Tax Policy – What the Internet Can Teach Us About Capital Investment, Infrastructure, and Tax Policy

The lockdowns imposed in response to the COVID-19 pandemic induced an increase in demand for broadband internet, as work from home and other social distancing measures pushed people to spend more time online.  As broadband becomes a more important piece of America’s infrastructure, it makes sense to look at tax policy that will help drive more investment and better service.

The United States’ internet has absorbed this surge in demand very well. As Alec Stapp of the Progressive Policy Institute (PPI) wrote in Morning Consult in April, increased use of digital services like Netflix and YouTube are not straining America’s Internet, while Europe is struggling with this sudden increase in traffic.

Why is the U.S. so much better at managing the increase in demand? Strong investment. From 2003 to 2015, the United States invested almost twice as much per capita on broadband internet than the average European country in the Organisation for Economic Co-operation and Development (OECD). And according to the PPI’s report on investment in the United States, four of the top 10 companies with the most capital investment in the United States in 2019 were telecommunications companies. PPI found that the top four firms combined for more than $54 billion in capital expenditures.

The difference between European and American  investment in broadband stems primarily from differences in regulatory policy: America’s more market-driven, light touch regulatory regime has proved more conducive to capital investment than Europe’s more top-heavy approach.

This also demonstrates how private investment can help build strong infrastructure. When people think of infrastructure, they often think of roads and bridges: take, for example, the Invest in America Act recently introduced in Congress. But for the modern economy, broadband is also a form of infrastructure. Like transportation infrastructure, it provides a method of transit for goods and information. And that’s been made possible mostly through private, rather than public, investment.

Like a common sense, light touch regulatory regime, smart, pro-growth tax policy can play a role in strengthening private investment in infrastructure like broadband. Austan Goolsbee, former Obama administration Council of Economic Advisers chair, found that the efficiency costs of taxing new technology such as broadband are more harmful than those of most taxes, as they slow the diffusion of productivity-enhancing tech.

Past reforms helped lower the cost of new investment like laying cable and constructing cell towers. Allowing companies to deduct the full value of spending on equipment permanently would reduce the cost of these investments, driving investment, job creation, and long-term productivity and wage gains. Improving cost recovery of investment is especially important for capital-intensive industries like telecom, as not allowing them to deduct the full value of their investments creates a bias in favor of capital-light industries, which rely more on ongoing expenses that can already be deducted immediately. 

As telecom companies prepare for the push for 5G, our tax system should not get in the way of investment that could bring large benefits in terms of quality of life and productivity for the public.

Source: Tax Policy – What the Internet Can Teach Us About Capital Investment, Infrastructure, and Tax Policy