Political Shakedowns: A Cost-Benefit Analysis

The House of Representatives voted May 10 to extend by five years the moratorium on Internet taxes. Although the bill may never make it through the Senate, it cleared the House with a lopsided and bipartisan majority, 352 to 75. “The single largest contributor to our economic prosperity has been the growth of information technology–the Internet,” Rep. John Kasich, a Republican, was quoted saying in today’s New York Times. “Why would we try to tax something, why would we try to abuse something, why would we try to limit something that generates unprecedented growth, wealth, opportunity and unprecedented individual power?”

Rather than repeat the tiresome-but-correct response (“Because not to do so gives Internet commerce an unfair advantage over bricks-and-mortar commerce, which is subject to taxation”), let’s assume that Kasich and his 351 allies in the House are right. The Internet, being a mighty engine of economic growth, must not be taxed, abused, or limited in any way. But if that’s the case, why are the Republican and Democratic parties bent on squeezing Internet firms for campaign contributions? “Both political parties are courting the technology sector,” Sen. Ron Wyden, a Democrat and leading supporter for moratorium extension, told the Washington Post with admirable frankness. “They are saying, ‘I hope this will end up in marriage, that you’ll end up with me.’ The high-tech folks are saying, ‘We’re just out on our first date here–we’re just getting acquainted!’”

If Kasich were more honest, he would have said the following to the New York Times: “Because the Internet generates unprecedented growth, it should be shaken down for as little money as possible. State taxation, eased by federal legislation working out complex jurisdictional questions, would take a lot of money out of the Web economy. The political parties, on the other hand, take comparatively little out of the Web economy. So it’s a better deal for Internet firms to give whatever money they fork over to the government not to the government itself, but to the political parties and the individual congressional and presidential candidates who run the government. And I hope, when they do so, that they favor the GOP.”

When you look at it this way, the protection racket of soft-money and PAC contributions is stunningly cost-efficient. According to the National Governor’s Association, current restrictions on states’ ability to tax Internet commerce, if kept in place, will within three years cost the states $20.1 billion annually. (Click here to read a state-by-state breakdown.) How much do Internet firms kick in now? A tally by the Center for Responsive Politics, which tracks campaign contributions, puts PAC contributions from the “computer equipment and services” sector for the current election cycle at under $1 million. Toss in PAC contributions from the “telecom services and equipment” sector, and the “telephone utilities” sector, which, increasingly, are also part of the Internet economy, and the total for what amounts to one year’s PAC tithe (most of the money was collected in 1999) is still only $4.6 million. Add in the $2.3 million that these sectors gave last year in soft money to the congressional fund-raising arms of the Democratic and Republican parties, and that’s a hair under $7 million. This calculation overlooks Internet-related soft-money contributions that bypass the DCCC and the NRCC, but let’s assume these total $10 million (which they surely don’t). Political contributions are still the best bargain in America. While it is mathematically possible that Republicans and Democrats, in vying for campaign contributions, could eventually drive the shakedown cost so high that Internet firms would be better off being taxed, in fact that isn’t likely ever to happen.