The following excerpts are from the Report to the
Congress on Communications Services Not Subject to Federal Excise
Tax, August 1987. To receive a full copy of the Treasury report,
please send an email with your name and mailing address to feedback@repealthetaxontalking.org.
Report to the Congress on Communications Services Not Subject to
Federal Excise Tax
Office of Tax Analysis
U.S. Department of the Treasury
August
1987
Principal Findin[g]
- The communications excise tax should be allowed to expire at the
end of 1987 as scheduled under current law and as envisioned in the
President's FY 1988 Budget. The tax causes economic distortions and
inequities among households. Further, allowing the tax to expire would
obviate the need to address the issues raised by the various
exemptions to the tax. There is no policy rationale for retaining the
communications excise tax in the federal tax system. (emphasis
added)
Conclusion
The above analysis indicates that, on efficiency grounds, only a weak
argument can be made in favor of the communications excise tax as it
applies to local calls placed by households. As it applies to toll calls
by households to and to businesses' use of communications services, the
tax causes distortions. Further, the tax is precisely the wrong policy
with respect to externalities, in that telephone services exhibit
positive externalities and should therefore not be taxed but rather
subsidized. There being no other efficiency arguments for the tax, on
balance it must be judged as inferior from an efficiency standpoint
relative to other taxes which could be used to raise the same amount of
revenue.
The tax violates the horizontal equity standard. With respect to
vertical equity, the tax is regressive, although perhaps only mildly so.
Finally, the tax does appear to be reasonably simple, although no more
so than other excises.
On balance, there are no strong arguments in favor of the
communications excise tax. In addition, there are reasonably strong
efficiency and moderate equity arguments against the tax. Further,
although reasonably simple in itself, the tax contributes to the
complexity of the tax system as a whole. For these reasons, the tax
should be allowed to expire at the end of 1987 as scheduled under
current law and as envisioned in the President's FY 1988 Budget.
Summary
The current exemption for private communication service is an attempt
to neutralize the otherwise disparate tax treatment of owning rather
than leasing communication equipment. An unintended consequence of this
exemption is that it creates a distortion between private and nonprivate
communication service. The recommended policy option is to allow the
communications excise tax to expire as scheduled under current law and
as envisioned in the President's FY 1988 Budget. This option would not
only obviate the need to address the problems associated with the
current exemption, it would also be desirable on general tax policy
grounds.
If the tax is extended, one policy option is to return to previous
law. Previous law, though distorting the owning versus leasing decision,
did not distort a firm's decision between private and nonprivate
communication service. However, it does not appear that the new
distortion is greater than the previous distortion. Furthermore, a
return to previous law would exacerbate the problem of bypass.
A second policy option, if the tax is extended, is to tax the
services provided by communication equipment, regardless of whether the
equipment is leased or purchased. This would eliminate the distortion
between private and nonprivate communication service, but would
exacerbate the distortion between communication services and other
inputs. Further, it would be difficult in practice to define the
equipment that should be subject to tax, and there are a number of
circumstances under which the tax would cause differentials between
various types of equipment.
A third policy option, if the tax is extended, is to improve current
law. This could be accomplished by rewording the definition of private
communications service to attempt to include all close substitutes.
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