - WHY ETHERNET BEAT TOKEN RING

According to Iljitsch van Beijnum http://arstechnica.com/gadgets/2011/07/ethernet-how-does-it-work/, ethernet was conceived and standardized as a body of standards with a clever, minimalist design that required only cheap, relatively simple components. Token ring remains in use in a very few special cases. Ethernet users sought ever faster networks, which led to the ubiquity of ethernet.

Reasons for ethernet's dominance:

1, Ethernet had a messiah, Bob Metcalf. -  Geoff Thompson
2. ArcNet (early network resembling token ring) didn’t make it into specification IEEE 802 -  Geoff Thompson
3. Ethernet tolerated failure. - Dan Pitt
4. Token ring patent, owned by Olof Soderblom, required the user to pay a royalty of 2 percent of the cost of the machine which was the node connected to the network. Competition was managed and never allowed to flourish. - Joe Skorupa

Oral history video discussions by networking pioneers of ethernet and token ring:
https://www.youtube.com/watch?v=3J-pK7oiRP0
https://www.youtube.com/watch?v=g2RlRRXZprY


SOURCES

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Michael W. Carroll, “Intellectual Property and Related Rights in Climate Data”, American University Washington College of Law Research Paper No. 2016-17 (2016 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2763709) .

We are grateful for additional ideas and information provided openly in some prepublication research by Dr. Carroll.

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