Over-Regulation of Phones Now Leading to Hidden Taxes

In ancient China the mandarin class ruled the country in such a complicated way that ordinary people could not begin to figure things out. Eventually the rules of the imperial court grew so tangled that the mandarins themselves couldn’t figure out what was going on. It apparently had something to do with calligraphy. What mattered was how you wrote, not what you wrote. The mandarins had lost touch with reality and China stagnated.

Unfortunately, the mandarins, in spirit, have found new sinecures in Washington, DC–at the Federal Communications Commission (the FCC). If you own shares of communications company stock, or your pension fund does, or even if you merely own a telephone (which means nearly everyone), you have a stake in what government does to the price and availability of phone service. But I defy you to make sense of the FCC’s growing regulatory empire.

At first I thought it was just me. I kept asking people in the industry to explain concepts like “universal access” and “universal service” (often, but not always, used as synonyms). Please tell me, I requested, how telephone services are priced and the various ways subsidies and charges in one part of the business are exchanged for benefits and advantages in others. When the industry experts all began with the observation that universal access increasingly means different things to different people–including those who wrote the Telecommunications Reform Act of 1996–I began to suspect that this field is mandarin to the core.

My suspicions were confirmed by telecom experts outside the industry. As an article in Investor’s Business Daily noted of the pricing dilemma: Because “the (regulated monopoly) system prevailed for so long, no one really knows how much telecom services are worth.”

Now, in economics, as folks in the former Soviet Union can tell you, if a government or a regulated monopoly has run things in a fashion that obscures real costs, you need a free market to clarify matters. Put the product on the shelves and see what people will pay for it. But as Robert Crandall of the Brookings Institution has pointed out, the FCC has not de-regulated the vast telecom industry in pursuit of the Telecom Reform Act; it mostly has re-regulated it.

Once upon a time we understood that phone companies had to subsidize high cost areas (such as rural districts) from profits made in lower cost areas, and from business and long distance calls. But now various transfers of subsidies are so involved that no one can fully account for them. And the response of the FCC has been to keep adding layers of subsidies and regulations.

For example, the FCC recently made plans to require phone companies to pay into a vast fund to provide billions of dollars for connecting America’s schools, libraries and hospitals to the Internet and other computer services. The ostensible purpose, of course, is worthy. But much of it already has been advanced by the phone companies and computer and software companies, or by state and local taxpayers.

The creation of the Gates Library Foundation, announced this week, is another example of generous private assistance. With $200 million from Bill and Melinda Gates, matched by Microsoft software of equal value, the foundation expects to aid half the libraries in the US and Canada, with special emphasis on poor communities.

If, after all such efforts, unmet needs remain, general revenue should be voted. At the very least, any new tax on phone companies to provide high tech services should be enacted directly by elected officials. There is no comparing the scrutiny given a publicly acknowledged tax and one adopted by agency fiat. Hidden taxes imposed by bureaucrats make a mockery of the express desire of Congress and the President to promote tax reform.

It is good news, therefore, that two phone companies–SBC and GTE–have had the courage to sue the FCC in court. For openers, a court might be asked to consider the illogic of asking phone companies to bear the expense of Internet connections and new computers and software. Isn’t the reason mainly that government has regulatory power over telecom and not over other technology industries?

On a recent PBS television program, “Techno-Politics,” FCC Chairman Reed Hundt was asked, further, whether the new implicit tax won’t just be passed on to ordinary people. “Yes,” Hundt said, “(the phone companies) will pass it on to somebody, but it’ll be passed on to everyone in America in insignificant ways.”

Such a vague and high-handed response should remind us of Justice Louis Brandeis’ warning that “Experience should teach us to be most on our guard to protect liberty when the government purposes are beneficent…The greatest dangers to liberty lurk in the insidious encroachment by men of zeal, well-meaning, but without understanding.”

The hidden tax on phone companies–and customers–is just one instance of regulatory over-reach by the FCC, misusing its new powers. It is plain now that Congress blundered when it turned telecom deregulation over to a regulatory agency. The mandarins really don’t know what they are doing and they are doing it outside the normal searching inquiry of the democratic process.

Bruce Chapman

Cofounder and Chairman of the Board of Discovery Institute
Bruce Chapman has had a long career in American politics and public policy at the city, state, national, and international levels. Elected to the Seattle City Council and as Washington State's Secretary of State, he also served in several leadership posts in the Reagan administration, including ambassador. In 1991, he founded the public policy think tank Discovery Institute, where he currently serves as Chairman of the Board and director of the Chapman Center on Citizen Leadership.