Internet Usage or Bit Tax?

Ideas for how to use old and new taxes can come up in a variety of contexts and situations. Certainly if you look at the hundreds of tax bills introduced in any session of Congress, you'll get the sense that the tax law can be used to solve all problems!

Recently there were reports that Microsoft's security officer offered that one possible way to fund computer security measures was to impose a tax on Internet usage. For one report on this - see McMillan, "Microsoft's Charney Suggests 'Net Tax to Clean Computers," PC World, 3/2/10.

I don't think I've heard of such a tax for years. I recall in the late 1990s, there was some discussion of a bit tax. In July 1999, the United Nations issued Human Development Report 1999. This report provided background to and solutions for dealing with various gaps that exist throughout the world, such as technology, wealth, and education. One solution offered for narrowing the technology gap was to create new funding mechanisms, such as a bit tax or a patent tax. These types of taxes would raise funds from people with the technology and could be used to help provide the benefits to a broader group. A press release about the report noted that a tax of 1 cent on every 100 e-mails would generate over $70 billion per year. A subsequent statement from the U.N. noted that the "bit tax" example is an illustration and that the UN has no power to tax.

S.Con.Res. 52 (106th Congress) proposed a sense of Congress opposition to a bit tax on Internet data mentioned by the U.N. It noted that Americans would be disproportionately affected by a global Internet tax. Also see H.Con. Res. 172 (106th Congress).

Is a bit tax or Internet usage tax a good idea? No. While it might sound like a user pays tax - making those who use the Internet and might be most concerned with hacking, viruses and other bad computing actions, it has several flaws. First, security issues are not limited to use of the Internet, but could appear on software purchased on tangible media.

But bigger problems are with the principles of simplicity, convenience of payment, equity, neutrality, and economic growth and efficiency:

• Simplicity - How would this be assessed? What would be the tax base? Who would collect it? How would it be enforced?
• Convenience of payment - These types of taxes would need to be assessed as you are incurring the tax. That is, as you are using the Internet. But that isn't how things work. If it were added as a percentage of your monthly Internet access bill, you'd know about it when you sign up, but if taxed on how much you used the Internet rather than how much your access fees are, you'd need a usage meter on your computer (or iPhone, etc.) to help you know just how much tax you're ringing up so you'd know if you can afford to keep surfing.
• Equity - A bit tax or Internet usage tax would be regressive as it would not be tied to one's income. Thus, if a low income and high income person each have the same amount of tax, it would represent a larger percentage of the low-income taxpayer's income relative to the higher income taxpayer's income.
• Neutrality - An Internet usage tax could affect a person's decision on whether or not to use the Internet. Taxes should not play a role in decision-making.
• Economic growth and efficiency - Businesses, individuals and governments rely more and more on the Internet for operations and information transfer. If the costs go up, it increases them for everyone and might lead to reduced use of the Internet for activities that would provide benefits to many.

I doubt the suggestion of an Internet usage tax is going anywhere. Perhaps though the comment will make people think of the high costs of Internet security and come up with alternatives for addressing the problem.