Topic: Telecom, Internet & Information Policy

Low Taxes Aren’t a Subsidy

Economist Dean Baker thinks that Amazon owes its profits to the fact that it doesn’t have to collect sales taxes for customers in states where it doesn’t have a physical presence. The absence of sales taxes on Internet purchases, he says, is a “subsidy that Amazon gets from taxpayers.” As I point out over at Techdirt, this is silly. Some states don’t have sales taxes at all, but no one would consider that a taxpayer subsidy. My local Wal-Mart benefits from a variety of state and local government services here in the St. Louis area, such as police and fire protection, and roads and other infrastructure. At least in part, sales taxes go to cover the costs of providing those services. Amazon uses few if any services from state or local governments in Missouri, so it’s hard to see anything unfair about the fact that it doesn’t have to collect sales taxes here.

On the other side of the ledger, sales tax collection would be far more burdensome to Internet-based businesses than to their brick-and-mortar competitors. A mom-and-pop retail store only has to learn about the tax rules in one jurisdiction. Most likely, there’s just one tax rate, one set of rules about which goods are taxable at that rate, and one set of reporting requirements. In contrast, a small e-commerce site would have to familiarize itself with the rules in thousands of different jurisdictions. The state of Missouri, for example, allows municipal governments to tack a variety of local taxes onto the state sales tax. As a result, the tax rate varies from city to city. Even worse, different states have different rules about which goods and services are taxable. Missouri, for example, exempts custom software (but not boxed software), farm equipment, and medical grade oxygen, among other things. Colorado has exemptions for bingo equipment, cigarettes, food, fuel and oil, machinery and machine tools, newsprint, precious metal bullion and coins, and more. Each of the other 40-some states with sales taxes have their own lists of what’s taxable. Many states exempt food and clothing from taxes, but the precise definitions of “food” and “clothing” varies from state to state. For example, in Wyoming, bagels are considered tax-exempt food unless they’re sold with cream cheese and a knife, in which case they become taxable “prepared foods.”

Not surprisingly, small online retailers are worried about the administrative burden of complying with so many different requirements. Some states have banded together to create a unified, “streamlined” sales tax system, but e-tailers are skeptical about how much the system can be simplified. Unless states first radically simplify and harmonize their sales tax rules (which might be a good idea anyway), I don’t think it’s going to be feasible to “streamline” the system enough to make it affordable for small e-tailers.

Brito on E-Government Transparency

One of the most important tools for limited government is transparency. Transparency keeps government accountable by giving citizens the ability to monitor what government officials are doing and publicize instances where government officials abuse their authority.

Of course, government officials dislike transparency for precisely that reason, and they have often worked hard to limit the amount of information they make available. The Freedom of Information Act, which was passed in 1966 and given teeth in 1974, required government agencies to disclose information upon request from voters.

Some government officials have taken the opposite tack: instead of withholding information, they’ve released enormous quantities of poorly organized information, making it difficult for voters to sift through the material and find what they’re looking for.

Former Catoite Jerry Brito, now at the Mercatus Center, has written a fantastic paper describing the remedy for this tactic of government obfuscation. Jerry argues that government agencies should be required to release their data in structured formats suitable for easy manipulation by software tools. That would allow computer geeks to use software tools to organize the information and make it easily searchable. And that, in turn, would make it much easier for citizen-activists to sift through the available information and unearth relevant information about government activities.

Jerry points to several excellent examples of how structured data can improve government accountability. One is Washington Watch, a side project of our own Jim Harper, which gives voters a user-friendly way to keep track of what Congress is doing and discuss pending legislation with other voters. Another is opensecrets.org, a project of the Center for Responsive Politics, that provides well-organized, searchable access to the FEC’s campaign contributions database. Creating opensecrets.org would have been prohibitively expensive if the FEC hadn’t made the raw information available in a reasonable electronic format.

Many more projects like this would be possible if government agencies made more public data available. I encourage you to check out Jerry’s paper to learn how it can be done.

Are Copyrights and Patents Property Rights?

The latest issue of Regulation magazine has a fantastic article by Peter Menell discussing the divisions in libertarian theory on copyright and patent issues. One one side is what Menel dubs the Property Rights Movement, of which Richard Epstein is a leading theoretician. They see intellectual property and more traditional property rights as fundamentally similar, and apply libertarian insights about the importance of strong property rights in tangible goods to debates over patent and copyright law. For theorists like Epstein, the need to reward the fruits of labor lie at the heart of the libertarian case for property rights, and as a consequence the argument for strong intellectual property rights is identical to the argument for tangible property rights.

The other camp sees copyright and patent law as fundamentally different from tangible property rights. It includes F.A. Hayek, many “cyberlibertarians,” and Menell himself. For this camp, the fundamental argument for property rights is not about rewarding creativity so much as managing scarcity. We need strong property rights in tangible property so people can make plans about the use of scarce resources. Since inventions and creative works are non-rivalrous once created, the argument goes, property-like restrictions on their use are at best a necessary evil.

