TCS Daily

Memo To IRS: Check With The Boss First

By Bruce Mehlman - August 4, 2004 12:00 AM

"If you want something to grow you don't tax it," proclaimed President Bush of his administration's commitment to universal broadband access for all Americans by 2007.

As both presidential candidates lament America's unacceptably low standing in the global broadband race it seems illogical that the IRS and Treasury Department said, as they did last Wednesday, that they are seeking public comment on whether to extend federal taxation to the most promising driver of broadband usage since email: Voice Over Internet protocol (or VOIP).

VOIP refers to the transmission of voice signals in the same packet-based fashion as email. Far greater than a more efficient telephone network, VOIP allows new features, services and possibilities. Deployment of VOIP is good for consumers, because its more efficient networks can cut operating costs, and save businesses and consumers money. VOIP will bring meaningful local voice competition to the current marketplace. And VOIP is proving to be the "killer app" that may convince the vast majority of Americans, who could sign up for broadband but chose not to, to make the leap into high speed.

The federal tax some are seeking to extend to VOIP dates back to 1898, when the tax was levied to finance the Spanish-American War. Back then telecommunications services were quite rare and available only to the most wealthy, a classic luxury tax item. Obviously, much has changed in the 106 years following the war. Telecommunications and information services have emerged as great American comparative advantages and have helped to create millions of jobs. Yet the tax has remained.

Today the tax generates nearly $6 billion for the federal treasuries annually, in addition to the billions collected by the states. After cigarettes, alcohol, and gambling, telecom is one of the most highly taxed industries in our society. But unlike these other "sin taxes," taxes imposed on the telecom industry discourage highly productive activities, and their extension to Internet-based innovations such as VOIP hurts consumers, slows our economy and reduces our ability to meet President Bush's broadband goal.

VOIP enables new features, such as the ability to customize telephone services so consumers can choose whether their phone rings at work, on their cell phone, or at home. VOIP is also increasingly being included in software applications, so X-Box gamers can communicate with each other while playing online multi-player games or online shoppers can ask real-time questions of virtual shop clerks.

More importantly, extension of the Spanish American War tax and other legacy taxes and regulations to VOIP would similarly frustrate other goals of our nation. As we seek to improve our education system, technologies such as VOIP would help immensely by providing "virtual classroom" opportunities to children who need special assistance. As we try to make health care more affordable and accessible, many of our nation's home-bound seniors would be able to communicate more robustly with a physician or specialist.

The inquiry of whether or not legacy taxes and regulations should be extended to VOIP is most easily answered by the president's own statement, "If you want something to grow you don't tax it."

The President's vision on broadband deployment and emerging technologies should be the driver for administration policy, and that vision puts to rest the notion of extending century-old excise taxes to VOIP.

Bruce Mehlman and Larry Irving are co-chairmen of the Internet Innovation Alliance. Mr. Irving served as Assistant Secretary of Commerce for Communications and Information and in the Clinton administration. Mehlman previously served as Assistant Secretary of Commerce for Technology Policy under President George W. Bush.


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