Closing the gap : Smart taxation could be key in solving the problem of the digital divide

America's Network, Sept 1, 2001 by Alan Pearce

The importance of developing a policy to narrow and ultimately eliminate the digital divide was made clear to FCC Chairman Michael Powell when he became embroiled in what is now known as the Mercedes gaffe.

During a press conference soon after becoming the agency's new leader, Powell said, "I think there is a Mercedes divide. I would like to have one, but I can't afford one." He was roundly criticized, especially because he earns $133,500 a year and is the son of Secretary of State Colin Powell, a multimillionaire. The verdict was in: Powell favors the rich and has little sympathy for the poor.

Not true.

Powell's quote was taken out of context. He said, in full: "I think the term [digital divide] sometimes is dangerous in the sense that it suggests that the minute a new and innovative technology is introduced in the market, there is a divide unless it is equitably distributed among every part of the society, and that is just an unreal understanding of an American capitalistic system. I think there is a Mercedes divide. I would like to have one, but I can't afford one. I'm not meaning to be completely flip about this. I think it's an important social issue, but it shouldn't be used to justify the notion of, essentially, the socialization of deployment of the infrastructure."

Good politics

Now Powell is turning his attention to solving the real problems surrounding the digital divide. His policy initiative, however, will be serious, not symbolic.

The statutory focal point of the debate is embodied in S.706 of the Telecommunications Act of 1996, the provision of advanced services to all Americans. It is of paramount importance to political leaders because this country cannot abide the rich and powerful being regarded as inherently more important than the poor, or, for that matter, rural America being considered less valuable than urban and suburban America.

Major developments have contributed to a major political problem confronting the industry. These developments include the following:

* The dynamic growth of the Internet and the trend from circuit to packet switching.

* The growth of multiple wireless networks that cause customer migration from both local and long long-distance networks.

* The need to promote advanced technologies, which can result in additional costs associated with the provision of new, innovative services.

* The promotion of local exchange competition, which reduces the financial power of the ILECs while increasing their financial burdens if they are compelled (by politicians and policymakers) to provide affordable broadband services to the poor.

* The need to wire schools, libraries, health facilities and other agencies for Internet access.

These factors have caused profits to shrink thus restricting the capital investments needed to build integrated digital networks that can serve all Americans. So the policy problem confronting the FCC is this: How do we pay for the deployment of ubiquitous universal broadband services?

Unfortunately, the traditional sources of subsidies are no longer sufficient to pay for the upgrades to serve the needs of a broadband, digital society.

Access charges levied by local telcos are declining rapidly because several segments of the industry have found legal ways of avoiding them. Therefore, the subsidy burden is left primarily with the ILECs and the IXCs.

The Powell-led FCC is aware that the traditional sources of subsidies are not sufficient to deploy affordable broadband services nationwide. In its search for an acceptable policy solution, it is soliciting input from all segments of the industry and the public.

One possible solution is to allocate all, or a portion of, the current 3% tax on telecommunications services to the Universal Service Fund. If we can reduce taxes for most Americans, then we can easily allocate a tax on telecom services and use at least part of the proceeds to reduce or eliminate the digital divide. That, to me, sounds like good politics.

Alan Pearce is president of Information Age Economics (Washington, D.C.). Send comments to anrespond@americasnetwork.com