E-Commerce: Tomorrow's Economy -Taxing and Regulating The Old Fashion Way

Remarks before the Georgia Public Policy Forum

Date:
By: 
Orson Swindle, Former Commissioner

Before addressing the topic of protecting consumers in cyberspace and the issues of Internet taxation and regulation of online privacy, it might be helpful to share with you a couple of personal thoughts gained from my years of experience as a federal official. First and foremost, I am convinced that our Founding Fathers had it right: government should play only a minimal role in our lives, and for good reason. I believe it was Will Rogers who once observed and said it best: "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. Those of us in government should be ever mindful of the Hippocratic Oath -- "First, do no harm." Before embarking on any type of government activity, we should ask ourselves, "Does this make sense?"

FTC Activities In A Target Rich Environment --Cyberspace

The world of cyberspace is a target rich environment for consumers -- rich in information, choices, opportunities, entertainment, knowledge and commerce. And, unfortunately, it is also a new and fertile field for those who prey on consumers with scams, deceit and outright thievery. Consumers have to be accountable and bear some level of responsibility for their actions. If a consumer is uncomfortable with a Web site then that individual has the freedom -- and should have the good common sense -- to go elsewhere on the Web. Government can play a positive role by educating consumers and businesses and by appropriate and rational attempts to minimize deception, unfairness and misleading practices. The FTC's traditional law enforcement role against deceptive or unfair practices is an appropriate way for government to intervene.

Law Enforcement Cases

For example, in the Geocities (2) case, the Commission settled allegations that the company misrepresented the purposes for which it collected personal identifying information from its customers. Contrary to its stated policy, Geocities permitted the information to be used for purposes such as target marketing by third parties. Accordingly, the Commission alleged that the company engaged in deceptive acts or practices in violation of Section 5 of the FTC Act.

Since our first Internet case in 1994, the FTC has brought 93 federal law enforcement actions against 239 defendants. Most of these cases have involved the traditional kinds of fraud such as business opportunity schemes, credit repair scams, pyramid schemes, and false claims for health-related products, to name a few. Today's scam artists are definitely "computer literate" and use the Internet as well as the old methods of telemarketing, mail, etc.

Using Technology to Uncover and Address Consumer Problems

As the saying goes, two can play the game as well as one. To assist in our law enforcement efforts, we are working to improve our ability to track Internet advertising and new trends as they arise. Online advertising has enjoyed exponential growth -- from approximately $125 million at the beginning of 1997 -- to nearly $500 million by the end of 1998.

As a result, the FTC has devoted new resources to monitor this new advertising medium. The same rules apply about advertising as before: advertising cannot be deceitful nor unfair. We systematically review web advertising with greater speed and are improving our ability to stop problems before they become widespread.

Our consumer fraud database, Consumer Sentinel, offers both U.S. and Canadian law enforcement agencies fast and secure access to complaint data through the Internet. Consumer Sentinel incorporates data from our Consumer Response Center (1- 877- FTC-Help) which receives complaints directly from consumers. Consumer Sentinel compiles the data received from CRC and numerous other sources and provides over 200 U.S. and Canadian law enforcement offices with fast, secure access to fraud data via the Internet.

Educating Businesses

The Internet has seen an explosion of entrepreneurs who may be entering the business world for the first time. Some may unwittingly violate the law because they do not know basic advertising and consumer protection principles. The FTC has done a number of things to educate these businesses. One unique concept is called a "Surf Day." The Commission conducted its first Surf Day viewing websites in December 1996 focusing on pyramid schemes that had begun to proliferate on the Internet. In an effort to educate online entrepreneurs, the FTC, along with state and federal partners across the country, surfed the Internet for three hours and sent business education messages to over 500 suspected pyramid schemes. The messages offered guidance about the difference between multi-level marketing and illegal pyramids and provided the FTC's Web address for more information.

The Commission has employed this technique over a dozen times targeting problems ranging from business opportunity fraud to "miracle cure" health product claims; exaggerated earnings claims; credit repair scams; fraudulent on-line coupon booklets and "get-rich-quick" schemes, among others.

Educating Consumers

The Commission also uses the Internet to give consumers more knowledge and learning experiences. The Commission has posted several "teaser" websites. Teaser sites mimic real scams, using common buzz words and exaggerated income or product claims. Consumers can click through a teaser site but when they arrive at the last page, they receive a sobering warning:

"If you responded to an ad like this, you could get scammed."

The warning page gives advice on how to avoid a particular scam and provides a link back to our own Web site where consumers can learn more. The Commission has now posted nine teaser sites on pyramid schemes, Internet business opportunities, scholarship scams, deceptive vacation advertisements, deceptive travel agent opportunities, false weight loss claims, fraudulent vending opportunities and credit repair schemes.

The Commission's Web site-- http://www.FTC.GOV -- is a great resource for consumers on the Web. We post all of our publications and decisions here, as well as on the U.S. Consumer Gateway -- http://www.Consumer.gov -- a "one-stop" link to a broad range of federal information resources. This site is designed so that consumers can locate information by category, such as Food, Health, Product Safety, Your Money, Technology and Transportation. This website (http://www.consumer.gov ) has more than 60 participating agencies linked to it.

