The disguised cell tax

Could it be a good idea to increase the government take on an efficient industry that did not require the massive bailouts that other industries received during the recent economic crisis? Some people apparently think so.

Industry Canada is reviewing the spectrum fees imposed on telecommunications companies offering wireless services, such as cellular phone, through the electromagnetic spectrum. There is real concern that the goal is to increase spectrum fees, and that the higher fees would apply not only to the companies that obtained spectrum blocks decades ago through the regulatory process then in existence, but also to the companies that have purchased their spectrum at auctions. Governments seldom review taxes to reduce them, although it is true that the current government did reduce corporate income taxes, as well as the GST.

It is important to understand that even the companies that “purchase” spectrum only obtain 10-year licences, which suggests that this industry is tightly controlled. But I am interested here in the narrower issue of spectrum fees.

Canadian spectrum fees are charged on the amount of spectrum a telecommunications provider is allowed to use, as well as on the population in the geographic area covered. Spectrum fees are currently higher in Canada than in any other G7 country and stand at three times the average across these countries. Calculated in dollars per subscriber, current Canadian spectrum fees are 34 times higher than in the U.S. The long-term impact of such high fees on the industry’s efficiency and competitiveness is likely to be unfavourable.

It is an illusion to think that administratively determined spectrum fees can be established at a level corresponding to the economic value of the spectrum. Government bureaucrats do not have, and cannot obtain, the information needed for this sort of evaluation. This information can only be provided (under certain conditions) by auction prices and, as conditions change, by prices on the secondary market. This is a special case of why economic planning in general cannot be efficient.

In reality, spectrum fees are mainly a transfer from the companies to the government. They are a disguised tax.

Somebody has to pay that tax. We know that the fallout of a tax is often not what it appears to be, that it generates complex distributional effects. Corporations are only legal entities, and all taxes are ultimately paid by flesh-and-blood individuals. So, we must ask, what is the actual effect of spectrum fees? Who actually pays them? Who would lose from their increase?

An increase in spectrum fees may penalize current shareholders of telecommunications companies (through reduced returns and share prices), but would certainly not be supported by future shareholders, who will move their capital to more profitable industries or to other countries. In the long run, perhaps, consumers would be hit. But industry workers are probably the ones who would support much of the tax increase in terms of wages lower than they would otherwise be (or in terms of unemployment). The reason is that workers can’t move their labour as easily as investors can move their capital around world markets. This theoretical prediction is supported by econometric evidence.

Besides the specific problems that they raise, spectrum fees share one big problem with auctions: They can too easily be used as cash cows. Experience shows that the government always needs more money, in booms and in recessions. Nearly $6-billion has already been earned by the federal government in auction proceeds, and $130-million is paid in annual spectrum fees at current rates.

As with all public policy, the goal of spectrum policy should be to maximize consumer welfare, not to maximize the economic rent grabbed by the government. Whatever the most efficient solution is, I suggest that it doesn’t lie in piling up increased taxes named spectrum fees on top of the current financial and regulatory burdens.

In brief, the government and its bureaucrats should leave the telecommunications industry alone. “If it moves, tax it. If it still moves, regulate it. And if it stops moving, subsidize it,” is what Ronald Regan use to say about government interventions. Let’s just hope we don’t go down that path with one of the most successful, independent and innovative industries of this country.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute.

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