Address

Advisory Commission on Electronic Commerce

Date:
By: 
Orson Swindle, Former Commissioner

It is a pleasure to be with you this afternoon. As is always the case for Federal Trade Commissioners, it is important for me to note that my comments today are my own and in no way represent the views of the Commission or of any other Commissioner.

Thank you, Governor Gilmore, for allowing me to participate in this important discussion. Also, thanks to all the other members of the Commission for dedicating your time and efforts to this important endeavor.

Rarely has an advisory commission's work been so important. Rarely will an advisory commission's work be followed so closely. Rarely will an advisory commission have the opportunity to make a great and lasting impact on public policy in the United States. I wish you the best of success.

Before addressing the topic of Policy Perspectives On Taxation In Cyber Space, it might be helpful to share with you some personal thoughts gained from my years of experience as a federal official. First and foremost, our Founding Fathers had it right: government should play only a minimal role in our lives. I believe it was Will Rogers who once observed: "All government programs have three things in common: a beginning, a middle, and no end."

Given the tremendous benefits that typically flow from private markets, government intervention in these markets should be undertaken only when it is clearly necessary. We in government, responsible for regulation and for economic and tax policy, should be ever mindful of the Hippocratic Oath -- "First, do no harm." Before embarking on any type of government activity, asking ourselves, "Does this make sense?" might serve us all well.

This meeting is being held at a pivotal point in history. The government can choose to adopt policies that promote the development of electronic commerce, thereby allowing Americans to realize the potential of this dynamic medium. Or the government can choose policies that hinder or stifle electronic commerce's development. This is the choice that we confront today.

The history of taxation seems to indicate that every time a new product, a new industry, a new form of social organization, or even a new economic concept of income or wealth has arisen, governments have moved to tax it. As President Reagan said, "The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

Taxation is a tangible form of regulation. There comes a time -- and in my view, it ought to come with great frequency -- to rationalize, consolidate, and simplify the existing regulatory code before adding new chapters to it. That same requirement should apply to the tax code. While fundamental tax reform is clearly far beyond the scope of your Commission, I believe we would all be remiss in our various responsibilities if we failed to consider the long-term consequences of not implementing fundamental tax reform.

My current vantage point is that of a regulatory policymaker and law enforcer. Congress created the FTC, and has given the FTC authority to act in certain situations in which government intervention in private markets may be needed. The role of the FTC is to enforce laws against conduct or transactions that are anticompetitive and against unfair or deceptive acts or practices. The FTC is responsive to Congressional interest on a variety of subjects where the agency is called upon to apply its regulatory expertise to study a particular issue.

Understanding the consequences of our actions is essential to decision making, as it should be in all government policy and action. Even when government action is motivated by noble intentions, careful consideration must be given to unintended consequences.

Ah, there's the rub. As we all know from our own experiences, good intentions do not always carry the day. There are seemingly always unintended consequences. If our experiences teach us but one thing, surely it must be, "Look before you leap."

The Question To Consider

The question before the Commission today is whether policymakers should apply a Depression-era tax system to the economy of the 21st Century. The answer to that question will have an enormous impact on economic growth -- the creation of wealth, jobs and prosperity -- throughout our country and the world. The question of imposing new taxes on the Internet is more than just an ideological debate. The economic consequences of government actions in e-commerce will be profound and serious. Any missteps will injure our country gravely, and diminish our position as the leading world economy.

During this meeting, very difficult problems have been discussed. The problems -- what is the right tax policy, and what should be done about the real and perceived loss of revenues to electronic commerce -- are magnified by the technological convergence of information, knowledge, entertainment and commerce. This convergence is affecting the lives of every American -- and we are only in the first inning.

We begin with a free and open Internet that is a U.S. competitive advantage. Since it starts with no barriers, it should be easier to keep it free of barriers (and as we all know, government spends enormous time and energy negotiating global trade agreements that reduce barriers). The Internet advances the causes of free trade and improvement of living standards by creating a comparative advantage for people and firms that produce competitive, high-quality services and goods. Since more than one-third of all current Internet usage is by Americans, imposing new taxes on the Internet will disproportionately affect U.S. consumers.

There are both short-term and long-term considerations for this Commission to address. Internet-specific taxes and taxes on Internet access threaten to choke the Internet economically at a critical early stage of its development. Unwarranted taxes and regulation at a time when the technology is still rapidly evolving threaten to lock in or limit the Internet to specific technologies and modes of service that fall far short of its likely potential.

Tomorrow's tax policy will have an enormous impact in shaping the future of this burgeoning new industry of electronic commerce supported by the Internet. Unlike past economic, industrial and commercial development, the "borderless" marketplace of cyberspace -- where location, distance, and physical plant facilities are no longer essential elements (or impediments) to business transactions -- will change the face of commerce. Since commerce on the Internet is digital, there are no localities, physical presence, or geographical boundaries. In other words, it's like being everywhere and nowhere at the same time.

The Internet Economy

Earlier this month, the University of Texas, backed by Cisco Systems, introduced a study of the current status of electronic commerce -- one of the very first attempts to measure the Internet economy. According to the Cisco study, the Internet economy generated an estimated $301 billion in revenue in 1998 and was responsible for over 1.2 million jobs. (These estimates are based on worldwide sales of Internet-related products and services by U.S.- based companies.)

The study divided the Internet economy into four layers: the infrastructure layer that includes companies like MCI Worldcom, AOL and Cisco; the applications layer that includes companies like Netscape, Microsoft, and Sun; the intermediary layer that includes companies like Schwab.com, Yahoo, and TravelWeb.com; and the commerce layer that includes companies like Amazon.com, IBM, and WSJ.com. It is important to note that many companies are players at multiple layers. Each layer produced a range of revenues from $56 billion to $115 billion and created from 230,000 to 482,000 jobs in 1998.

