U.S. Tax Code Is Hurting the Country's Global Competiveness

On September 28 2015, the Tax Foundation released its 2015 International Tax Competitiveness Index (ITCI) and the United States ranks 32^nd out of 34 OECD countries. The ITCI ranks countries based on policies which limit taxation of businesses and investment and seek to raise the most revenue with the fewest economic distortions.

The ITCI says the following regarding the United States’ low score:

There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

The United States was unable to improve from its 2014 ITIC score. This is likely because the U.S. tax code has remained fairly unchanged since the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent. Since then, many OECD countries have lowered their own rates, reducing the OECD average corporate tax rates from 47.5 percent in the early 1980s to around 25 percent today. The U.S. government actually raised the top marginal corporate rate to 35 percent in 1993, giving the U.S. the highest corporate income tax rate in the industrialized world.

It is important that Congress use the ITCI to understand and address why many U.S. companies have moved their headquarters abroad. Job creation is essential for a growing economy, and lower tax rates and a competitive tax code would allow for entrepreneurs and businesses to invest in new opportunities. Lowering U.S. tax rates, especially the corporate rate, would not only lead to more jobs and higher incomes. Consumers also would pay lower prices as the U.S. expands trade around the globe.

The State of Broadband

FCC GON Wild

Last week, briefs were filed in the court of appeals by parties challenging the FCC’s preemption of a Tennessee law imposing restrictions on a local government’s ownership and operation of a broadband network. In the same order, the Commission also preempted a similar North Carolina law. In FCC acronym-land, a government-owned network is commonly referred to as a GON.

As in … FCC GON wild.

I have never suggested that, as a matter of policy, GONS should be prohibited in all circumstances at all times. If there are particular areas that private sector broadband providers simply are not serving, and do not intend to serve, then a GONS, or some form of public-private partnership, may be appropriate. But these cases, by far, should be the exception, not the rule.

As my colleague Seth Copper and I explained in a May 2015 article, FCC Preemption of State Restrictions on Government-owned Networks: An Affront to Federalism, in the Federalist Society publication Engage:

A threshold issue is the problematic nature of government assuming the dual role of both enforcer of public law and competitor to private sector providers. This duality poses inherent conflicts-of-interest. For example, local governments may excuse their own networks from running the bureaucratic permitting and licensing gauntlet through which private providers must pass. Fear of disfavored treatment deters private market investment in broadband infrastructure. In addition, questions concerning the institutional incentives and competency of local governments operating capital-intensive advanced communications networks in rapidly innovating markets heighten the concerns of local taxpayers. And speech restrictions that are common in the terms of services of government-owned networks raise significant First Amendment issues.

So GONS are problematic from a policy perspective. But I want to use the occasion of the filing of the initial appellate briefs to emphasize the highly questionable nature of the FCC’s preemptive action as a matter of law. The FCC’s action raises rule of law concerns that are at the heart of our federalist constitutional system.

Our Federalist Society article focused primarily on theses serious legal issues. To my mind, the FCC’s preemption order is sufficiently beyond the authority delegated to the agency by Congress, and beyond the bounds of the Constitution’s federalist structure, that I suggest this is a case of the FCC GON wild. Below are a few excerpts from the article that highlight why the Commission’s action is likely to be overturned in court.

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“The most obvious difficulty with basing preemptive authority on Section 706 is that the statute’s language nowhere authorizes it. Section 706(a) provides:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans...by utilizing, in a manner consistent with the public interest, convenience and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.

Preemption is not one of the enumerated measures or methods. Inferring preemption from Section 706(a) is also difficult because of its poor fit with the statutory structure. Section 706(a) recognizes a role both for ‘[t]he Commission and each State commission with regulatory jurisdiction over telecommunications services.’ Federal preemption of state laws imposing geographic or other forms of restrictions or safeguards on government ownership of broadband networks disregards the role of state officials that the statute explicitly acknowledges.”

