Tài liệu Taxation by Telecommunications Regulation doc

The first-best prescription of setting price equal to marginal costwould require government subsidies or would lead to bank-ruptcy of local telephone companies.5 The United Stateshas not

Taxation by

Telecommunications

Regulation

The AEI Press

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1998

Alex Brill, Susan Dynarski, and Hyde Hsu provided research assistance Jim Poterba and Tim Tardiff provided helpful com- ments.

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FOREWORD, Christopher DeMuth and

Harold Furchtgott-Roth vii

REGULATION OF U.S TELECOMMUNICATIONS 5

ESTIMATION OF ECONOMIC EFFICIENCY LOSSES 12Calculation of the Losses 13

Previous Estimates 15

DID THE FCC MAXIMIZE THE EFFICIENCY LOSS? 17The Effect of Increasing the

Subscriber Line Charge 17

Estimated Effects of Increasing the SLC 18Other Possible Policy Choices 20

APPENDIX A: PARTIALLY INDIRECT UTILITY FUNCTION 25APPENDIX B: EXACT CALCULATION OF DEADWEIGHT LOSS 27

APPENDIX C: MARGINAL EFFICIENCY LOSS FROM

LONG-DISTANCE ACCESS CHARGES 28

vi CONTENTS

APPENDIX D: MARGINAL EFFICIENCY LOSS

FROM AN INCREASE IN THE SLC 29

Foreword

Regulated industries such as telecommunications,

transportation, and electric power have always hadnumerous “cross-subsidies” embedded in their ratestructures To promote “universal service” or just to sat-isfy the demands of politically influential consumer groups,state and federal regulatory agencies have set rates forsome services at levels below the costs of supplying themand other rates at levels commensurately higher than costs

of supply As a result, some consumers have paid whatamounts to a tax on their telephone and electricity bills tofinance subsidized service to other consumers The pat-tern of cross-subsidies has generally been from businesscustomers to residential customers and from urban to ru-ral customers—but the subsidies have often been highlycomplex as well as oblique, with numerous exceptions,anomalies, and departures from the general pattern builtinto regulated rate structures

This “taxation by regulation” has drawn heavy cism from academic students of regulation Political sci-entists have noted that it is a form of public financeoperating outside the usual legislative and executive pro-cedures of taxing, appropriation, and budgeting—proce-dures that promote political accountability and restrainthe influence of narrow interest groups in most areas ofgovernment spending Economists have noted that cross-subsidies are usually highly inefficient: taxing customers

criti-of a particular service (say, business users criti-of long-distance

viii FOREWORD

telephone service) to fund subsidized service to others duces far greater economic distortions than if a broad-basedgeneral tax funded the subsidized service

pro-The academic criticisms have had very little ence on practical policy; indeed, they have provided a pow-erful explanation of why cross-subsidies are so pervasivedespite being so wasteful Precisely because the source oftax revenues is obscure and “stealthy”—invisibly embed-ded in the prices large numbers of utility customers pay—taxation by regulation is an attractive means of subsidizingpolitically influential groups—including some customers,such as the well-to-do who own vacation homes in the coun-try, who would be unlikely candidates for public largess ifthe subsidies were a matter of open legislative debate

influ-In recent years, however, cross-subsidization hascome under pressure from a different, more powerfulsource: technological and economic developments that havegenerated new entry and price and service rivalry in regu-lated markets, thereby undermining the private monopo-lies and public regulation that had been the source of thecross-subsidies In the typical case, new competition hasfirst emerged in the “taxed” segments of the regulated ratestructure, such as urban and business telephone serviceand industrial electric power, which have presented at-tractive targets for new entrants precisely because of theirartificially high rates Price competition, with its usualresult of compressing prices to costs of supply, has obligedregulators and legislators to search for other revenuesources—such as other regulated services where competi-tive entry remains difficult—to fund continued below-costservice to favored customers Where industries have beencompletely deregulated, legislators have occasionallyturned to explicit general taxes to continue subsidizingthose who had benefited from cross-subsidies The AirlineDeregulation Act of 1979, for example, which entirely abol-ished federal and state regulation of airline fares, estab-lished a grant program for “essential air service” to certain

