Tax Analysts Blog

Taxing the Internet Is a Bad Idea – As the Hungarians Learned

Posted on Nov 5, 2014

American political leaders can learn something from Hungary's ill-fated attempt to impose an Internet tax. The plan in Hungary was to tax Internet usage at the equivalent of about 62 cents a gigabyte. Why tax Internet usage? Apparently, having the world's highest VAT rate (27 percent) doesn't bring in enough money. Hungarian politicians were looking to the Internet to raise revenue. The government was expecting a whopping $440 million a year from the tax.

Over the past year, several state political leaders have asked me about the viability of taxing Internet usage. There are no doubt many folks dependent on government spending who would welcome collecting a tax every time someone opens a browser.

Hungarians were angry. It turns out that a lot of them use the Internet. There were Facebook protests, Twitter protests, and street protests. The Hungarian government said that the new law would require Internet service providers to pay the tax -- not consumers. Nobody was buying that. Service providers in Hungary even said they would be passing every forint of the tax on to their customers.

The tax would hurt e-commerce as well as social use of the Internet. No, it wouldn’t kill the Internet, but when you tax something, you get less of it. But the real problem with the tax is that it is devoid of any principle. The Hungarians need money, and they were looking at an easy target. It is no different than trying to tax smokers, or drinkers, or people who eat cupcakes. It is a special tax aimed at a specific industry and activity. That is generally wrong unless the government can demonstrate externalities associated with the tax target.

I am sure that Hungarian parents share the same frustrations American parents do -- their teenagers spend all of their time on a smartphone. The average American 16-year-old Snapchats about 17,000 times a day. Yes, it's annoying, but it's hardly excise-tax-worthy. Taxes should be imposed broadly on income, sales, or property. Industries, people, and activities should not be singled out for unique taxes or tax breaks. Thus, including a sales tax (or a VAT) in your cable or Internet provider bill is appropriate. Taxing the income earned by the Internet service provider is appropriate. But a gigabyte tax is terrible tax policy.

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