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“In a 1997 order, the FCC rejected a petition requesting it to preempt state law restrictions on municipal telecommunications networks based on Section 253(a) of the Communications Act. … As the FCC’s 1997 order declared: ‘[S]tates maintain authority to determine, as an initial matter, whether or to what extent their political subdivisions may engage in proprietary activities.’ It also observed that preemption ‘effectively would prevent states from prohibiting their political subdivisions from providing telecommunications services, despite the fact that states could limit the authority of their political subdivisions in all other respects.’

This agency precedent cannot be avoided simply because Section 706 is now invoked as opposed to Section 253. The states’ authority to decide ‘whether or to what extent their political subdivisions may engage in proprietary activities’ is not altered just because a particular FCC majority wants local governments to offer broadband services. Federalism principles previously recognized by the FCC, grounded in the Constitution, do not lend themselves to dismissals based on ‘reasonable explanations’ about current Commission policy objectives. For that matter, the 1997 Order recommended states consider restrictions on government-owned networks rather than totals bans. The FCC’s present about-face regarding such restrictions hardly seems reasonable. Indeed, it seems arbitrary and capricious.”

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“The clear statement doctrine requires that Congress speak with unmistakable clarity before federal preemption of ‘a decision of the most fundamental sort for a sovereign entity’ will be considered. The rule is in ‘acknowledgment that the States retain substantial sovereign powers under our constitutional scheme, powers with which Congress does not readily interfere.’ In Gregory v. Ashcroft (1991), the Court reiterated its longstanding jurisprudential requirement that “[I]f Congress intends to alter the ‘usual constitutional balance between the States and the Federal Government,’ it must make its intention to do so ‘unmistakably clear in the language of the statute,’” and that “Congress should make its intention ‘clear and manifest’ if it intends to pre-empt the historic powers of the States…. No fair reading of Section 706 can find any clear statement of congressional intent that the FCC can interpose itself between states and their political subdivisions. And Section 706 cannot be read to clearly state that Congress intended to preempt state authority over decisions about whether and to what extent to allow its political subdivisions to offer proprietary services.”

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“Finally, and importantly, the FCC’s preemption of state restrictions on government-owned broadband networks violates constitutional federalism principles. The Supreme Court has stressed that: ‘The Framers explicitly chose a Constitution that confers upon Congress the power to regulate individuals, not States.’ The Constitution established ‘two orders of government, each with its own direct relationship, its own privity, its own set of mutual rights and obligations to the people who sustain it and are governed by it.’ Indeed, ‘[t]he Constitution thus contemplates that a State’s government will represent and remain accountable to its own citizens.’

Local governments are created by state constitutions through state legislation. They are accountable to the citizens of the respective states in which they exist. Thus, the Supreme Court has long recognized that “[s]tate political subdivisions are ‘merely ... department[s] of the State, and the State may withhold, grant, or withdraw powers and privileges as it sees fit.’” Our constitutional regime does not recognize, as a matter of legal status, ‘citizens’ of Chattanooga or Wilson. It does recognize citizens of Tennessee and North Carolina. And the Constitution confers upon these citizens of states the authority to exert their will through their elected representatives to adopt laws that restrict municipal activities. In essence, this is what the Supreme Court reaffirmed in Nixon, declaring that ‘preemption would come only by interposing federal authority between a State and its municipal subdivisions, which our precedents teach, are created as convenient agencies for exercising such of the governmental powers of the State as may be entrusted to them in its absolute discretion.’”

A Most Shocking Display of Regulatory Overreach

Presidential candidate Jeb Bush has an op-ed in the Wall Street Journal entitled, “How I’ll Slash the Regulation Tax.” There is much in his piece with which I agree, including his conclusion: “Once we remove the burden of overregulation, America will once again reclaim its reputation for inventiveness, energy, and boundless opportunity.”

The use of “reclaim” was deliberate. Mr. Bush began his commentary by pointing out that, according to the World Bank, “the U.S. ranks 46^th in the world in terms of ease of starting a business.”