rural communities that is funded by general tax revenues.The Telecommunications Act of 1996 provides an im-portant case study in the tensions between deregulationand “universal service” subsidies The TelecommunicationsAct did not go nearly so far as the Airline DeregulationAct in lifting government controls from an increasinglycompetitive industry It did, however, relax or remove sev-eral of those controls, including price controls that hadlong been employed to “tax” many telecommunicationsservices At the same time, the act instructed the FederalCommunications Commission to continue promoting uni-

versal service—but without access to explicit federal tax

revenues such as those provided by the Airline tion Act

Deregula-How, if at all, this circle might be squared is the ject of the present study by Jerry Hausman of the Massa-chusetts Institute of Technology Using economictechniques he pioneered in other contexts, ProfessorHausman examines one of the FCC’s most striking andcontroversial “universal service” policies under the Tele-communications Act of 1996 This is the so-called e-rateprogram, under which certain schools and libraries arereceiving subsidized computer facilities, Internet hookups,and telecommunications services funded by a specialcharge on the long-distance revenues of AT&T, MCI, Sprint,and other suppliers of long-distance and wireless services

sub-As one would predict, the commission’s e-rate schemeabandons the old and now infeasible technique of embed-ding subsidies within the rate structure and instead makesthe taxes and subsidies explicit Long-distance carriers,and through them their customers, are taxed the costs ofthe program, and the commission pays out the tax rev-enues in cash grants to qualifying schools and libraries.More surprising, perhaps, is that the commission is usingthe new subsidies not just to maintain but to expand—quite substantially—traditional regulatory cross-subsidies

No one received free or cut-rate computers when FCC rate

regulation was in full flower; now, however, schools andlibraries will spend a large share of e-rate grants (whichanalysts project will total several billion dollars annually)

to purchase sophisticated computers and to build or bish facilities to accommodate them Yet one critical ele-ment of the traditional cross-subsidy approach remains:the program’s revenue source is a usage-sensitive tax oncertain regulated services The commission selected thatsource, of course, not out of considerations of economic ef-ficiency, political fairness, or legislative logrolling, but sim-ply because the taxed service falls within its regulatoryjurisdiction The FCC appears to be transforming itselffrom an architect of cross-subsidies and promoter of uni-

refur-versal service within telecommunications markets to a tax collector for funds to subsidize other markets and purposes.

The e-rate program has been the subject of lively andsometimes heated controversy since the commission firstimposed the e-rate taxes at the beginning of 1998 Advo-cates say that the program is essential to ensure that poorcommunities and schoolchildren are not left behind on the

“information highway.” Opponents say that schools thatcannot teach their students to read and write should not

be plugging them into the Internet instead—and thatWashington should not, in any event, be determining schooland library spending priorities Some say that the pro-gram, regardless of its merits, is unconstitutional because

it establishes, calibrates, and collects taxes—functions theConstitution vests in Congress

Professor Hausman’s study focuses on a separate andmore analytically tractable issue, but one that has impor-tant implications for the broader political debates He askswhether the e-rate tax is an efficient tax, in the sense ofraising a sum of public revenue with minimum disruption

to private economic activity He finds that the tax isappallingly inefficient, causing more than one dollar ofsheer waste—deadweight economic costs that produce nobenefits for anyone—for every dollar of revenue raised

x FOREWORD

Tax distortions of that magnitude are exceptionally highcompared with broad-based general taxes and even withthe implicit taxes embodied in traditional regulatory cross-subsidies The result leads Professor Hausman to ask

whether the FCC has actually maximized, rather than

minimized, the cost to economic welfare of its e-rate gram and to suggest several alternatives that, even with-out resort to general federal tax revenues, would be farless harmful

pro-Congress intended the Telecommunications Act of

1996 to reduce regulatory costs and improve consumerwelfare in one of America’s most rapidly growing and so-cially important industries Professor Hausman’s studydemonstrates that one critical component of that act isinstead increasing regulatory costs and harming consumerwelfare No one ever said that the transition from regu-lated to competitive markets would be easy or free of po-litical controversy, compromise, and false steps—but thee-rate tax appears to be a step backward rather than apartial step forward One hopes that the FCC and Con-gress, as well as business executives, professionals, andacademics will pay due attention to this cautionary tale

