The Toll Booth on the Information Highway
Mark Weller
Governments around the world are continuing to show remarkable innovation in finding new ways to tax their citizens. User fees, processing charges, even state lotteries and bridge tolls, all are forms of taxation. The creativity of the various tax departments, however, is especially notable with regard to the many proposed forms of Internet tax.
Recently, discussions in government circles about taxing the Net have begun in earnest, as it has become clear that on-line transactions are starting to generate real money. As a world-wide phenomenon, the Internet is anticipated to generate over US$5 billion in annual revenues by the year 2000.
One proposed way of capturing some of the revenue being generated by Internet use is to tax users at their point of entry. This would be a sort of toll booth on the Information Highway. This would work as follows: as you dial into your Internet service provider, you would agree to spend a predetermined amount of time on-line. At the end of this time, the server would automatically log you off. As a service, this would, first of all, be subject to any applicable sales taxes. However, it would also be opportune to charge a user fee at this point.
Another way to tax the Net is to charge a usage fee. However, this tax would be charged on the amount of data transferred, not on the amount of time spent browsing. This is the so-called bit tax. A calculation would be made on the basis of how much bandwidth a user was taking up. This means that a person downloading a lot of graphics would be charged more tax than someone simply transferring e-mail text. Particularly among the users who favour text-based interfaces, this holds some attraction. However, since bandwidth is currently expanding at an exponential rate, the idea of setting a fixed tax rate based on bits transferred seems impractical.
Another proposed way of taxing the Net is for the government to charge fees based on accessibility. This idea has not been fully fleshed out by its proponents, but the premise is simple. In order to ensure that the poor have equal access to the Internet and its resources, more well off users should be taxed in order to subsidize government programs that will provide access. This would be a sort of "inner-city-internet-outreach" tax. The collection mechanism proposed is less creative—revenue would likely be obtained through the existing income tax system.
It is interesting to note that the existing tax system is changing too. Some governments already provide options for citizens to file their income tax forms on-line. Further steps along these lines are also being planned. In fact, it may not be long before a citizen can opt to let the tax department do their calculation for them, and automatically withdraw the money owed directly from the bank. Whether by Internet or Interac, governments are increasingly interested in providing taxpayers with simplicity and efficiency—with the tradeoff being greater government control of the tax base.
Finally, there is the looming spectre of Internet licensing. Although this has yet to appear in North America, versions of Internet licensing have arrived in Germany and China. Under this regime, in order for a firm to provide internet services, it must first acquire a license. Of course, this involves a fee that is passed on to the consumer—yet another form of tax.
Before any government considers broadening its tax base by expanding into the Internet, however, it should consider the potential for avoidance. Although it may be difficult for a given taxpayer to relocate themselves geographically to avoid tax, it is comparatively simple to move to an off-shore provider for one's Internet service, thereby circumventing these various regimes. Instead of expanding taxation onto the Net, governments should remember that in the end, there is only one taxpayer, and that most of the activities that are currently conducted on-line are taxed at the source. The Net may be new, but that does not necessarily mean that a new form of Internet taxation is justified.
This article originally appeared in the July 1997 issue of Fraser Forum.
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