The Value of Broadband and the Deadweight Loss of Taxing New Technologies

Innovation and Economic Growth, Networks, the Internet, and Cloud Computing, Internet and Broadband

Article Snapshot

Author(s)

Austan Goolsbee

Source

The B.E. Journal of Economic Analysis & Policy, Vol. 5, No. 1, 2006

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.

Main Points

  • 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.
       
  • 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.
       
  • 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.
       
  • 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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