The Value of Broadband and the Deadweight Loss of Taxing New Technologies
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ARTICLE SUMMARY
When it is costly to deploy a technology, taxes will greatly slow the adoption of that technology.
POLICY RELEVANCE
Taxes on new technologies that require a large up-front investment, like broadband, will likely have a significant negative effect on technological development.
KEY TAKEAWAYS
- When a tax prevents a mutually beneficial exchange that would have occurred in its absence, economists say that deadweight loss has occurred. Put another way, deadweight loss is the cost of lost economic activity brought about by a policy.
- This hidden cost of taxation is borne by both consumers and businesses, regardless of who pays the tax directly.
- For example, if high taxes force an ice cream parlor to raise prices, children will not be able to afford as much ice cream, and the ice cream sellers will not obtain profit from ice cream cones they could otherwise sell to children.
- This hidden cost of taxation is borne by both consumers and businesses, regardless of who pays the tax directly.
- A hypothetical tax on broadband Internet, implemented in markets where broadband was available, would generate twice as much deadweight loss as revenue.
- Consumers would bear 55% of this loss.
- Consumers would bear 55% of this loss.
- However, in response to the tax, firms would be more reluctant to make substantial investments to bring broadband to new markets.
- This would cause even greater economic loss than a tax implemented only in areas already possessing broadband access, and the loss would be borne even more disproportionately by consumers.
- Worse still, no revenue would be raised at all from these markets, since there would be no broadband to tax.
- This would cause even greater economic loss than a tax implemented only in areas already possessing broadband access, and the loss would be borne even more disproportionately by consumers.
- For example, by delaying broadband availability in four cities—Miami, Cleveland, Tampa, and Milwaukee—for a year, the authors estimate an economic loss of $56M for consumers and $14M for broadband firms.
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About Austan Goolsbee
Austan D. Goolsbee studies the Internet, the new economy, government policy, and taxes.
He recently returned from Washington where he was the Chairman of the Council of Economic Advisers and a member of the President's cabinet. Before Washington, his research earned him recognition as a Fulbright Scholar and a Sloan fellow. In previous years, he was named one of the Global Leaders for Tomorrow by the World Economic Forum, one of the six "Gurus of the Future" by the Financial Times and one of the "40 under 40" by Crain's Chicago Business.
