TAX BADS RATHER THAN GOODS A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of.

Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.

Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense. That would provide substantial revenue that could be used to reduce other taxes. By taxing bad things more, we could tax good things less.

I can agree with him on gasoline. The decision makers in most South Asian countries appear to agree as well. They tax the hell out of gasoline.

My gripe is re mobile telephone user charges. Why are they being taxed excessively? Therefore, they are being consumed less. Why? Do the governments think the use of mobile phones is a bad? No need to say it is good; just be neutral. Treat it like anything else.

The awaited end of rapacious money making from international calls is nigh, according to Telegeography.

International long distance traffic growth is slowing rapidly. According to new data from TeleGeography, international long distance traffic grew four percent in 2011, to 438 billion minutes. This growth rate was less than one-third of the industry’s long-run historical average of 13 percent annual growth. Because telcos must rely on strong volume growth to offset inevitable price declines, slowing traffic growth is making life ever more difficult for international service providers.

Governments, of course, haven’t a clue, and are erecting even more elaborate gateway monopolies (e.g. Bangladesh) and slapping extra taxes on outgoing international calls (Sri Lanka). The first is futile; the second is stupid.  But the question is when international telephony disappears, not whether.

But the really good stuff is in Para 53.

The Telecommunications Regulatory Commission will implement policies and strategies to encourage telecommunication companies to give priority for the development of broad-band network facilities. In keeping with development priorities, telecommunication charges on incoming and outgoing calls will be revised suitably.

Since the LKR 2 billion expected to be generated by the increases in taxes on incoming calls (from USD 0.07 to 0.09 per minute) and on outgoing calls (from LKR 2 to LKR 3) is reflected in the new revenue measures (Table 1), I was scratching my head about this last sentence. It seemed, on the surface, like an ordinary revenue-raising measure; what did it have to do with encouraging broadband development?

But then I realized that it would. Because international calls will be made more expensive by the LKR 3/mt tax on outgoing calls, Sri Lankans will have greater incentive to call their friends, relatives and business contacts using Skype and Gtalk. This will create demand for broadband. All that one needs is a dongle and mobile signal. The government won’t get its 3 rupees, the telecom operators will see their international revenues dipping. But on the good side there will be more demand for broadband. But this is “in keeping with development priorities.”

I still have to figure out the hidden wisdom behind the decision to raise the tax on incoming calls from USD 0.07 (app. LKR 8) to USD 0.09 (app LKR 10). This will, for sure, increase incentives to engage in bypass or grey-market business. The TRC and Police will have lots to do, shutting down bypass businesses and running newspaper ads. The flow of black money into the economy will increase, which is useful for political campaigns and such. Perhaps people will use black money to obtain broadband services? This bit is a work in progress. Ideas, suggestions welcome.

He has described the mobile as the single most transformative technology for development. He expands on this statement in an interview on AllAfrica.

I found only a few excerpts worth pulling out. One is that he believes the mobile will help bridge the Digital Divide:

I actually think that we’ve turned the corner on the digital divide — not that it’s closed but that a gap that seemed to be widening pretty relentlessly is now going to be narrowing in the coming years and I think narrowing quite quickly. We’ll find that it’s in business, it’s in emergency services, it’s in public education, it’s in primary healthcare, banking, distance learning, scientific communications, entertainment and all the rest, and this will make a very big difference.

The other is the plain truth about taxes:

Taxes are also part of the regulatory environment. The phone companies have been cash cows traditionally both for governments and often for political parties. This has been one of the reasons for a reluctance in many places to deregulate, but it’s a mistaken view and a very costly one. So reducing the taxes and essentially opening up these services for broad competition is really important and a [will bring] very good economic return.

I do not think they are called taxes when extracted by political parties and politicians, but . . . . And he does not seem to understand that payments to politicians can actually result in deregulation.

“The combination of the capital gains tax, uncertain regulation and the very tough competitive environment has caused investors to say it wasn’t great timing” to do the deal, said Robert Grindle, an analyst with Deutsche Bank in London.

