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74 IRET Policy Bulletin 1 (1999)

handle is hein.taxfoundation/iretpbul0033 and id is 1 raw text is: .... g j February 2, 1999 _No. 74 TAXING TALK: THE TELEPHONE EXCISE TAX AND UNIVERSAL SERVICE FEES* The federal government imposes explicit excise taxes on a handful of goods and services, and further interferes with market activity in certain products through a series of implicit, largely hidden price controls that tax some users to subsidize others. These taxes and regulations serve chiefly to distort production and consumer demand, thereby reducing the total value of goods and services that could otherwise be extracted from available resources if the resources were directed to their most efficient uses. An excise tax raises the cost of obtaining a product above its actual cost of production, and relative to the cost of other goods and services. The result is that consumers under-utilize that product, and over-consume other products, for a net loss in economic efficiency and satisfaction compared to raising the same revenue from a more broadly based, less distorting tax. Furthermore, fairness suffers when some users of a particular product are taxed to provide a cross-subsidy to other users, regardless of income. All such market-distorting taxes and regulations should be repealed. Federal efforts to discourage or encourage production and consumption of specific goods and services are generally unwarranted, and should be eliminated. If the objective is to help the poor obtain needed goods and services, there are more direct and less costly ways of doing so. If the objective is to raise general revenues for the government, they should be obtained through less distorting methods. The telecommunications industry is saddled with all of these forms of market intervention. There is an explicit federal excise tax of 3% on telephone service. In addition, the universal service program imposes hidden charges and subsidies that boost the price of telephone service for some subscribers to hold down the price for others. These taxes, charges, and subsides violate basic economic principles. They should be abolished. * An earlier version of this paper was presented at the Tax Foundation Excise Tax Conference, Amelia Island Plantation, Amelia Island, Florida, January 14-16, 1999. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 . Washington, D.C. 20006 Taxation (202) 463-1400 e Fax (202) 463-6199 e Internet www.iret.org

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