As I’ve written before, my sympathies are with the latter camp. One difference that’s particularly important—and which Menell mentions only in passing—is the issue of clear boundaries. It’s almost always easy to determine who owns which parcel of land and where the boundary lies. In contrast, both copyright and patent law suffer from vexing line-drawing issues. For example, the legal principles governing what constitutes fair use of copyrighted materials is notoriously vague. The result is endless litigation that can hamper technological progress. Patent law can be even worse. Microsoft, for example, has vaguely hinted that the Linux operating system has infringed several hundred of its patents, but no one has been able to figure out which of Microsoft’s 6000 patents they might be referring to. It’s hard to imagine a company complaining that its competitor is trespassing on its land but refusing to give any specifics.

Ultimately, I think that lumping copyright and patent law together with traditional property law obscures more than it illuminates. There may very well be good arguments for expansive interpretations of copyright and patent law, but they’re likely to be rather different from the arguments for robust property rights in tangible goods. It makes more sense to debate those arguments on their own terms rather than confusing the issue by lumping together legal regimes that have relatively little in common.

A Bad Copyright Reform Proposal

Matt Yglesias points to this Dean Baker piece arguing for sweeping reforms of the copyright system. I think he correctly identifies some of the problems with the copyright laws on the books today, but I think his conclusions reflect a poor understanding of the nature of the problem:

There are many other mechanisms for supporting creative work, such as university funding (most professors are expected to publish in addition to their teaching), foundation funding, or direct public support. It is easy to design alternative mechanisms to expand this pool of non-copyright funding, such as the Artistic Freedom Voucher, which would give each person a small tax credit to support creative work of their choosing.

The fundamental problem with copyright is that it gives copyright holders too much control over the works they create. Terms are too long, the rules regarding derivative works are too restrictive, penalties for infringement are too high, secondary liability is too broad, copyright formalities have been unwisely abandoned, and so forth. The first-order solution is to fix those problems: copyrights should last for 14 years. Authors shouldn’t be able to stop people from using their characters in fan fiction. Maximum penalties for infringement should be reduced by an order of magnitude. And so forth.

A sensible copyright system—perhaps similar to the one we had for most of the 20th century—would work just fine for the 21st century. It would ensure artists are fairly compensated while greatly reducing the deadweight losses Baker identifies in the status quo. The reasons these reforms haven’t happened (and indeed, the reason that copyright rules keep getting more and more draconian) is that the copyright industries are one of the most powerful special interest groups on Capitol Hill. This is the old story of concentrated benefits and dispersed costs. There’s no shortage of good reform proposals, there’s just no one with the clout to push any of those reform proposals through Congress.

Baker seems to be presenting his plan for taxpayer subsidies to artists as an alternative to the copyright system, but this fails to appreciate the way Capitol Hill works. The copyright interests who have been pushing ever-more-draconian copyright policies are not going to give up those benefits in exchange for taxpayer handouts. Similar schemes have been tried in other countries, and it didn’t lead to a more sensible copyright system. Instead, the industry just scooped up the subsidies and continued to lobbying for bad copyright policies as enthusiastically as ever.

Moreover, taxpayer handouts for artists has the long-run potential to hurt consumers a lot more than bad copyright policies ever could. Whatever the flaws of today’s overly-broad copyright rules, the extent of the damage is at least limited to the value of the items being sold. Bad copyright policy can allow copyright holders to capture an unfairly large share of the surplus value created by the purchase of creative works, but they can’t ever capture more than the total value of those works. In contrast, once we start putting artists on the dole, there’s every reason to think they’ll start lobbying for larger and larger welfare checks, the same way farmers do today. Whatever the flaws of the current copyright system, a system in which every rock star in the country is dependent on the dole would certainly be a lot worse.

Governor Spitzer Gets It Right

In a Cato TechKnowledge newsletter issued today, I’ve updated the world on the status of the REAL ID Act.

One of the more interesting recent developments is the decision by New York Governor Eliot Spitzer to break the link between driver licensing and immigration status. He and the Department of Motor Vehicles commissioner announced the policy September 21st.

De-linking driver licensing and immigration will reduce unlicensed driving, uninsured driving, hit-and-run driving, insurance costs for legal drivers, and roadway injuries. Linking driving and immigration status is a requirement of REAL ID, and Spitzer’s move is another nail in the coffin of this national ID law.

In my TechKnowledge piece, I laud the governor’s action as follows:

Spitzer is not willing to shed the blood of New Yorkers to “take a stand” on immigration, which is not a problem state governments are supposed to solve anyway.It’s a welcome — and somewhat surprising — move, to see a Democrat and law-and-order-type former attorney general resist mission creep in a state bureau and hold fast to the federal system devised in the constitution. But he’s done the right thing. Thanks most recently to Governor Spitzer, and to state leaders from across the ideological spectrum, REAL ID is in collapse.