In the course of his piece, Mr. Bush identifies a number of Obama Administration initiatives that he contends have “mired America’s free market in a flood of creativity-crushing and job-killing rules.” He concludes his list with this: “And in perhaps the most shocking display of regulatory overreach, it is regulating the Internet as a public utility, using a statute written in the 1930s.”

Well, Title II of the Communications Act of 1934, under which the Federal Communications Commission has now decided to regulate Internet providers as public utilities, is derived in all essential respects from the Interstate Commerce Act of 1887, which itself was enacted to regulate long-since deregulated railroads. So, in truth, Mr. Bush could have said, “using a statute written in the 1880s.”

But who’s counting? The fundamental point is that the public utility-like provisions of both the Interstate Commerce Act and the Communications Act, which the FCC now has applied to today’s broadband Internet providers, were included in those statues to prevent abuses by monopolistic carriers. This point is indisputable. And it is also indisputable – despite the FCC’s feeble attempt to suggest “gatekeeper” market power in the effort required by consumers to switch among providers – that broadband Internet services are offered in a largely competitive environment.

Most Americans can choose among several different broadband providers to access the Internet, including among four wireless providers that are carrying an increasing amount of broadband traffic. The fact that there are still pockets where this is not the case does not justify subjecting all Internet providers, in all areas of the country, to a public utility regulatory regime.

The extent to which Chairman Wheeler and his two Democrat colleagues are willing, perhaps even eager, to look backwards in time – as though looking through a rear view mirror – to justify their stringent approach to regulating Internet providers should be clear to all. At the very outset of its Court of Appeals brief, the FCC begins its defense of its Internet regulation order by stating: “The roots of the [Open Internet] debate can be traced back to 1980 and Computer II, … in which the Commission separate data-processing activities from the telecommunications services regulated under Title II in order to enable new information services to flourish free from the ‘bottleneck’ power of telephone companies.” [FCC Brief, at 10.] The agency’s brief declares the purpose of the Computer II regime, with its strict definitional separation of “telecommunications” and “information services” was “to establish a regulatory framework supporting development of the nascent information economy free from interference by the traditional providers of telecommunications services.” [FCC Brief, at 11.] Even a casual glance at the brief reveals the extent to which the Commission harkens back to 1980 in an effort to find support for its current order imposing Title II regulation on today’s Internet service providers.

But this backwards-looking approach is highly problematic. As you can see from the above (and you can read the FCC’s lengthy Computer II order and reconsideration orders for much more of the same), the Commission’s action in 1980 was clearly premised on the assumption that the “telephone companies” possessed “bottleneck” power and that information services were “nascent.” This may have been true then, but it is simply not true 35 years later. Today’s broadband Internet providers (there no longer are “telephone companies” in the sense the Commission used the term in 1980) operate in a competitive environment, and information economy providers like Google, Facebook, Twitter, eBay, and so forth are anything but nascent.

Above all, understood through the lens in which regulations ought to be properly assessed, whatever the case in 1980, in 2015 no demonstrable evidence exists of market failure or consumer harm justifying the Commission’s imposition of public utility regulation on Internet providers.

I am no expert regarding many of the Obama Administration’s regulations in other areas. But it doesn’t surprise me at all that Jeb Bush calls the FCC’s action perhaps the Obama Administration’s “most shocking display of regulatory overreach.”

GroupM Will Require Partners to Become TAG-Certified

Today, WPP’s GroupM, the leading global media investment management company, announced that it will require all of its media partners to receive anti-piracy certification from the Trustworthy Accountability Group (TAG) by Q1 2016. TAG is a voluntary initiative which helps prevent ad placement on websites which facilitate the distribution of pirated content and/or the illegal dissemination of counterfeit goods. (Read more about TAG in this blog.)

