NBER WORKING PAPER SERIES EFFICIENCY EFFECTS ON THE U.S. ECONOMY FROM WIRELESS TAXATION. Jerry Hausman

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1 NBER WORKING PAPER SERIES EFFICIENCY EFFECTS ON THE U.S. ECONOMY FROM WIRELESS TAXATION Jerry Hausman Workng Paper NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambrdge, MA August 1999 The vews expressed heren are those of the authors and not necessarly those of the Natonal Bureau of Economc Research.

2 1999 by Jerry Hausman. All rghts reserved. Short sectons of text, not to exceed two paragraphs, may be quoted wthout explct permsson provded that full credt, ncludng notce, s gven to the source. Effcency Effects on the U.S. Economy from Wreless Taxaton Jerry Hausman NBER Workng Paper No August 1999 JEL No. H22, L51 ABSTRACT Ths paper measures for the frst tme the economc effcency effects of the taxaton of wreless servces, whch are taxed by federal, state, and local governments at relatvely hgh rates n the range of 14%-25%. The paper concludes such taxes are a much greater dran on the economy than ther drect costs. The taxes dentfed n ths paper cost the economy $2.56 bllon more than the $4.79 bllon they rase n tax revenues. These taxes are rased from wreless consumers and thereby suppress demand for servce, mposng an effcency loss on the economy of $0.53 for every $1 currently rased n taxes. Prospectve taxes wll mpose an effcency loss of $0.72-$1.14 per addtonal dollar of tax revenue rased. Jerry A. Hausman Department of Economcs E52-271A MIT Cambrdge, MA and NBER jhausman@mt.edu

3 1 July 16, 1999 Effcency Effects on the U.S. Economy from Wreless Taxaton Jerry Hausman, MIT 1 Summary Unlke local wrelne access servces, demand for wreless servce s relatvely elastc. Ths paper measures for the frst tme the economc effcency effects of the taxaton of wreless servces, whch are taxed by federal, state, and local governments at relatvely hgh rates n the range of 14%- 25%. The paper concludes such taxes are a much greater dran on the economy than ther drect costs. The taxes dentfed n ths paper cost the economy $2.56 bllon more than the $4.79 bllon they rase n tax revenues. These taxes are rased from wreless consumers and thereby suppress demand for servce, mposng an effcency loss on the economy of $0.53 for every $1 currently rased n taxes. Prospectve taxes wll mpose an effcency loss of $0.72-$1.14 per addtonal dollar of tax revenue rased. I. Introducton Federal, state, and local government authortes are now levyng a wde range of taxes and fees on the use of cellular telephone, PCS, and ESMR servces (jontly wreless servces). 2 The sum effect 1. The approach used n ths paper s related to an earler paper, Hausman (1998). Sandra Chan provded research assstance. 1

4 2 of the FCC-mposed fees and other federal taxes s currently 4.52% (ncludng the federal excse tax and the FCC s share of current unversal servce program fundng). 3 Addtonal tax ncreases have been proposed by the FCC to fund other socal programs n telecommuncatons. 4 State and local taxes on wreless vary by jursdcton, and commonly mpose hgher tax rates on wreless than on other busnesses. Many localtes charge a varety of drect and ndrect fees to wreless provders. Most such taxes and fees are of recent orgn. More such taxes and fees are currently beng proposed. The subsequent analyss estmates the effcency loss to the economy from these addtonal proposed taxes and fees. Moble wreless telephone s an example of a new product that has sgnfcantly affected how Amercans lve n a relatvely short perod of tme. 5 Snce ther ntroducton n 1983, cellular telephones adopton has grown at 25-35% per year such that at year end 1998 about 69 mllon wreless telephones are n use n the U.S. Thus, approxmately 28% of all Amercans use wreless telephones, and there are about 40% as many cellular telephones n the U.S. as regular (landlne) telephones. The average cellular customer spends about $525 per year on cellular servce. Thus, consumers and busnesses have found cellular telephone to be a valuable addton to ther lfestyles. However, federal, state, and local governments have seen wreless as a ready source of tax revenue whle the FCC has 2. PCS s a form of dgtal cellular telephone servce. ESMR, enhanced specalzed moble rado, s a cellular-lke servce offered by Nextel and other companes. Throughout ths paper I wll combne these servces nto the sngle term wreless servces. They are often referred to as CMRS (consumer moble rado servces) by the Federal Communcatons Commsson (FCC). 3. See Hausman (1998) and Hausman and Shelansk (1999) for a dscusson of the FCC taxaton program to provde nternet subsdes for schools and lbrares. 4 The FCC s only allowed to assess "fees", not taxes. However, the FCC fees have the same economc effect as a tax. 5 Wreless has led to sgnfcant ncreases n consumer welfare. For estmate of these welfare gans see Hausman (1997) and (1999). 2