The move has subjected Spitzer to withering political attacks from Republicans. The attack most embarassing to witness, though, comes from “relatives of 9/11 victims.”

Freedom to Unlock

Tim Wu has a great article chronicling his decision to unlock his iPhone (which allows him to use it with carriers other than AT&T and run applications not authorized by Apple). He then considers the legal and ethical implications of his actions:

Did I do anything wrong? When you buy an iPhone, Apple might argue that you’ve made an implicit promise to become an AT&T customer. But I did no such thing. I told the employees at the Apple Store that I wanted to unlock it, and at no stage of the purchasing process did I explicitly agree to be an AT&T customer. There was no sneakiness; I just did something they didn’t like.

Meanwhile, lest we forget, I did just throw down more than $400 for this little toy. I’m no property-rights freak, but that iPhone is now my personal property, and that ought to stand for something. General Motors advises its customers to use “genuine parts,” but it can’t force you to buy gas from Exxon. Honda probably hates it when you put some crazy spoiler on your Civic, but no one says it’s illegal or wrong.

The worst thing that you can say about me is that I’ve messed with Apple’s right to run its business exactly the way it wants. But to my mind, that’s not a right you get in the free market or in our legal system. Instead, Apple is facing trade-offs rightly beyond its control. When people unlock phones, Apple loses revenue it was hoping for, but also gains customers who would have never bought an iPhone in the first place. That’s life.

This is exactly right. Apple, it should be emphasized, was entirely within its rights to sign a contract promising that the iPhone would only be sold in conjunction with AT&T’s wireless service. But that contract binds Apple and AT&T; it doesn’t bind Apple’s customers. Absent any explicit contractual agreement, customers are under no legal or moral obligation to use their iPhones only in the ways Steve Jobs wants them to. Hence, unlocking your iPhone is, as Wu puts it, “legal, ethical, and just plain fun.”

It’s also worth highlighting that part of the reason Wu concludes that unlocking the iPhone is legal is that the Copyright Office included cell phone unlocking as one of its explicit exemptions to the Digital Millennium Copyright Act, the law that I’ve argued is holding back innovation in other parts of the consumer electronics industry. It’s great that the Copyright Office has recognized that using your iPhone with the carrier of your choice has nothing to do with copyright infringement, but it’s still not legal to (for example) build a DVD player that will fast-forward through commercials, or to build an MP3 player that will play songs purchased from iTunes. It would be better if the DMCA’s anti-circumvention provisions were repealed, so that inventors didn’t have to go begging to the bureaucrats at the Copyright Office for permission to engage in this kind of beneficial tinkering.

So Many Reasons Government Shouldn’t Fund Newspapers

The Columbia Journalism Review has an article suggesting that the government should step in and stop the red ink at the nation’s leading newspapers. Declan McCullagh has a great post enumerating all the many reasons that’s a bad idea. Here’s one of the most important:

Government money tends to come with strings attached. Sure, at first, a handout may seem free. But over time, that tends to change.

Look at the ongoing controversies over the National Endowment for the Arts. In response to controversial photographs (including a provocative retrospective of photographer Robert Mapplethorpe’s work) in an NEA-funded exhibit, Congress did two things. It reduced the NEA’s budget for the next fiscal year and then slapped a new restriction on the agency, saying that its grants must take “into consideration general standards of decency and respect for the diverse beliefs and values of the American public.”

Mapplethorpe was, of course, a brilliant photographer, and some of his work has inspired my own modest efforts. But the U.S. Supreme Court upheld the NEA funding restrictions as constitutional, concluding that they’re perfectly OK “when the government is acting as patron rather than as sovereign.”

That patrons can muzzle the recipients of their largesse should be no surprise. Last decade, librarians lobbied Congress to create the E-rate program, which levied taxes on Americans’ phone bills to pay for wiring schools to the Internet. It was an unalloyed, billion-dollar political win for the librarians — until Congress decided to force them to filter out porn if they wanted the cash.

They howled, they complained, they sued. They lost. The Supreme Court ruled in 2003 that the law “is a valid exercise of Congress’ spending power.”

It’s also worth noting that, as Mike Masnick has pointed out repeatedly, news gathering isn’t in decline. Only the portion of the news business that involves shipping people reams of ink-stained paper is having trouble. Most other parts of the news business are thriving. Cable and satellite news channels are thriving, news websites are seeing record traffic, and the blogosphere is providing hundreds of thousands of new sources for news and analysis. The trends in journalism are only alarming for people who think that journalism is synonymous with the print edition of the New York Times. Ironically, that attitude seems to be over-represented among the people in charge of educating the next generation of journalists.