Certification entails that TAG has approved an advertising agency’s ability to identify at risk websites, prevent advertisements on such websites, disrupt fraudulent or deceptive transactions, and eliminate payments to such websites that facilitate access to illegal content and/or counterfeit goods. John Montgomery, Chairman of GroupM Connect in North America and Co-Chair of TAG Anti-piracy Working Group made the following statement in a press release:

We’re in the business of giving the world’s most valuable brands marketing advantage with smart media strategies. This inherently means we’re vigilant for clients’ brand safety. Our work with TAG in the development and now full adoption of anti-piracy guidelines is a major leap forward. With IAB, 4As, and ANA, we’ve worked years to make the digital ecoSystem more trustworthy. Fighting pirates of copyrighted content required every ounce of our tenacity and ingenuity, but with the advent of TAG’s Brand Integrity Program Against Piracy, we have powerful new tools and safeguards.

TAG and other voluntary initiatives, such as WheretoWatch.com, Rightscorp, and CreativeFuture, have emerged to aid consumers in finding legal content and raising awareness about websites, enterprises, and advertisers that violate intellectual property rights.

Diminishing ad-supported piracy is important to help ensure that content providers, artists, innovators, and marketers can earn a return on their creative works - incentivizing more innovation, investment, and economic growth. 

FSF scholars applaud the work of TAG and support this decision by GroupM!

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All the Investment We Cannot See

I am reading the New York Times bestseller and Pulitzer Prize winning novel All the Light We Cannot See, which I heartily recommend. But you’ll have to read it yourself to discover what it is about. I only bring it up now because the title calls to mind . . . telecom policy.

Well, only in this sense. I’m afraid that over the next several months and years we are going to be talking about All the Investment We Cannot See.

As I pointed out in my recent blog, “We Told You So: Title II Regulation Harms Investment,” Free State Foundation scholars warned the FCC dozens (and dozens more!) times in recent years that adoption of stringent “net neutrality” regulation almost certainly would dampen investment in new broadband facilities by Internet providers. In “We Told You So,” I referred to PPI scholar Hal Singer’s work, published in a Forbes article, showing that, already, there appears to be a significant drop – a decrease of 8% and $2.5 billion for the top wireline and wireless ISPs – in year-over-year investment as a result of the FCC’s net neutrality action.

We might refer to this drop-off as All the Investment We Cannot See.

But I want to address another Investment We Cannot See phenomenon because I’m confident this other unseen, more difficult to calculate, investment loss will come to play a role in considering the impact of the FCC’s new regulations. Here’s what I have in mind: Regardless of any adverse impact of the FCC’s net neutrality action, Internet infrastructure providers will continue to invest in new network facilities and modernize existing facilities. The nature of the competitive broadband marketplace and ever-increasing consumer demand for more “bandwidth” will dictate continuing capital expenditures.

So, in discussing the Commission’s net neutrality regulations at last week’s CTIA show, it is not surprising that FCC Chairman Tom Wheeler declared “investment has continued.” While unsurprising, his statement does not prove much concerning the merits of the FCC’s action. 

As I said, I am fairly sure investment by Internet providers will continue. And Mr. Singer does not suggest that, in an absolute sense, investment has not continued or will not continue. Just that it already has been diminished and will be diminished in the future. In other words, infrastructure investment will be less going forward than it otherwise would be absent the FCC’s new Internet regulations.

It will be difficult, going forward into the out years, to measure with precision the exact size of the diminished investment – in other words, the amount of investment that did not occur as a result of the disincentives created by the net neutrality mandates, especially the Title II regulatory overhang.

This investment that simply does not take place in out years, like the significant year-to-year drop-off already calculated by Mr. Singer, falls into a black hole we might call All the Investment We Cannot See.

Chairman Wheeler and his Commission colleagues who voted to adopt the new Internet provider regulatory mandates, along with the advocates of Title II regulation, likely will argue that All the Investment We Cannot See in the black hole doesn’t really count. That it doesn’t matter.

But this is wrong. It’s a costly black hole indeed, and consumers and the nation's economy will be the losers.