Taxes threaten web

These days there is a certain feeling of inevitability to the US expansion. Output increases greater than 7 per cent in the third quarter? We could have predicted it. Matching productivity gains? No surprise. New jobs? You bet. The US is a Schwarzenegger of growth. Might as well learn to love it, since you cannot stop it.

This feeling is, however, misleading. For the US economy remains, despite its size, a vulnerable creature. Its health is the result of thousands of discrete and courageous policy deci sions taken by individuals over the course of decades. Very often, those individuals have had to wage repeated battles to make their pro-growth ideals reality. Very often, those battles have turned against them, threatening prospects for growth in the process.

Over the past week - even as everyone was crowing about the growth numbers - just such a battle was being fought in the US Senate. It involved a well-loved component of the American s uccess story: internet commerce. The story starts in the mid-1990s, a period when US e-commerce was just breaking the $1bn-a-year mark. States cast their eyes about for a revenue source and settled on the young internet. A number of states levied taxes on internet acce ss. In addition, everyone wanted to impose sales taxes on internet commerce.

The pro-taxers argued that the job of new technology was to help society shoulder old social responsibilities. This resonated with the man then widely expected to become the next pres ident, Al Gore. He also backed a telephone tax to pay for wiring schoolrooms. A second argument held that handicapping the virtual competitor wasn't so awful, since it would help vulnerable brick-and-mortar shops across the land.

Soon the notion of new internet taxes took on an air of inevitability. After all, the US had a long tradition of taxing and regulating innovations, however young.

As early as 1898, just as the telephone was becoming part of everyday life, Washington had slapped a national excise tax on phones to fund the Spanish-American war. The war had lasted a year, the tax a century. Nonetheless, some argued that the phone industry had done just fine.

Others saw things differently. Some of them noted that telecommunications advances had slowed during decades of regulation, and that taxes had not really helped matters. Perhaps it wa s time for an experiment? One such thinker was Ira Magaziner, an adviser to president Bill Clinton, known principally for his top-down efforts to manage the healthcare sector.

Mr Magaziner might have been expected to advocate e-taxes. Instead, he took a classically liberal position on the tax matter, going so far as to issue a White House manifesto on inter net freedom in 1997. The manifesto praised the web's "decentralised nature", stating that "the regulatory frameworks established over the past 60 years for telecommunication, radio and television may not fit the internet".

Chris Cox of California, a Republican congressman, decided that Congress must try to ensure that the fledgling internet had a chance to grow untaxed. He penned the Internet Tax Freedo m Act, and found a co-sponsor in the Senate in Ron Wyden, a Democrat from Oregon.

Making the internet a tax-free zone turned out to be too ambitious a project to get past the voracious states and their lobbies. But following intense efforts, especially on the part of Mr Cox, lawmakers did manage to see through a 1998 law that established a three-year moratorium on new access taxes and a ban on "multiple and discriminatory" taxes. The lawmakers also called for a tariff-free internet worldwide. Later, when the expiry date neared, Mr Cox and his supporters won a two-year extension, to November 1 2003.

The moratorium had two consequences. The first was to allow e-commerce to grow, as hoped. Today, American shoppers spend not billions but tens of billions online. The less-tax experim ent worked, and therefore it was assumed it might be allowed to continue.

The second consequence was to fuel American growth overall; e-commerce is at the core of the current productivity numbers. While some bricks-and-mortar shops lost market share, genera lly the economy gained. Even the anxious states are now seeing record revenues.

Mr Cox felt emboldened, and this summer pushed for a law that would make the moratorium permanent and remove grandfather-clause exceptions. The House voted in September, by acclamation, to make the moratorium permanent. But then the debate moved to the Senate - and the Senate balked. Some senators noted that the original argument for a tax moratorium - that e-commerce was an infant industry - was becoming weaker by the hour. What was more, a number of lawmakers sought more revenue for their states. November 1 came and went. By last Thursday, the bill's sponsors were already reversing down the sad path of compromise. On Friday, they thought they had enough votes. But opponents began appending unre lated amendments about the minimum wage or federal judgeships on to the legislation, and it stalled.

The point here is not that the moratorium is permanently off the agenda, or that a single narrow tax can bring down an economy. It is that US growth is not a force of nature, but rath er the result of policy as promulgated by people such as Mr Cox. To forget that is to jeopardise the growth - inevitably.

© Copyright 2003 Financial Times

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