5 3 used wreless to fund new subsdy programs for wrelne telephone usage. No calculaton has ever been done to estmate the cost to consumers and the U.S. economy that arses from the relatvely hgh level of taxaton. Indeed, snce separate taxes are leved at all three levels of government, most government offcals seem unaware of the cumulatve tax rate leved on wreless. They each see ther own tax rate as beng small wthout realzng that the cumulatve effect of the three levels of taxes levy a hgh cost on consumers and the economy. The effect of these federal taxes, and the many state and local taxes on wreless, s to rase costs to consumers, suppress demand, and mpose effcency losses on the economy. For example, the aggregate New York state tax of 20% mposes a cost of about $11.52 per month or $138 per year on the average wreless user. The combned federal and state tax burden on a wreless user n New York s 24.5% or $170 per year. Smlar taxes on wreless users n Calforna and Florda average about 21%. The resultng state tax oblgaton for the average wreless customer n these states exceeds $152 per year. 6 When federal taxes are ncluded, the overall tax rate ncreases to 25.5%, and average consumers tax blls ncrease to $185 per year. Even n states where lower taxes are leved on wreless, the medan state tax rate s 10%, and the tax payment for the average wreless customer s about $62. Includng current federal taxes, the medan tax rate s 14.5% and the yearly tax bll s about $ For nstance, a wreless user n Calforna pays the followng taxes: FCC taxes for the hgh cost fund, unversal servce and school and lbrary nternet subsdy, state, county and cty sales taxes, taxes (fees) leved by the Calforna Publc Utltes Commsson for unversal servce (3.2%), emergency telephone servce (0.72%), hgh cost funds (3.14%), teleconnect fund (0.41%), hearng mpared fund (0.36%), local utlty taxes (7%), and the federal excse tax (3%). 3

6 4 There are now over 69 mllon wreless subscrbers about 40% as many as there are landlne telephones n the U.S. 7 The average monthly bll for cellular s about $43 per month. Moble telephone s most often used by small busnesses as a productvty tool and by consumers for personal safety reasons. Thus, taxaton of wreless should be evaluated not as taxaton of a luxury good, but n terms of ts dstortonary effect on consumer behavor and economc effcency compared to other revenue sources for government expendture. 8 Economsts have well-developed tools, used for more than 100 years, to assess the dstortonary effect of a tax on consumer welfare and economc effcency. 9 Taxes decrease the consumpton of a good or servce and, n ths case, also lead to under-utlzaton of the nfrastructure nvestment made by wreless provders. In ths paper, I calculate the effect on deadweght loss and economc effcency from the dstortonary effect of taxaton on wreless. The change n economc effcency accounts for both harm to consumers, from the deadweght loss term, and harm to wreless provders who have nvested tens of bllons of dollars n ther networks and who have pad over ten bllon dollars to acqure ther lcenses, often from the federal government. 10 I calculate the effcency cost to the economy of rasng the approxmately $4.79 bllon that s currently rased from wreless taxaton to be about $2.56 bllon (n addton to the $4.79 bllon of tax revenue) or the effcency loss to the economy for every $1 rased s about $0.53. Furthermore, for 7 These are year end 1998 estmates from the Cellular Telephone Industry Assocaton (CTIA) semannual surveys. 8. See Posner (1971) for an early dscusson of taxaton by regulaton. Hausman (1998) estmates the dstortonary effects of taxaton of landlne telephone servces. 9. See e.g., Auerbach (1985) and Hausman (1981). 10. PCS provders bought ther spectrum n auctons conducted by the federal government. The cellular spectrum and much of the ESMR spectrum was dstrbuted free of charge by the federal government n an earler perod before auctons were used. But, n many nstances, current lcensees 4