Still, he said, “India is one of the fastest growing assets in Vodafone’s footprint, and without the contribution from India the company would have much lower top line growth than it does.”

Vodafone’s total revenue, excluding asset sales, will grow about 2.4 percent this quarter, Mr. Grindle estimates. Without the India business, growth would be just 1.3 percent, he said.

Vittorio Colao, Vodafone’s chief executive, alternates between enthusiasm and frustration when discussing India. The country’s “communicative, talkative society is the ideal ground for a communications company,” he said in a telephone interview.

At the same time, he said, “in the Indian regulatory system sometimes there is a tendency to see the telecom sector as a lemon to be squeezed.”

Full story.

The previous Labour government hummed and hawed about this rural-urban “digital divide”. Eventually, in 2009, it proposed levying a 50p tax on every fixed telephone line in the country: the proceeds were to be given to BT to allow it to connect even the remotest hamlets by 2012. The new coalition administration abandoned that plan, ditching the tax and pushing the target date back to 2015. Jeremy Hunt, the Conservative culture secretary, insists that the private sector ought to be able to bring broadband to the rustics. Only if it fails will the government consider subsidies.

Mr Hunt may be right. A string of small firms are offering fast broadband to offline areas, via cables, satellites or the airwaves.

For example, will Washington offer tax breaks or other export incentives? While businesses may clamor for them, these would be a setback for freer trade — after all, for years it has been America that has been hectoring other countries to end their subsidies to exporters. Will Washington try to pick winners in the global marketplace, like green energy? More often than not, this kind of industrial policy wastes money, fosters inefficiency and creates few permanent jobs.

So, let’s assume the government does its part to break down barriers and open more foreign markets — what can our businesses themselves do to improve their performance? First, no company should assume that its services can’t be exported. Today’s technologies allow us to do things that were unthinkable just a decade ago. For example, surgeons are using high-speed data connections and robotics to operate on patients thousands of miles away.

How was the telecom market affected? In the same report, a figure shows how the subscriber base increased over time. However, the rate of growth declined in recent quarters. In 2007, the rate of growth was 9.9 percent; 2008 ended with a minus 0.3 percent growth. The average revenue per user went from USD 3.1 in the last quarter of 2007 to USD 2.58 during the last quarter of 2008.

Similarly in Sri Lanka, government has seen the mobile industry as an easy source of revenue through taxes and levies. There may be lessons for Sri Lanka from the counter-productive outcomes of Pakistan’s efforts to milk the golden mobile goose.

LIRNEasia’s T@BOP3 study conducted in 6 Asian countries indicated that only 38 percent of households at the bottom of the pyramid in Pakistan have access to mobile phones. There are consumers waiting to adopt mobile phones. Shouldn’t the government make efforts to make them available to them? Getting more people connected and taking a reasonable share of their payments as tax would be more productive than imposing taxes that bar them from becoming customers and deprive the government of tax revenues.

The PTA is to be applauded for doing these kinds of analyses. One hopes that the government of Pakistan will take remedial action to get telecom growth back on track. One hopes that other regulatory agencies will conduct and publish similar studies.

If they got it earlier, there would have been no need to change the description in the phone bills from mobile subscriber levy to telephone subscriber levy.

Hopefully this will also end the anomaly of taxing the same broadband service differently.

Of course, this is not the only telecom relevant item in the Budget. More as we get the news.

The mobile operators did not quite understand what the government wanted to do and decided to absorb the tax.  They made various pleas and protests and got the tax reduced to Taka 800.  Finally, in 2008, they decided they had enough and decided to pass on most of the tax to customers.  As a result, it is likely that Bangladesh, which is experiencing the highest mobile growth rates in the world, will see a slow down, especially in the rural areas and among poorer people.

If the companies decide to pass on the entire tax to those who wish to obtain connections, they will serve the government’s objectives better.  They must understand that the government would much prefer that mobile service remain a privilege of the rich and those who work for the government.

If the government keeps taking JHU advice, they are likely to make the economy slow to a crawl.