The Internet, Electronic Commerce and Public Policy

The Internet Economy

Earlier this summer, 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.

With the Internet Economy as context, I would like to briefly turn to couple of burning issues in public policy. 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.

The Question To Consider

I was a speaker in June at the inaugural meeting of the Advisory Commission on Electronic Commerce, the group charged by Congress to make recommendations about Internet tax policy. The question I posed 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. 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.

The problems, encompassed in two questions -- 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.

Internet-specific taxes and taxes on Internet access threaten to choke the Internet economically at a critical early stage of its development by locking in or limiting 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 Complications of Taxing Internet Commerce

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

a. First, there are about 30,000 taxing jurisdictions in the country. Need I say more! The Internet is inherently susceptible to multiple and discriminatory taxation in a way that commerce conducted in more traditional ways is not.   b. The Internet commerce is very 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? Many adverse, unintended and unanticipated consequences are lurking in the weeds.   c. 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 small 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.   d. Which state, county, country or countries has tax jurisdiction over income generated by electronic transaction?

Privacy-- Emotion and Reason In a Race for Hearts and Minds

Privacy of personal information, especially financial and medical information, is another public policy issue of paramount importance to consumers in the new electronic economy. Today's ability to collect vast quantities of personal information via the Internet is mind-boggling. There is the possibility of a significant erosion of consumers' confidence in their own ability to protect their personal privacy on the Internet. This could impede the growth of Internet use, and in particular, the expansion of electronic commerce. The concern is legitimate. The solution is very complex. There must be a careful balance between protecting privacy and allowing information-sharing when necessary to serve customers.

On July 13, 1999, the FTC submitted "Self-Regulation and Privacy Online: A Report" to Congress. The report correctly concludes that no legislative action is necessary at this time to cope with the privacy concerns. As FTC Chairman Robert Pitofsky noted, "We are at the dawn of the most impressive new sector of the economy that this country has ever seen. It is dynamic. It is fast changing. It is remarkable the extent to which people are becoming committed to doing commerce on the Internet. In a circumstance like that, you want to stay flexible about the nature of regulation that you impose."(3)

The Chairman is exactly right. The path to those higher standards is not through more laws and regulation. Rather, industry, advocates for privacy and consumers, and the Commission should be able to make further progress by continuing to work together toward what we all agree to be a mutually beneficial goal. Industry, however, must lead the way -- and, I am confident that it will and will do so far more effectively than will more laws and bureaucratic decision making.

However, for those who wish to regulate online privacy (and there are many,) I ask, "how would we do it?" The devil is in the details. We are coming to realize that technology and cost, not to mention the exponential growth of the online world, are serious impediments. Recent data suggests there are now approximately 3.6 million commercial Web Sites, and they are increasing at over 275,000 a month.(4)

Imagine this scenario: First of all, massive numbers of unintended or innocent violations of the new law will likely occur. Commercial Web sites are increasing at almost 10% a month. The overwhelming majority of these violations would be by entrepreneurs seeking to market a product on the Internet without understanding the new privacy requirements or not possessing the technology or the resources to comply. The regulators, armed with the new law, would, of course, have to enforce it. Imagine the scope of this task and the likely effects on entrepreneurs.

While this might be a nightmare for regulators (but, it sure bodes well for government jobs,) it pales in significance to the possibility of regulation impeding the growth of this economic engine.

Do I suggest throwing in the "virtual towel?" Certainly not. I suggest a different approach driven by practicality. More law and government regulation will not solve this problem. It is in the interest of businesses, large and small, to provide customers with safe transactions and secure privacy and business practices to win the confidence of those customers.

There is an incredibly exciting new world of economic and educational power before us brought on by the convergence of technology, information and entrepreneurship. It may be ushering in one of the greatest expansions of freedom, choice and independence mankind has seen. For certain, there are hazards associated with this new environment. How we protect consumers and, at the same time, make it possible for the vast potential to develop is critical. Excessive regulation, new forms of taxes and other government-inspired actions can do real harm.

I recently met John Chambers, CEO of Cisco Systems Inc., and will conclude with something he said about electronic commerce, "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."

Words of wisdom worth heeding. Said another way, "Look before you leap." Thank you for your attention. I would be happy to answer questions from the audience.

Endnotes:

1. The views expressed by Commissioner Swindle in this written text and in his oral remarks are his own and do not necessarily reflect the views of the Commission or other Commissioners.

2. GeoCities, C-3849 (Feb. 12, 1999) (consent order challenging misrepresentations about the Web sites's use of personal information collected from children and adults.)

3. Testimony of the Federal Trade Commission, Hearing on Electronic Commerce: The Current Status of Privacy Protections For Online Consumer, Tuesday, July 13, 1999, U.S. House of Representatives, Committee on Commerce, Subcommittee on Telecommunications, Trade, and Consumer Protection.

4. Internet statistics source: http://www.netcraft.com/Survey/Reports .