7 5 every addtonal dollar rased, the margnal effcency loss to the economy vares between $0.72 to $1.14. Ths cost to the economy s hgh compared to other taxes used by the Federal and state governments to rase revenues. 11 Three reasons exst for the hgh cost to the economy of ths tax on moble telephone servces: (1) the prce elastcty of wreless servces s relatvely hgh, (2) the taxaton of wreless servces s hgh, and (3) the prce to margnal cost rato of wreless servces s hgh. Thus, the taxaton of wreless mposes hgh effcency costs on the U.S. economy. Other commodtes can be taxed to rase the same revenue wthout creatng nearly so large deadweght losses or losses n economc effcency as I have dscussed n prevous papers, Hausman (1995, 1998). Wthn telecommuncatons, a tax on monthly local landlne access rates wll create almost no deadweght loss or loss n economc effcency snce the prce elastcty for local access has been estmated to be very near zero, (Hausman et. al. 1993, 1998). I conclude that taxaton of wreless cannot be justfed on ncome dstrbuton grounds (e.g., the luxury good approach) nor can t be justfed on economc effcency grounds. 12 Government use of wreless as a taxaton source to fund expendture n other areas leads to hgh effcency costs to the economy. II. Estmaton of Economc Effcency Losses obtaned ther spectrum by buyng t at market prces from the orgnal lcensees. 11 Ths paper answers the queston rased by Posner (1971) of the cost of subsdy programs arsng from regulaton and taxaton of wreless telephone whch I also consdered n Hausman (1998) wth respect to wrelne telephone tax and subsdy programs. 12 Accordng to a 1997 survey of approxmately 1000 wreless users by Peter Hart Research Assocates, the medan (and modal) wreless user s famly ncome was n the range of $30,000 to 5

8 6 Taxes (and subsdes) dstort economc actvty. Taxes ncrease prces and thus lead to lower demand. Ths lower demand has two adverse affects on economc effcency whch s defned (approxmately) as the sum of producer surplus and consumer surplus. 13 To the extent that the ndustry s mperfectly compettve and prce exceeds margnal cost to cover fxed costs, decreased demand reduces the amount of producer surplus whch s the product of quantty demanded tmes the dfference between prce and margnal cost. 14 Decreased demand from hgher prces also affects consumers adversely snce consumer surplus decreases. Thus, the change n economc effcency from the mposton of a tax s gven approxmately by the formula: [ η Ε [- q ( p - m ) p p -.5 p q ] p ( p q - m q )+.5η p 2 p q ] (1) where the frst term s the change n producer surplus and the second term s the change n consumer surplus, after the amount rased by the tax s subtracted off. 15 Fgure 1 provdes a graphcal demonstraton of ths relatonshp. Equaton (1) demonstrates that taxes whch cause prces to ncrease create losses n economc effcency wth the sze of the effcency loss dependng on the prce elastcty $50, See e.g. A. Auerbach (1985) for a further dscusson of how taxaton creates effcency losses to the economy. 14. Even n a free entry mperfectly compettve ndustry wth constant margnal cost and zero (economc) profts, prce wll exceed margnal cost. 15. Thus, as dscussed above, the possble dstorton created by expendture of the tax are not consdered. All the quanttes n the formulae are assumed to be Hcksan compensated quanttes. See Hausman (1981) for computaton of compensated quanttes. 6

