At a recent Tech Net Conference, venture capitalist Floyd Kvamme decried the “multiple digital divides” caused by the paucity of broadband, which is only available in an estimated 5 percent of American households. This is a lamentable situation and one that stalls development in other high-tech sectors. For the past three years, Microsoft Chairman Bill Gates has publicly stated that the dearth of broadband is the “biggest bottleneck to where we’d like to take the PC.” The unavailability of broadband slows sales growth and investment in semiconductors, software applications, and convergence technologies.
Unfortunately, thus far the “digital divides” rhetoric has been used to kindle favor for government programs instead of an honest policy debate. The most effective short-term policies to close “digital divides” would be the elimination of many telecommunications taxes, a removal of the current ban on the construction of inter-LATA broadband networks by incumbent phone companies, and to attach clearly defined property rights to the electromagnetic spectrum. These policies would reaffirm the long-term goal of “open market” architecture, which encourages innovation and substantial broadband investment.
It is distressing that many leaders concerned with the shortage of broadband have largely ignored this policy approach. Instead, they seem inclined to address the problem through new government programs: a “War on Broadband Scarcity,” so to speak.
The most popular of these programs seems to be tax credits to cover investment in broadband architecture. Presumably, these tax credits would artificially stimulate demand for fiber optic wires and encourage rapid network development. Although these tax credits may seem appealing, they would pervert investment, harm emerging technologies, and may ultimately trap consumers into another Universal Service boondoggle.
Consumers are currently trapped in a “copper cage” for voice telecommunications service. This legacy network was financed by government expenditure and rate-of-return regulation. These policies have encouraged dubious investment decisions, discouraged innovation, and fostered the “open network” competition policy of the 1996 Telecommunications Act, which has provided limited competition and consumer benefit. By choosing fiber and ignoring the next technological alternative, tax credits have the potential to trap consumers in the “glass cage” of a legacy fiber optic network.
Yet, proponents of tax credits try to disguise the expenditure as a “free-market” alternative to a government-constructed infrastructure. But no one is suggesting a New Deal employment program to build broadband. That alternative lacks any economic rationale and is politically untenable. That special preferences carved out of the tax code are preferable to a government-constructed Internet is not at issue: Beware of the false choice between broadband constructed by the government and broadband constructed by the private sector. It is a rhetorical device to make an injurious government program appear to be a prudent policy choice.
A government program administered through preferential tax treatment is still a government program. It will limit innovation in fixed wireless and two-way satellite technologies, bias financial markets toward a concentrated group of beneficiaries, and may eventually lead to a broadband entitlement.
If anyone doubts that tax credits would fuel a universal broadband entitlement, look at the “Rural Telecommunications Infrastructure Bill” introduced in Texas by State House Member Steve Wolens (D-Dallas). The bill offers lines of credit to purchase broadband and obligates incumbent local phone companies to provide broadband to rural consumers at a price and service level “reasonably comparable” to that of urban areas.
In the Texas bill the string attached to tax credits is explicit, but veterans of Capitol Hill are too savvy to give away their hand. They present tax credits as the “business friendly” alternative to more government. Some businesses may indeed be friendly to the idea, but by perverting market outcomes and inviting coverage mandates, tax credits are big government.
Satellite and wireless communications are growing at exponential rates in underdeveloped countries. Across the globe, wireless telecommunications are rapidly expanding where legacy landline systems either do not exist, or are prohibitively expensive. Western Europe is far ahead of the United States in wireless broadband, thanks in large part to better spectrum allocation and innovation precipitated by the expense of landlines.
Tax credits would divert the investment necessary to develop this technology in America toward unprofitable ventures. Tax credits are not a free market alternative, but rather a ill-fated step down the path of old fashioned rate regulation.