CHRISTOPHER DEMUTH

PresidentAmerican Enterprise Institutefor Public Policy Research

HAROLD FURCHTGOTT-ROTH

CommissionerFederal Communications Commission

JERRY HAUSMAN 1

1 Introduction

1

Policy makers have paid increasing attention to

tele-communications as new features such as cellulartelephones and Internet services have becomewidely available to businesses and consumers Rapidlychanging technology has led to these new services alongwith the realization that market-based competition mayreplace much outdated regulation, which has harmed con-sumers (see, for example, Hausman 1997) Congress passedthe Telecommunications Act of 1996, the first major change

in telecommunications legislation since 1934, in response

to these changes

What role does public finance have in the analysis oftelecommunications policy? Telecommunications regula-tion in the United States is replete with a system of subsi-dies and taxes, in part because of the dual system ofregulation in which the federal government (through theFederal Communications Commission) and each state haveregulatory jurisdiction over local telephone companies.1Public finance analysis demonstrates how to evaluate thecosts and benefits of tax and subsidy systems.2 Indeed,public finance analysis demonstrates how to measure thedistortions to economic efficiency that tax and subsidysystems create.3 Furthermore, public finance analysis hasdetermined rules for optimal taxation that can be applied

to telecommunications regulation.4

A potentially important application of public financeanalysis to telecommunications regulation is the financ-ing by regulation of telephone companies’ fixed and com-mon costs The technological characteristics of the localtelecommunications industry with its large fixed costsgenerate significant economies of scale and scope The first-best prescription of setting price equal to marginal costwould require government subsidies or would lead to bank-ruptcy of local telephone companies.5 The United Stateshas not used government subsidies; instead, regulatorshave set price in excess of marginal cost for some services

to allow regulated telephone companies to cover their fixedand common costs and to provide a subsidy to basic resi-dential service Here Ramsey optimal tax theory, whichexplains how taxes on different goods or services causedifferent amounts of economic efficiency loss depending

on the elasticity of demand for the good or service beingtaxed, would suggest how prices should exceed marginalcosts to minimize the efficiency losses to the economy.6While Ramsey theory was devised for the purpose of rais-

ing revenue in just the situation that regulators face, it

has found little acceptance in telephone regulation, haps because most of the tax burden would fall on localtelephone service, which actually receives the highest sub-sidy of any telephone service Estimates of the differentrelevant elasticities of demand necessary for Ramseytheory to be applied appear later in this discussion.Another potential application for public finance analy-sis in telecommunications regulation, and the main topic

per-of this volume, is the marginal cost to the economy per-of thenew congressional legislation that leads to additional taxa-tion of telecommunications services Because of budget-ary spending limits, Congress is increasingly unable toraise general taxes to pay for social programs.7 Thus, Con-gress increasingly funds social programs from taxes onspecific sectors of the economy Here, I consider the con-gressional legislation that established a program to pro-

In this volume, I calculate the efficiency cost to theeconomy of the increased taxation of interstate telephoneservices to fund the Internet access discounts to schoolsand libraries.10 I do not attempt to measure the benefits,but for reasoned policy decisions the cost estimates areuseful.11 I estimate the cost to the economy of raising the