9 7 η, the magntude of the prce ncrease ( p /p ), the revenue of the good or servce beng taxed p q, and the margnal cost of producton, m. A more accurate method than equaton (1) replaces the second term of equaton (1) wth a calculaton of the exact deadweght loss to consumers based on the analyss of Hausman (1981a). Rather than usng the Taylor expanson, I use the expendture functon based on the log-lnear demand curve to calculate the compensatng varaton from the ncrease n taxes: -δ [ p 1 x 1 - p 0 x 0 ] + y (1-δ ) CV = y (1+ α ) (1-δ ) 1/(1- δ ) - y (2) where δ s the ncome elastcty (0.8) and α s the prce elastcty. To calculate the deadweght loss to consumers, I subtract the compensated revenue rased R * from the compensatng varaton calculated n equaton (2): DWL = CV - R *. The DWL estmate replaces the second term n equaton (1). Hausman (1981a) demonstrates that ths exact calculaton can be consderably more accurate than the approxmaton contaned n equaton (1). For moble telephone I have estmated the prce elastcty η to be -0.51, Hausman (1997), whch s relatvely hgh for telecommuncatons servces. 16 The magntude of the prce ncrease ( p /p ) depends on the tax rate n each state wth the medan tax rate 10% and the hgh tax rates n the range of 20%-21% n Calforna, New York, and Florda. When current federal taxes are ncluded the medan tax rate s 14.5% and n the hgh tax states the overall rate s 24.2% to 25.5%. The revenue of wreless 16. The prce elastcty for nterstate long dstance servce exceeds (n magntude) the cellular prce elastcty, but the cellular prce elastcty exceeds the elastctes for most other telecommuncatons 7

10 8 servce p q s about $525 per year, excludng taxes. Lastly the margnal cost of producton for wreless, m, s relatvely low, whch s expected gven the large fxed costs of wreless networks. I estmate the margnal cost to be about $0.05 per mnute. Thus, the expected result from equaton (1) or equaton (2) s relatvely hgh effcency costs to wreless taxaton gven the relatvely hgh demand elastcty, the sgnfcant tax rates, and the low margnal cost of producton. A. Estmaton of the Average Effcency Loss from Wreless Taxaton Usng equaton (2), the cellular elastcty estmate consdered above, and the fact that the margnal cost of wreless s about $0.05 per mnute whle the medan tax rate s 14.5% I estmate that for average revenue rased by the tax on wreless: E = * TR (3) where TR s total tax revenue rased. Ths calculaton follows from dvdng through equaton (1) by the tax revenue rased, t p q (.e. the tax revenue term TR), and usng wreless revenue and tax amounts collected from wreless by the federal, state, and local jursdctons. For the hgh tax states the effcency loss ncreases on average for each dollar of tax revenue rased from wreless customers. For a 21% state tax rate used n Calforna, Florda, and New York, the estmated effcency loss ncreases to approxmately $0.70 for each dollar of tax revenue rased, servces. 8

11 9 smlar to the result n equaton (2). For lower tax rates, the estmated effcency loss decreases accordngly. The elastcty estmate that I used to calculate equaton (2), reported n Hausman (1997), s Ths estmate was based on data up through Usng more recent data, I have estmated an elastcty of about 0.71, although the estmate s not statstcally sgnfcantly dfferent from the earler estmate. An ncreased elastcty estmate mght be expected gven the rapd penetraton of moble telephone and the expected results that early adopters place a hgher margnal valuaton on ther usage whle later adopters are affected by decreasng prces. Whle I would need to collect more data before changng the elastcty estmate, note from equaton (1) that the estmated effcency loss s homogeneous of degree one n the elastcty estmate. An approxmately smlar result holds for equaton (2). Thus f the hgher elastcty estmate were used to estmate the average effcency loss, the amount would ncrease from for the medan tax state to The effcency loss for the hgh tax states would also ncrease accordngly. B. Estmaton of the Margnal Effcency Loss from Wreless Taxaton Perhaps a more relevant calculaton s the margnal effcency loss to the economy from changes to the tax rates. The FCC and state and local tax authortes apparently vew wreless as a ready tax revenue source so that they have been ncreasng the tax rates over tme. The FCC has ncreased tax rates to provde unversal servce for landlne telephone users and to provde nternet subsdes to 9

