Keep the In­ter­net tax-free

Financial Mirror (Cyprus) - - FRONT PAGE -

When you spark one of the largest protests in East­ern Europe since the fall of com­mu­nism, you know that you have stirred up the elec­torate. That is ex­actly what the Hun­gar­ian gov­ern­ment did when it re­cently pro­posed an “In­ter­net tax” of 50 euro cents ($0.62) per gi­ga­byte. More than 100,000 pro­test­ers gath­ered in Bu­dapest, fu­ri­ous at the po­lit­i­cal sym­bol­ism of the tax and its very real eco­nomic im­pact. Prime Min­is­ter Vik­tor Or­ban’s gov­ern­ment quickly backed down.

Hun­gary’s pro­posed tax was ab­surd – akin to as­sess­ing fees on read­ing books or charg­ing peo­ple to have con­ver­sa­tions with friends. But the pro­posal, even if dis­carded (though Or­ban has hinted that he may bring it back in another form), re­mains wor­ri­some, be­cause it is part of a disturbing trend. A large num­ber of coun­tries have in­tro­duced taxes and tar­iffs that ham­per the adop­tion and use of in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy (ICT). All to­gether, 31 coun­tries – in­clud­ing Turkey, Brazil, and Greece – add 5% or more to the cost of ICT, on top of stan­dard value-added taxes.

In Hun­gary, the pro­posed tax would have been par­tic­u­larly oner­ous, be­cause it would raise the cost of mo­bile data by 5-15% and have an even big­ger im­pact on fixed broad­band sub­scrip­tions. For the young and the poor, it would be a sig­nif­i­cant bur­den. A cap of 2.30 euros per per­son, hastily pro­posed after the ini­tial pub­lic out­cry, and be­fore the pro­posal was with­drawn, would have done lit­tle to ease that bur­den on low-in­come In­ter­net users, while dras­ti­cally re­duc­ing the pro­gramme’s over­all rev­enue.

As the pro­test­ers in Bu­dapest pointed out, the pro­posed tax is wrong for Hun­gary. It is wrong for other coun­tries, too. Cash-strapped gov­ern­ments adopt th­ese taxes be­cause ICT goods and ser­vices are an easy tar­get for rev­enue au­thor­i­ties. In ad­di­tion, they are some­times mis­char­ac­terised as lux­ury prod­ucts – as if the In­ter­net has not be­come cen­tral to peo­ples’ lives.

Th­ese poli­cies are ul­ti­mately self-de­feat­ing. The re­sult­ing price hikes im­pede the adop­tion and use of ICT, low­er­ing tax rev­enues from pur­chases of goods and ser­vices. And the ev­i­dence shows an even larger in­di­rect ef­fect: re­strict­ing ICT adop­tion damp­ens growth. Ul­ti­mately, this has a neg­a­tive im­pact on to­tal tax rev­enues, off­set­ting any gains from fees on In­ter­net use. One study found that for ev­ery dol­lar equiv­a­lent of tar­iffs In­dia im­posed on im­ported ICT prod­ucts it suf­fered an eco­nomic loss of $1.30 from lower pro­duc­tiv­ity.

Taxes on ICT are the mod­ern-day equiv­a­lent of eat­ing the grain you were sav­ing to plant next year. The adop­tion of ICT drives fun­da­men­tal tech­no­log­i­cal change, po­ten­tially trans­form­ing a broad range of in­dus­tries, as well as peo­ple’s daily lives. For busi­nesses, ICT can im­prove ef­fi­ciency and fa­cil­i­tate co­or­di­na­tion. For in­di­vid­u­als, it can boost in­comes and make every­day life more con­ve­nient.

The ben­e­fits of ICT goods and ser­vices grow sig­nif­i­cantly as more busi­nesses and con­sumers start to use them. Smart gov­ern­ment poli­cies, such as sub­si­dies or tax breaks for ICT pur­chases, boost adop­tion by help­ing users who would not oth­er­wise be able to af­ford them. Tax­ing the In­ter­net, like other taxes and tar­iffs on ICT goods and ser­vices, has the op­po­site ef­fect.

Hun­gary’s pro­posed tax was es­pe­cially per­ni­cious, owing to its poor de­sign. Be­cause the tax was a flat 0.50 euros per gi­ga­byte, its share in to­tal ICT spend­ing would rise as the cost of a gi­ga­byte fell – as it is almost guar­an­teed to do. The cap on such a tax would pre­vent the rate from spi­ral­ing up­ward, but ris­ing band­widths would cause most users to max out quickly, af­fect­ing not only the poor­est con­sumers, but also new or small busi­nesses. Keep­ing poor peo­ple and en­trepreneurs off the In­ter­net is no way to fund a gov­ern­ment.

Coun­tries would be bet­ter off with poli­cies that pro­mote ICT: elim­i­na­tion of taxes and tar­iffs on ICT prod­ucts and ser­vices, re­moval of non-tar­iff bar­ri­ers like re­quir­ing lo­cal data stor­age, and en­cour­age­ment of dig­i­tal in­no­va­tion and trans­for­ma­tion in eco­nomic sec­tors through reg­u­la­tory and pro­cure­ment re­form. The re­sult­ing rise in pro­duc­tiv­ity, com­pet­i­tive­ness, and eco­nomic growth would es­tab­lish a far more sta­ble and rev­enues.

The Euro­pean Union as a whole has done a good job of keep­ing ICT taxes and tar­iffs low, de­spite sub­stan­tial fis­cal dif­fi­cul­ties in many coun­tries. In­deed, the over­all nondis­crim­i­na­tory tax regime has been an im­por­tant boon to ICT adop­tion, and the EU’s com­mis­sioner for the dig­i­tal agenda spoke out strongly against Hun­gary’s pro­posed tax, call­ing it “a par­tic­u­larly bad idea.”

The only EU coun­try with sig­nif­i­cant taxes on ICT prod­ucts and ser­vices (around 9%) is Greece, some­thing of a spe­cial case in Europe.

The re­cent ac­tions by Hun­gar­ian pol­i­cy­mak­ers show that no coun­try is im­mune to bad pol­icy ideas. Gov­ern­ments need rev­enue, but how they raise it shapes their coun­tries’ economies by en­cour­ag­ing some trans­ac­tions and dis­cour­ag­ing oth­ers. Poli­cies that en­cour­age ICT adop­tion are the right choice for long-term and in­clu­sive eco­nomic growth. As the case of Hun­gary showed, ul­ti­mately it is up to cit­i­zens to hold gov­ern­ments ac­count­able and en­sure that tax and tar­iff poli­cies work for the ben­e­fit of all.

suc­cess­ful foun­da­tion

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in­creas­ing

tax

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