Budapesters' Response to Internet Tax.

In Defense of Hungary's Internet Tax

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Vigorous protests in Hungary against the government's attempt to tax Internet usage seem to support the idea, popular among U.S. legislators, that the Internet is a sacred cow and should be exempt from taxation. In reality, the protests have more to do with Hungarians' fatigue with Prime Minister Viktor Orban's unorthodox approach to taxation. Taxing information consumption is not such a crazy idea.

Orban's government proposed the tax after his Fidesz party triumphed in municipal elections earlier this month, boosting his authoritarian ambitions. Under the draft legislation (since revised), starting next year, Hungarians would have paid 150 forints ($0.62) per gigabyte of data consumed.

No other country has imposed such a "bit tax" -- but the move was largely consistent with the tax policy Orban has pursued since coming to power in 2010. Hungarians pay a flat income tax of only 16 percent, and the country's corporate tax rate is fixed at 19 percent (less for small businesses). But Hungary's value-added tax is 27 percent, the highest in Europe, and special taxes have been imposed on specific industries -- including banking, advertising and telecommunications, which are dominated by foreign players. Telecom operators pay per minute of voice calling and per text message. From the government's point of view, as the Internet comes to dominate those services, it should share the tax burden, too.

Hungarians, however, are getting tired of such indirect taxation. After all, the industries Orban has chosen to milk are passing the extra expense on to consumers.Activists have added to people's exasperation by providing some scary, if spurious, estimates of how much the proposed tax will cost users: 14 cents per hour on Facebook, $19 per movie stream, $323 for watching a TV series.

The reality is, a consumer who regularly watches programs on a streaming service such as Netflix uses about 40 gigabytes per month, which would mean a potential monthly tax bill of $25. That's a lot for Hungary, where the average monthly salary is $680, but it's about what Texans pay in monthly Internet-access taxes.

Orban, ever the populist, could not ignore the protests. The government has announced it will cap the tax at 700 forints ($2.87) per month for private users and 5,000 forints for companies. Although Hungarians are likely to accept that, their initial reaction to the tax proposal shows how close they are to their pain threshold. Orban needs to find other ways to keep deficits down -- or, perhaps, look for less sensitive areas to single out for special taxation. Both the advertising tax and the Internet tax have been criticized as attempts to limit information freedom, a natural impulse for a politician who sees Russian President Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan as role models.

Information restriction has been the problem with taxing Internet usage anywhere. The ideology behind the U.S. Internet Tax Freedom Act -- which, incidentally, expires on Nov. 1 -- is that information freedom creates bigger benefits for society than Internet taxes ever could, and that it's wrong to create taxes for the Internet that do not exist for offline activities. (Texas and six other states are grandfathered out of the legislation.)

In the mid-1990s, when the idea of a "bit tax" was first aired in Europe, two of its authors, Luc Soete and Karin Kamp of the University of Maastricht, complained that the responses they received ranged from "you schmuck" to "hands off the Internet." In 20 years, that reaction hasn't changed, but neither has Soete and Kamp's argument that "as economic activity becomes increasingly concentrated in immaterial information transactions, large parts of value chains appear invisible."

If governments choose to tax consumption in general -- and most of them do, through value-added or sales taxes -- it's logical to tax data consumption, too. There is no reason why a society that accepts taxation of traditional telephony should reject levies on Internet traffic. The infrastructure that carries it is physical and not limitless, and taxing heavy consumption could be a way to preserve net neutrality.

It can also be argued that we users do not really need as much video and audio as content providers, especially advertisers, push at us. Witness those annoying self-launching videos on Facebook and elsewhere: If we were taxed for watching them, more of us would block them.

To consumers, these arguments sound like government rationalization. However, there's one reason that I believe heavy Internet use should be taxed -- progressively, if possible: It would force technology companies to develop ways to minimize traffic and perhaps push the Internet's technological development toward decentralized, mesh-based communication. FireChat, the off-the-grid app that powered the Hong Kong protests, could be an early model for a truly free -- and untaxable -- Internet.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net