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Opinions/Editorial Taxing Cyberspace Bit by Bit: The Danger of New Internet Taxes Released by Thomas A. Giovanetti on 10/05/99 of Institute for Policy Innovation |
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| The other day my
neighbor and I were chatting over the fence about the various trials
and tribulations of homeownership. At some point I requested a piece
of information from him, a phone number or something. As we returned
to our respective mowers, he shouted back across the fence to me,
"I'll email it to you." Few recent innovations have affected our lives as thoroughly and as quickly as the Internet. Every day new products, services, and information are available through the Internet to save us money, save us time, or to otherwise make our lives more pleasant. Some services, such as Internet telephony, have the potential to revolutionize whole businesses. Can you imagine making long-distance phone calls through the Internet, for a fraction of the cost of going through the major long-distance carriers? People are doing it now. Bits are bits, and anything that can be converted to bits can traverse the globe at light speed and at almost no cost through the Internet. And at such speeds, there are no geographical limits on bits. Practically speaking, bits aren't limited to distance, time and speed, or to states and nations. Someday soon you won't pay any more for a long-distance call than you do for a local call. Once your voice has been converted to bits, it doesn't matter to anyone whether those bits land next door or in Zimbabwe. Well, that's not exactly true. It does seem to matter to the government. Governments seem terribly concerned about anything they can't regulate and can't tax. And the government is getting terribly concerned about the Internet. And that should concern us. Beyond making things much more expensive, taxes and regulation slow down innovation and distort the path of technological development. Does anyone believe that the Internet would have progressed as quickly and as efficiently if the government had been in charge of its development? Today, the government is getting involved in the Internet in a big way, and it is doing so through back-channel programs, hidden taxes, and a deceptively-named program called the FCC's Universal Service Program. The Universal Service Program Here's a lesson in why a government program should be eliminated once it's finished. The Universal Service Program was instituted in 1934 to provide subsidized telephone service to rural communities. When it succeeded at that task, rather than closing up shop, it invented a new task for itself: subsidizing phone service for the poor. Today, the Universal Service Program collects $4 billion in telephone excise taxes for the purpose of subsidizing phone service and phone installation for low-income Americans. Today, I'm confident that everyone in America who wants phone service has phone service. Yet the Universal Service Program has no intention of shutting itself down, so yet again it has invented a cause for itself: Wiring schools and libraries nationwide for the Internet. This expansion of the Universal Service Program was implemented with great gusto by the Clinton administration. Rather than using existing Universal Service Funds, and rather than using education funding, the FCC imposed a new excise tax on phone carriers, who pass the charge onto consumers. This "e-rate," better known as the "Gore tax," is in the neighborhood of 5% of your phone bill. That's bad enough. But when phone companies itemized the tax on their phone bills, the FCC was livid, and demanded that they hide the tax from consumers. On May 27th, the FCC voted to increase the Universal Service Charge ("Gore tax"), by almost $1 billion. In addition, the FCC adopted a rule that would bar telephone companies from separately itemizing this tax so as to hide their actions from the taxpayers. But that is not the only troubling thing about the Gore tax. First, why is the FCC imposing taxes at all? The FCC has no constitutional authorization to impose taxes. Second, if the cause is noble and has public support, why demand that the tax be hidden? And third, what about the dubious premise of the e-rate in the first place? Granted, having schools and libraries wired for the Internet is probably a good thing. In fact, 78% of schools already had Internet access before this new program started. But if schools need to be wired for the Internet, isn't that a matter of education spending? Shouldn't that need be weighed with all other needs, and be prioritized accordingly? Don't we have local control of education? And if so, why is Washington setting the spending priorities for local schools? In fact, of the $2 billion that schools had requested by the beginning of this school year, only 4 percent went to actual Internet access. The rest went to bureaucratic overhead, ripping up walls, repairing carpets, and other extra costs. But taxing consumers to pay for dubious Internet-related government programs is only the tip of the iceberg. The Universal Service Program is an example of how the government will use any device at its disposal to get its hand on new sources of revenue, including the burgeoning field of Internet telephony. Internet Telephony As mentioned earlier, one of the most exciting areas of the Internet is the possibility of Internet telephony. Making phone calls through the Internet has the potential to dramatically reduce the costs of voice communication around the globe. No doubt this is troubling to long-distance service providers, but it is also troubling to government-types who will be first in line to tax this form of commerce. The FCC has already announced that it "might" tax Internet telephony through its Universal Service authority by imposing access charges. New charges would stifle this growing technology, which is spurring conventional telephone monopolies around the world to begin adapting to new technologies and new forms of competition. Taxing Internet telephony would be another example of government standing between people and the technological solutions to their problems. More important, the FCC would be adding taxes and regulations to the Internet, a previously tax-free environment that is generating jobs, innovation, and new forms of commerce for our economy. The Internet Tax Freedom Act, recently passed by the House of Representatives, shields much of the Internet but leaves a gaping hole for the FCC to impose charges on Internet telephony. Congress should protect the Internet and Internet telephony from the kinds of taxes, fees, and regulations that will stifle its development and cost consumers money. One way to do that would be to declare the Universal Service Program a success, and shut it down. | |
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