12 10 schools and lbrares. 17 These subsdes and the taxes (fees) to fund them are expected to contnue ncreasng n the near future. The formula for the margnal effcency loss of ncreased taxaton s computed by takng the margnal change n equaton (1) wth respect to the tax rate, E/ t, and dvdng by the margnal change n tax revenue wth respect to the tax rate, TR/ t : m η (1 ) + η Ε/ t p ( ) TR/ t t +[ η p 1-η t p tm 2 p p t -.5 η 2 t p 2 p ] t (4) Usng equaton (4) together wth the assumpton that p / t = 1 along wth the fact that t /p = for the medan state when federal taxaton s ncluded, I estmate equaton (4) to be When I calculate the margnal effcency loss usng the exact calculaton based on equaton (2) usng the approach of equaton (4) nstead of the tradtonal approxmaton, I estmate the margnal effcency loss to be For all further calculatons, I use the exact approach rather than the approxmaton of equaton (4). 17 Hausman (1998) and Hausman and Shelansk (1999) dscuss the nternet subsdy program for schools and lbrares. 18. If nstead of the assumpton that p / t = 1, I use a dfferentated product olgopoly markup model assumpton along wth constant elastcty demand curves, the margnal effcency loss could be hgher than Other olgopoly models, especally models based on lnear demand curves could fnd p / t < 1. For a further dscusson of these matters see e.g. Hausman and Leonard (1999). However, the ntroducton of 4-5 new wreless compettors n addton to the two cellular ncumbents n each market wll lead to ncreased competton, leadng to the concluson that the entre tax wll be passed on to customers. When I dd a smlar analyss for the ntroducton of the E-rate tax on long dstance n Hausman (1988), the chef economst at the FCC at that tme clamed that the long dstance companes mght not pass on the ncreased tax to ther customers. However, experence demonstrates that the long dstance companes dd pass on the entre tax, often usng a separate lne tem on the bll to call customer 10

13 11 Thus, for ncreased taxaton the effcency loss to the economy s approxmately $0.72 for each $1 of addtonal tax revenue. For states such as Calforna and New York wth tax rates near 20% (whch rse to 25% when current federal taxaton s ncluded), the margnal effcency loss s about $0.93 for each $1 of tax revenue rased from wreless servce. Thus, the margnal effcency loss s qute hgh snce for each dollar rased by an ncrease n wreless taxes, $0.72 to $0.93 of effcency loss s created for the economy, beyond the tax revenue rased. 19 Three reasons exst for ths hgh amount of effcency loss to the economy from wreless taxaton, whch can be seen by an examnaton of equatons (1) and (3): (1) the elastcty η s relatvely hgh, (2) m /p s relatvely low snce gross margns are hgh n wreless whch s to be expected gven the large fxed costs of wreless networks, and (3) t /p s relatvely hgh n the range of 14%-25%. To see how ths effcency loss compares wth other taxes n the U.S. economy, I turn to a revew of the lterature. III. Prevous Estmates of the Effcency Loss from Taxaton n the U.S. Economy Rather than taxng telecommuncatons usage to fund the subsdy for unversal servce landlne telephone subsdes and nternet access subsdes for schools and lbrares, Congress could have used general tax revenue. Smlarly, states can levy taxes on ncomes or expendtures (sales taxes) to fund ther varous socal programs. Whle no generally agreed to number exsts for the value of the margnal attenton to the tax. 19 Snce the numerator s homogeneous of degree one n the prce elastcty and the denomnator wll decrease wth a hgher elastcty, the margnal effcency loss would ncrease sgnfcantly f the hgher elastcty of 0.71, whch I dscussed above, were used. Indeed the estmate of $0.724 ncreases to $1.14 for the margnal dollar of tax revenue. 11