Let me put those figures in perspective. The Internet economy already is bigger than the energy industry ($230 billion), the telecommunications industry ($270 billion), and is almost as big as the automobile industry ($350 billion). The Internet economy is becoming as essential to American life as the automobile.

As impressive as this is, realize that the Internet is still in its infancy. Recall that the browser programs, such as Netscape, which make the Internet so consumer-friendly did not arrive on the scene until 1993.

As is dramatically reflected in the stock market, estimates of e-commerce and related stock valuations are driven by potential -- enormous potential -- rather than by traditional values of plant facilities, inventory and sales. The greatest danger to electronic commerce will be impediments to fully developing this enormous potential.

The stock market's valuation of these emerging firms, products, and services is based to a great extent on expectations about new products and services that may arrive in the marketplace someday soon but are still on the drawing board. Those advocating taxation of the electronic marketplace are also operating on the basis of expectations: they are hungrily anticipating new products and services whose sale can be a source of revenue for government. What they may lose sight of, however, is that inappropriate government intrusion in the form of regulation and taxation may in fact chill the development and marketing of new products and services.

The Complications of Taxing Internet Commerce

The issue of taxing the Internet is complicated by several factors:

  1. With approximately 30,000 taxing jurisdictions, compliance becomes a significant obstacle. The Internet is inherently susceptible to multiple and discriminatory taxation in a way that commerce conducted in more traditional ways is not. Double taxation would be inevitable because the diffuse nature of the Internet makes taxation very tricky.
     
  2. Since Internet commerce is so new, we do not know what the basic business model will look like in a few years. How can we know how to tax it? There are likely many adverse unintended and unanticipated consequences lurking in the weeds.
     
  3. How would the taxes be collected? One of the main benefits of Web-based businesses is that the ability to reach such a large potential universe of customers cheaply provides an opportunity for very small one- and two-person companies to thrive without a tremendous amount of start-up capital. The cost of compliance and tax collection alone for these small businesses could be enough of a deterrent to keep them from participating in the marketplace.
     
  4. Another major enforcement issue is identifying the state, country or countries that have tax jurisdiction over income generated by electronic transactions. Electronic commerce permits a foreign person to engage in multiple business transactions with customers in the United States without ever having entered the country.

For example, Angiesflowers.com could have its homepage code on a server in Alexandria, the order forms on a server in Tennessee, the software for downloading stored on a server in Micronesia, and the hardware for shipping in Georgia. Of course, the customer of Angiesflowers.com is oblivious to the various server locations, which are irrelevant from the Internet consumer's perspective.

I recently met John Chambers, CEO of Cisco Systems Inc., and he said something that caught my attention. "We need to be very careful not to rush in and really stifle the opportunity this gives our country in terms of job growth and economic growth by applying old-world regulations to this new world," said Chambers. He implored me, as a regulator, to understand the issues of taxation and regulation before acting.

I cannot overstate how difficult it is to heed his advice, although I think his suggestion is most applicable to all of us here today. People are most comfortable with what they know. And in this case, what we know is ill-suited to the world that is being shaped by the Internet economy.

Privacy

Let me give you an example, using the very important topic of Internet privacy, of how Washington, D.C. works. Internet privacy has been a hot topic at the FTC for the better part of three years. Yet as concerns about privacy have become a part of public consciousness, industry has stepped up to the plate and taken leadership in promoting self-regulatory solutions.

But the debate in Congress is taking a very different path. Six months ago, nobody would have predicted that privacy would become the key issue in the banking deregulation bill --H.R. 10 -- but that's exactly what has happened. It is a case study in an emotional response to an important issue without the benefit of sufficient study and consideration of possible unintended consequences.

As approved earlier this month, one version of the banking bill would give the FTC new authority to prescribe standards over how financial institutions disclose personal information and would require financial service companies to get permission from customers before sharing information among affiliates and with third parties. While the privacy of customer financial information is vital to customers, it is also vital to industry.

There must be a careful balance between protecting privacy and allowing information-sharing when necessary to serve customers. Congress feels that it must address this issue, which is its prerogative. But this type of proposed regulation makes it difficult for Congress to achieve that delicate and careful balance on privacy issues. If Congress mishandles privacy issues in the banking bill, those mistakes will likely repeat themselves in other legislation.

Given the broad scope of your Congressional charter, and the public's concerns about online privacy and the protection of sensitive financial and medical records, I hope you will consider taking on this issue as one of your most important efforts.

As I asked at the beginning, do we want to apply an "old-world," Depression-era tax code to 21st Century electronic commerce? To even think about burdening the growth of the Internet and electronic commerce with new taxes demands a "look before we leap" approach. The prospect for doing grave damage is enormous. As you consider solutions, most of all, do no harm.

Do you remember the children's game where you sat in a circle and passed a sentence from one child to the next and invariably the meaning was lost in the translation? That's the way it can be with regulation and taxation, and that's perhaps the greatest peril your work faces. The devil is always in the details, and in Washington, the details are frequently left by Congress to the regulators. So I urge you to be clear, concise, and unambiguous in the recommendations that you make. If you are successful, Congress will work to implement your recommendations. It is easy to imagine how the meaning of your work is similar to that children's game once the regulators get hold of it. Regulators will have a role in interpreting and shaping your work, so you should leave little to their imagination. Remember that the biggest buildings in Washington are occupied by regulators and that the stakes in your work are too important to be left to unelected bureaucrats.

Thank you again for the opportunity to speak to you today. Please let me know how I can be a resource to you as you deliberate.