Changing policies that no longer achieve their original goals is hard. Failing to make such changes when needed, however, harms society as a whole but it seldom causes controversy.
No better example of this is the fact that Americans are still taxed on their telephone bills. Telecommunications taxes are bad in terms of fairness and of efficient use of resources. But there is little impetus for change.
Telecom taxes are a classic example of how good policies can become bad ones over time. Federal and state governments did not have income taxes when telephone service was first taxed more than a century ago. Money for government came from customs duties and excise taxes on specific goods or services. Telephone calls seemed an excellent service to tax for several reasons.
Most of those reasons were pragmatic. A successful excise tax has to be easy to administer. An excise tax on mowing lawns or cutting hair would be problematic because millions of people can provide such services. Taxing such services would be expensive to administer and easy to evade.
Telephone services, in contrast, were provided by just a few easily identifiable companies. Taxing phone calls was simple to administer.
Taxing telephone calls also seemed fair. Long before any technical discussions of “progressive” or “regressive” taxes, people recognized that ability to pay was an important consideration. Taxes should not cut into the ability of households to meet basic needs of food, clothing and shelter. It was considered better to tax nonessentials like tobacco, alcohol, jewelry or perfume.
Telephone calls seemed to fall in this category. Initially, only the wealthy had telephones. Making calls was handy, but far from a necessity. Taxing calls affected only a small proportion of households and did not take bread off anyone’s table.
That still might be true, but contemporary telecommunications taxes clearly are regressive. They take a much bigger proportion of the incomes of poor households than of rich households because even basic services form a much bigger share of monthly expenses for poor people than for those with higher incomes.
Moreover, telecommunications access is no longer a luxury for a few. Lack of access to telephones and the Internet handicaps one’s ability to earn a living. Yet governments have increased rather than decreased taxes on telecommunications. In many states, even low-income individuals may pay $20 or more in such taxes and taxes make up 15 percent or more of some total monthly telephone bills.
Our economy would be more efficient and fair if we eliminated these outdated taxes. Their only virtue is that they raise revenue while attracting little attention. Abolishing such taxes would require raising income or other taxes. Elected officials of both parties readily acknowledge that the expediency of retaining a bad source of money to avoid raising more visible taxes is the principal hurdle to reform.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.