It’s fairly standard practice for us all to insist that government must do more for us, but that to pay for it, it should be them over there that gets taxed, not us. Thus, there’s always a certain cynicism about any industry or business demanding that they themselves should pay less tax -- that’s just the flip side of demanding that some other person must pay instead.
However, the mobile telecoms suppliers do have at least the beginnings of a reasonable case. There’s one part of the mobile business that should be taxed and taxed heavily. The benefits of all the rest of it are such that we’d all be much better off if it were entirely untaxed -- although we’d still tax the resultant profits of course.
We should all know that, in the words of the Nobel Laureate Paul Krugman, productivity isn’t everything but in the long run it’s pretty much anything. By far the largest determinant of future living standards is how productive we are at using the assets we’ve available, especially our own labour.
It is advancing technology which drives productivity along, therefore, we’re in favour of more technology. This is, true, more than a little circular as the economic definition of technology is something that makes us more productive. Still true all the same.
Quite the most surprising economic finding of recent decades is that the mobile phones drive economic growth. Theory tells us it should help, but it was an empirical study which revealed quite how much.
For each extra 10% of the population that has a mobile -- including the service coverage to be able to use it, obviously -- GDP growth rises by 0.5% a year.
That’s not a half percent addition to the amount of growth that occurs – that’s another half a percent on top of GDP each year. There is simply nothing, no one other thing at all, we’ve ever found which has such a startling effect.
Other work has investigated why and it’s a matter of enabling “contracts to complete.” In an economy without a landline network, without any person to person form of communication other than the personal spoken word, there’s an awful lot of information that doesn’t get passed along.
People with things for sale can’t find those who might want to buy them. Or, much more damagingly, people might not even know there’s a market, a desire, for what they have in abundance.
One piece of research work looked at something as simple as the owner of an unused field not knowing that there was a shepherd nearby with hungry goats. The spread of the mobile phone across East Africa led to an awful lot of such contracts being made, being completed.
The spread of the mobile phone, the penetration of the technology into the population, is the most growth-enhancing thing researchers have ever been able to pinpoint.
Vastly more important than the railway, for example, the jury still being out on whether more important than the steam engine or electricity itself.
We, therefore, probably don’t want to be taxing mobile phones directly -- the industry is correct there. Thus the taxation of SIM cards, or of talk time itself, no, perhaps not.
That doesn’t mean that there should be no taxes at all. We’ve a scarce resource here, that spectrum which is used to build the system upon. This is a natural resource, the money that can be made from it being a resource rent.
As David Ricardo told us all back in 1817, resource rents should be taxed until those pips squeal. No one created them, no effort went into placing them above Bangladesh. So, if we tax them, we’ll still have exactly the same amount we started with.
That is, the supply is entirely inelastic and we should tax things that are that. Normally, tax something and you get less of it -- our reason above for not taxing mobiles. But for spectrum, this isn’t true.
It’s also true that if no one made it then there’s no one with a just or righteous claim to the profit from it. As we’ve got to get our tax revenue from somewhere, it should be all of us, through the government.
So, the taxation system for mobile telephony can be designed from basic economics. We sell -- or rather rent out on long term leases -- the spectrum to mobile operators for as much as we can squeeze out of them.
Then we leave the business alone from the tax point of view, because we really do want all of the population to get communicating. It grows the economy to do this. Finally, profits made get taxed in the normal manner any other profits do and that’s what economic theory and practice both say the correct taxation system should be.
The mobile operators are right that SIM cards, talk time, shouldn’t be directly and separately taxed. Even as they might be a little unhappy when we insist upon taxing away all the value of the spectrum they use.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
