The Value of Broadband and the Deadweight Loss of Taxing New Technology

With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.