$2.25 billion per year to be at least $2.36 billion (in tion to the $2.25 billion of tax revenue) or the efficiencyloss to the economy for every $1 raised to pay for theInternet access discounts is an additional $1.05 to $1.25beyond the money raised for the discounts themselves.12This cost to the economy is extraordinarily high comparedwith other taxes used by the federal government to raiserevenues Three reasons exist for the high cost to theeconomy of this increased tax on interstate long-distanceservices: (1) the price elasticity of long-distance services isrelatively high; (2) the taxation of interstate long-distanceservices is already quite high; and (3) the price-to-marginal-cost ratio of long-distance services is high Thus,the FCC’s choice of a tax instrument to finance the Internetdiscounts imposes extremely high efficiency costs on theU.S economy

addi-Next, I propose an alternative method by which theFCC could have raised the revenue for the Internet dis-counts that would have a near zero cost to the economy,beyond the revenues raised Econometric research has led

to wide agreement on the relative size of telephone vice price elasticities, and the FCC could have chosen toincrease taxes already in place, which would have led to

ser-much lower costs to the economy of funding the Internetdiscounts Indeed, economic theory and public finance

analysis establish the goal of using taxes that minimize

the cost to the economy of raising government revenue.The FCC, to the contrary, chose the taxation method ap-

plied to interstate telephone service that likely maximizes

the cost to the economy of raising the revenue to providethe Internet discounts

Taxpayers can hope that the FCC will begin to takeheed of economic analysis in the future as it continues tomodify the tax and subsidy system for telecommunications.The Telecommunications Act of 1996 calls for further modi-fications to regulation in the future Telecommunicationsregulation at the federal level has always recognized the

“public interest standard” as one of the main bases for lation The public interest standard should recognize eco-nomic efficiency as one of its primary goals Economicefficiency implies not assessing unnecessary costs on U.S.consumers and firms The FCC’s current policies are cost-ing the U.S economy billions or tens of billions of dollarsper year The goal of the Telecommunications Act of 1996was to decrease these regulatory costs to the United States,not to increase them as the FCC has done in its imple-mentation of provisions of the 1996 act

Regulation of U.S.

Telecommunications

2

Regulation of telecommunications in the United

States is unique among all countries in that twolevels of government regulate telephone service:the federal government through the FCC and each of fifty-one state (including the District of Columbia) regulatorycommissions In broad principle, the FCC is in charge ofinterstate telecommunications, while the state regulatorycommissions are in charge of intrastate telecommunica-tions Although the FCC has periodically attempted tomake “power grabs” to attain more control over regula-tion, the state commissions have resisted those attempts

In two notable decisions, the Louisiana decision (1986)

and recently in the interconnection decision by the EighthCircuit Court of Appeals in July 1997, 13 the courts haveupheld the states Both times, the appeals courts havenarrowly circumscribed the ability of the FCC to inter-vene in intrastate telecommunications regulation

As most users of a telephone realize, however, thesame telephone wire that connects a residence to the lo-cal central office switch, the switch itself, and the fiber-optic cable that connects the switch to other switches carryboth intrastate calls and interstate calls Thus, no natu-ral boundary exists to demarcate spheres of regulation

During the years in which regulators used cost-based orrate-of-return regulation, they arbitrarily separated therate base into an intrastate portion and an interstate por-tion, based primarily on the relative number of calls ofeach type The “separations” system has achieved an in-creasingly complicated level of detail that only a regula-tory accountant could love and perhaps no living personcan understand in its entirety.14 If the system ever madesense, it has no basis in economic reality today, since boththe FCC and a majority of the states no longer use rate-based regulation.

The end result of the separations system is that theFCC interstate regulation is responsible for about 25 per-cent of the local exchange companies’ assets, and stateregulators are responsible for the other 75 percent Underrate-of-return regulation, the regulated telephone compa-nies’ profits in each regulatory regime were meant to belarge enough to allow the firms to earn their regulatedcost of capital on these regulatory-determined rate bases.Before the breakup of AT&T in 1984, long-distanceservice cross-subsidized local residential service throughintracompany transfers, the result of an earlier agreementwith regulators and the Ozark Plan of 1971.15 After theAT&T divestiture, regulators had to establish an explicitsubsidy flow to continue the cross-subsidy of local resi-dential service.16 The FCC established a per minute of useaccess fee that long-distance companies had to pay localtelephone companies for the use of their networks to origi-nate and terminate long-distance calls.17 The commissioninitially set access fees at quite high rates, about 17.3 centsper minute for both origination and termination The ac-cess fees had the same effect as a tax on long-distancecalls because the access fee paid for the subsidy to localresidential service as well as for some of the fixed and com-mon costs of the local exchange companies that were in-cluded in the FCC’s 25 percent share of the local exchangecompanies’ rate bases over which the FCC held jurisdic-tion.18