14 12 effcency loss to the economy from ncreasng overall taxes, the range of estmates s reasonably close. In Table 1 I present estmates of margnal effects of addtonal taxes: Table 1: Margnal Effcency Effects of Addtonal Taxes Rased 20 Study Type of taxes Margnal Effect 1. Ballard, Shoven and Whalley (1985) US taxes $ Brownng (1987) US taxes $ Bovenberg and Goulder (1996) US taxes $ Hausman (1981b) Income taxes $0.405 All of the estmates n Table 1 are below $0.405 of margnal effcency loss per dollar of addtonal revenue rased. Thus, they are all sgnfcantly less than the $0.72 -$1.14 effcency loss per addtonal dollar of tax revenue rased by the FCC and by the state and local authortes. Thus, consderably less expensve means to rase tax revenues, n terms of economc effcency losses, exst for the federal government and for the states n terms of ncreasng ncome taxes or other broad-based taxes, rather than targetng the use of wreless servces. 20. Where a range of estmates s gven n the orgnal paper, I use the md-pont of the range. Feldsten (1995) has estmated sgnfcantly hgher margnal effcency losses from the ncome tax. 12

15 13 In terms of the FCC tax rate used for unversal servce subsdes, the margnal effcency loss for the medan state of $0.72 s sgnfcantly less than the margnal effcency loss for the FCC tax on long dstance servce for the E-rate whch Hausman (1988) estmates to be $1.25. Thus, to the extent that some of the unversal subsdy s rased from wreless servce, nstead of all beng rased from long dstance servce, a lower effcency loss to the economy results. However, as Hausman (1998) and Hausman and Shelansk (1999) dscuss a far better method exsts to fund the unversal servce subsdy. The alternatve method whch the FCC could use to rase the revenue for the unversal servce subsdy s to ncrease the Subscrber Lne Charge (SLC). The SLC was establshed n 1984 and s a monthly fxed fee of $3.50 per resdental lne and $6.00 per busness lne. The FCC has not ncreased the SLC for resdental households snce 1984 despte approxmately 56.9% nflaton snce that tme perod. The SLC s used n large part to fund the jont and common costs of the local exchange carrers networks as well as the cross subsdy for local exchange access (e.g. local telephone servce). Note that n terms of the effcency effects on the economy the SLC s very attractve snce the own prce elastcty of local access wth respect to ts prce s estmated to be by Hausman et. al. (1993). Thus, the SLC acts smlarly to a lump sum tax whch has "frst best" economc effcency propertes snce t does not create an economc dstorton,.e. equaton (4) s approxmately zero snce η s very near zero so that the numerator s approxmately zero. To calculate the effcency effects of ths ncrease n the SLC, I return to equaton (4) but now compute the margnal change n economc effcency for a change n the SLC. I frst consder the second 13

16 14 term n equaton (4), whch s the change n consumer surplus (after subtractng off tax revenue rased). Snce the rato t j /p j = for the SLC approxmately, the margnal change n consumer surplus s about.0006 usng the assumpton that p j / SLC = 1. Thus, for each addtonal dollar of revenue rased, the effcency loss s about 6/100 of a penny,.e. nearly zero as expected. Now the frst term has a rather surprsng outcome. Local access servces for resdental customers are prced below margnal (ncremental) cost n most states as a polcy to subsdze unversal servce, to subsdze rural customers, and to subsdze mddle class resdental customers. The rato of m j /p j exceeds 1.0, and a natonal average s approxmately Thus, the frst term equals so that the sum of the ntal two terms n equaton (7) yelds a change n economc effcency from ncreasng the SLC of , actually an ncrease n economc effcency because the subsdy s decreased. When the last two terms n equaton (7) are estmated and the denomnator s computed, I calculate the margnal effcency loss to be.0006, or an effcency loss of about $ for each $1.00 ncrease n the SLC. Thus, an ncrease n the SLC to fund the unversal subsdy has only an extremely small effcency effect, essentally equal to zero. IV. Conclusons The FCC and state regulatory authortes typcally do not take nto account effcency effects on the economy from ther regulatory actons. Yet, these regulatory decsons can have large adverse effects on economc effcency. In both Hausman (1998), Hausman and Shelansk (1999) and n ths paper, I fnd that the dstortonary effects of taxaton of telecommuncatons servces s sgnfcantly 14

