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Proposed phone tax

The government is proposing to levy a tax of £6 a year on all telephone lines, to pay for the expansion of high-speed broadband services to give nation-wide coverage. This is an excellent example of the government’s lack of understanding of economic principles.

High speed broadband is a good thing, but not everyone wants it, needs it, or is even capable of using it. If people want it they will pay for it. There are many alternative methods of delivering the service, through wireless, copper cable or fibre optic systems, or combinations of all three. There are many national providers of utility networks who could achieve this in various ways, although it has to be said that they have failed to take the opportunity to do so as part of the general renewal of infrastructure that has turned so many of Britain’s city streets into building sites in recent years.

Writing in the Financial Times, Lombard likened it to the eighteenth century government’s “failure” to connect all parts of the country to the canal network through leaving “delivery” of the infrastructure to the market. If the provision of broadband is left to the market, they will indeed focus on serving the more densely populated areas and avoid the outliers, which will end up “deprived”. This appears to be the government’s concern and its recourse to the principle of “postage stamp pricing”.

We are not, in principle against postage-stamp pricing, but it must be borne in mind that the availability or otherwise of services such as broadband is reflected in land values. If the service is made available at the taxpayers’ expense through a government intervention, then the land value created should be duly collected. Whether the availability of broadband will actually enhance land value to any significant extent is another question. The proposed subsidy is expected to amount to a total of £1.4 billion by 2017; would the money be better spent by putting it towards, for example, tramway systems for a couple of major provincial cities? Or sea defences? It raises the question of how is the government establishing its priorities?

There are further worrying features of this proposal. It seems as if BT, a private company, will be the main beneficiary, ending up as the owner of a subsidised monopoly carrier. Competitors such as Virgin, Carphone Warehouse and BSkyB have responded critically. How will charges and access be regulated?

Finally, there is the issue of the telephone tax itself, a strange thing since telephone services are already subject to VAT. Will VAT be levied on top of the tax charge? So many taxes have started off at a low level with the intention that they should be used for a specific purpose. The Treasury has always resisted hypothecated taxes such as this. It looks like just another addition to the UK’s ramshackle collection of revenue-raising measures. It will end up in the general pot and it soon rise to a lot more than £6 a year, an amount which is barely worth collecting.

One way and other, then, this proposal is an excellent display of the government’s lack of understanding of the principles of economics and natural justice.