JERRY HAUSMAN 7

These access charges were not a very economicallyefficient set of taxes because studies funded by AT&T BellLaboratories and other researchers have consistently dem-onstrated an interstate long-distance price elasticity ofabout −0.7.19 Furthermore, policy makers did not seriouslyanalyze the fundamental question of whether every resi-dential telephone customer should receive a cross-subsidy,

no matter what his income Policy makers discussed subsidies of local telephone service under the rubric of “uni-versal service,” which was part of the Communications Act

cross-of 1934 By 1984, however, telephone penetration in theUnited States was about 91.5 percent, with additional tar-geted subsidies in place for low-income customers In Wash-ington, D.C., for example, Bell Atlantic offers local phoneservice to qualifying households for $3 a month and toqualifying senior citizens for only $1 a month

Current telephone penetration is about 93.9 percent.Econometric studies that I conducted did not show anysignificant “network effects” at this level of penetration; I

am unaware of any econometric studies that did show asignificant network externality.20 Thus, the replacement

of a universal cross-subsidy with targeted subsidies phone stamps, for example) would have been more eco-nomically efficient than access charges for long-distanceservice But policy makers never seriously considered such

(tele-a r(tele-ation(tele-al policy

In 1984, the FCC adopted a framework that did low for a significant decrease in long-distance accesscharges It adopted a “subscriber line charge” (SLC), whichreached $3.50 per line per month for residential house-holds and $6.00 per line per month for businesses Accessrates for long-distance sevice decreased from about 17 centsper minute to about 9.5 cents per minute (for both origi-nation and termination), primarily as a result of the ad-vent of the SLC The FCC considered a higher SLC thatwould have decreased long-distance access rates evenmore, but Washington lobbying groups such as the Con-sumer Federation of America (CFA) made apocalyptic fore-

al-casts of 6 million households’ stopping their telephone vice, which would have decreased telephone penetrationbelow 85 percent As with much of the policy debate overtelephone regulation during the past twenty years, theCFA’s forecasts were based on little real economics andproved to be vastly inaccurate Indeed, telephone penetra-tion increased because of the SLC and lower access prices,

ser-as demonstrated by Hausman, Tardiff, and Belinfante(1993)

The SLC was quite unlikely to bring about large creases in telephone penetration since an increase in theSLC leads directly to lower long-distance prices and tele-phone subscribers needed local service to make long-distance calls Available data at that time demonstratedthat low-income households made numerous long-distancecalls; indeed, long-distance charges accounted for abouthalf their monthly telephone charges Thus, economicanalysis led to the conclusions that consumers buy tele-phone service for both local and long-distance calls and,because an increase in the SLC would be more than coun-teracted by the decrease in long-distance call prices, thatthe monthly bill of the large majority of residential cus-tomers would decrease when the number of long-distancecalls was held constant Economic-efficiency calculationsdemonstrated that consumers would be made better off

de-by billions of dollars per year if the SLC were further creased and the long-distance charges decreased Never-theless, the FCC refused to allow the SLC to increasefurther, even at the rate of inflation