17 15 hgher than the dstortonary effects created by ncome and sales tax revenue sources. Thus, the negatve effect on the effcency of the U.S. economy created by these regulatory and sales taxes merts careful consderaton. Unfortunately, the FCC and state and local enttes largely gnore the negatve effcency effects of ther varous tax plans leved on wreless. Indeed, the FCC has ncreased the Internet component of the unversal servce subsdy to schools and lbrares whch has lead to ncreased taxes. The FCC also plans to requre local number portablty for wreless, whch has been estmated to lead to an addtonal 0.5%-2.2% tax on wreless usage. 21 Addtonally, the FCC has requred mplementaton of an extraordnary expensve emergency (E911) plan for wreless whch s estmated to approxmately $1.5 bllon, or about tmes the estmated cost of the local number portablty requrement. 22 Whle the FCC programs wll lkely have consumer benefts, no economc analyss has been done wth respect to a beneft-cost analyss to see whether the expected benefts outwegh the hgh effcency costs to consumers and the U.S. economy. 23 The FCC and state and local authortes could estmate the costs to consumers and the economy when they mplement tax and subsdy programs and only mplement regulatory requrements that lead to commensurate benefts to consumers. Ths 21. The requrement was scheduled to go nto effect n June 1999, but t has been delayed. The lower estmate s from Evolvng Systems, "Wreless LNP: An Industry Whte Paper", Fall The hgher estmate s from the Yankee Group, "Wreless Number Portablty Costs", Exhbt 4a, March These qute expensve regulatory requrements have arsen by the extenson of regulatory requrements from local landlne provders to wreless. No economc analyss has been undertaken to decde whether the extenson of landlne regulaton to wreless provdes net consumer benefts. 23 State and local taxng authortes have apparently seen wreless as a convenent fundng source for unrelated purposes. 15

18 16 recommendaton s partcularly mportant gven the fndng of ths study that the margnal effcency loss of these taxes ncreases sgnfcantly as the overall tax rates ncreases. 16

19 17 REFERENCES Auerbach, A., "The Theory of Excess Burden and Optmal Taxaton", n A. Auerbach and M. Feldsten, Handbook of Publc Economcs, Amsterdam, Feldsten, M., "Tax Avodance and the Deadweght Loss of the Income Tax", NBER Workng Paper 5055, Hausman, J., "Exact Consumer's Surplus and Deadweght Loss", Amercan Economc Revew, 71, 1981a. Hausman, J., "Income and Payroll Tax Polcy and Labor Supply", L. Meyer, ed., The Supply Sde Effects of Economc Polcy, 1981b. Hausman, J., "Prolferaton of Networks n Telecommuncatons: Technologcal and Economc Consderatons, D. Alexander and W. Schel eds., Networks, Infrastructure, and the New Task for Regulaton, Unv. of Mchgan Press, Hausman, J., "Valuaton and the Effect of Regulaton on New Servces n Telecommuncatons", Brookngs Papers on Economc Actvty, Mcroeconomcs

20 18 Hausman, J. "Taxaton Through Telecommuncatons Regulaton", Tax Polcy and the Economy, Hausman, J. "Cellular Telephone, New Products and the CPI," Journal of Busness and Economcs Statstcs, Hausman, J. and G. Leonard, Effcences from the Consumer Vewpont, George Mason Law Revew, Hausman, J. and H. Shelansk, Economc Welfare and Telecommuncatons Welfare: The E-Rate Polcy for Unversal Servce Subsdes, Yale Journal on Regulaton, 1999 Hausman, J., T. Tardff, and A. Belnfante, "The Effects of the Breakup of AT&T on Telephone Penetraton n the Unted States, Amercan Economc Revew, 83, Posner, R., "Taxaton by Regulaton", Bell Journal of Economcs, 2, </ref_secton> 18

21 19 P Fgure 1 p 1 =p 0 +t p 0 B MC A D E=A+B Q 1 Q 0 Q 19

22 20 20