3 Studies of Telephone

Demand

To determine the economically efficient method of

taxation within telecommunications regulation,given that subsidies are unlikely to disappear soon,

we need estimates of certain demand elasticities First, Idiscuss the price elasticity of demand for interstate long-distance service In the original edition of Taylor (1994),the author had estimated this elasticity to be about −0.7

on the basis of 1970s data Subsequent studies based ondata from the 1980s by Gatto et al (1988), Taylor and Tay-lor (1993), and Taylor (1994) have continued to estimatevery similar elasticities.21 Thus, the “consensus” elasticityestimates for interstate long-distance calls are in the range

of −0.65 to −0.75. 22

The demand elasticity for local exchange access is thenext important piece of information Throughout theUnited States with the exception of New York City, mostresidential customers buy unlimited-use local calling, so-called flat-rate local service.23 This service also allows theconsumer to make long-distance calls, typically through apresubscribed long-distance carrier such as AT&T or MCI.The imposition of the SLC as well as other local rate in-creases in the 1980s and the decrease in long-distanceprices caused mainly by the decrease in access charges

allow relatively precise estimation of the demand for dential service.24

resi-Hausman, Tardiff, and Belinfante (1993) modeled thedemand for local access as a partially indirect utility func-tion that recognized the demand for both local calls andlong-distance calls Details of this model and its signifi-cance appear in appendix A The study by Hausman et al.used panel data for the years 1984–1988 from a randomsample of about 55,000 households The study estimatedthe elasticity with respect to the basic access price to be

−0.005, which is quite small, with a 10 percent price crease leading to a 0.5 percent decrease in penetration(which is approximately 0.005 given a penetration rate ofabout 93 percent) The finding of a very small but signifi-cantly nonzero own-price elasticity for residential basicaccess demand is consistent with prior studies, with thebest known the paper of Perl (1984), and with subsequentstudies such as those by Ericksson, Kaserman, and Mayo(1995) and Solvason (1997)

in-The small but negative price elasticity effect has ledsome regulators to resist raising basic access prices be-cause of the negative effect it would have on telephonepenetration Concentration only on the own-price effect,however, could lead to incorrect conclusions Hausman,Tardiff, and Belinfante (1993) estimated that the cross-price elasticity of the demand for basic access service withrespect to the price of calls within a local access and trans-port area (intraLATA)25 is −0.0086 Cross-price elasticitywith respect to interstate toll service is −0.0055, almost ashigh This demonstrates the complementary nature ofbasic access demand and local and long-distance telephoneusage As prices for local access increase, demand for long-

distance service decreases But an increase in basic access price combined with a decrease in long-distance toll prices

(through a decrease in long-distance access prices) could

well lead to an increase rather than a decrease in

tele-phone penetration Hausman et al concluded that the

im-JERRY HAUSMAN 11

position of the SLC and the associated decrease in

long-distance prices led to an increase in telephone penetration

of about 450,000 households Thus, the SLC had led toincreased telephone penetration and increased economicefficiency since the lower access fees led to lower distanceprices, which led to a significant increase in long-distancecalls

4 Estimation of Economic Efficiency Losses

Taxes (and subsidies) distort economic activity Taxes

increase prices and thus lead to lower demand Thislower demand has two adverse effects on economicefficiency, which is defined (approximately) as the sum ofproducer surplus and consumer surplus.26 To the extentthat the industry is imperfectly competitive and price ex-ceeds marginal cost to cover fixed costs, decreased demandreduces the amount of producer surplus, which is the prod-uct of quantity demanded times the difference betweenprice and marginal cost.27 Decreased demand from higherprices also affects consumers adversely since consumersurplus decreases Thus, the change in economic efficiencyfrom the imposition of a tax is given approximately by

∆E ≈∆q(p−mc) + 0.5∆q∆p,

where the first term on the right side is the change inproducer surplus and the second term is the change inconsumer surplus, after I subtract the amount raised bythe tax.28 Figure 4–1 graphs this relationship

A more accurate method than equation (4–1) replacesthe second term on the right side of equation (4–1) with acalculation of the exact deadweight loss to consumers on

(4–1)

JERRY HAUSMAN 13

the basis of the analysis of Hausman (1981a) An tion of this technique appears in appendix B

explana-Calculation of the Losses

Using equation (4–1), the long-distance elasticity estimateconsidered above, and the fact that the marginal cost oflong-distance service is at most about 25 percent of theprice while the long-distance access rate is $0.0604 perminute, I estimate that for average revenue raised by thetax on long-distance service, the change in efficiency is

(0.654)*(TR), where TR is tax revenue raised The first

term on the right side of equation (4–1) (after dividing by

tax revenue TR) is estimated to be 0.415, and the second

FIGURE 4–1EFFICIENCY LOSS CAUSED BY TAXATION

S OURCE : Author.

term is estimated to be 0.239 Thus, the average efficiencyloss to the economy for each $1 raised through the accesstax is $0.65, which is quite high, as we shall subsequentlysee Indeed, by changing the method by which policy mak-ers raise the access “tax” revenue, they could reduce thisefficiency loss to essentially zero (see Hausman 1995).Using the exact approach based on Hausman (1981a),

I calculate the average efficiency loss to the economy foreach $1 raised through the access tax to be $0.79 instead

of the $0.65 that I estimated by using the traditional proximation based on equation (4–1) Thus, I find that theexact calculation leads to a higher estimate of average ef-ficiency loss than the approximate method based on a Tay-lor expansion

ap-Perhaps a more relevant calculation is the marginalefficiency loss to the economy, since the access tax is al-ready in place and the recent FCC action to fund theInternet subsidy to schools and libraries increased the tax(or at least caused it not to decrease as much as it wouldhave) The formula for the marginal efficiency loss appears

in appendix C and is calculated to be 1.249 Thus, themarginal efficiency loss is extremely high, since for eachdollar raised by an increase in the access tax, $1.25 of effi-ciency loss is created for the economy, beyond the tax rev-enue raised Using $1.89 billion of the $2.25 billion ofrevenue per year for the Internet subsidy leads to an esti-mate of the efficiency loss to the U.S economy of $2.36billion per year.29

When I calculate the marginal efficiency loss by ing the exact calculation based on Hausman (1981a) in-stead of the traditional approximation, I estimate themarginal efficiency loss to be $1.250, which is almost ex-actly the same as the previous estimate of $1.249.30 Thus,for the marginal efficiency loss calculation the two meth-ods lead to virtually identical results

us-Three reasons exist for this high marginal efficiencyloss to the economy: (1) the elasticity η is relatively high;

JERRY HAUSMAN 15

(2) m i /p i is relatively low since gross margins are high inlong-distance service, which is to be expected given thelarge fixed costs of telecommunications networks; and

(3) t i /p i is high since a significant proportion of the subsidy

to local service and contribution to the network’s fixed andcommon costs comes from access charges on interstate long-distance service To see how this efficiency loss compareswith other taxes in the U.S economy, I turn to a review ofthe literature

Previous Estimates

Instead of taxing the use of telecommunications services

to fund the subsidy for Internet access for schools and braries, Congress could have used general tax revenue.While no generally agreed-to number exists for the value

li-of the marginal efficiency loss to the economy from ing total taxes, the range of estimates is reasonably close

increas-In table 4–1, I present estimates of marginal effects of ditional taxes

ad-All the estimates in table 4–1 are below $0.405 of

TABLE 4–1MARGINAL EFFICIENCY EFFECTS OF ADDITIONAL TAXES RAISED

Marginal Effect Study Type of Taxes (dollars)

1 Ballard, Shoven, and

Whalley (1985) U.S taxes 0.365

2 Browning (1987) U.S taxes 0.395

3 Bovenberg and

Goulder (1996) U.S taxes 0.260

4 Hausman (1981b) Income taxes 0.405

N OTE : Where a range of estimates is given in the original paper, I use the midpoint of the range Feldstein (1995) has estimated sig- nificantly higher marginal efficiency losses from the income tax.

marginal efficiency loss per dollar of additional revenueraised Thus, they are all less than one-third of the effi-ciency loss created by the FCC when it increased the ac-cess rates on interstate long-distance service to fund theInternet subsidy Congress and the FCC have used an ex-traordinarily expensive means to fund that subsidy.31