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We live in a world where leaps in technology happen on a regular basis.  The latest jump is new technology that lets telephone users make calls over the Internet.  Called Voice over Internet Protocol (VoIP), the new service will allow a person to talk to anyone in the world for a fraction of the cost of a traditional long distance call.

An e-mail that talks

Here’s how it works.  An adapter attached to a standard telephone converts voice transmissions into digital data, which is then sent over the Internet just like any other type of computerized information.  When it arrives the transmission is converted back into audible speech that the recipient hears over a regular telephone.  Some technicians refer to a VoIP conversation as an e-mail that talks, since the technology for sending both kinds of message is the same.

So far some VoIP systems only connect people who have compatible Internet connections.  Programmers are working to expand the system so VoIP users can call anyone in the world who has a telephone number, combining local, long-distance and cell phone connections in one digitalized service.

Advantages for consumers and businesses

VoIP technology will bring major advantages to both consumers and businesses.  Personal and public phone directories could be kept on computer.  Simply clicking on a phone number will instruct the computer to dial that number automatically and make the connection. 

Businesses will be able to consolidate their phone, e-mail and fax systems into one network, resulting in major savings and increased efficiency.  Businesses may also include “call us now” boxes on their websites.  Clicking the box would allow customers to establish immediate voice contact with a salesperson, making routine shopping that much faster and easier.

The computer can also act as an answering machine, recording messages when you don’t want to answer the phone.  People will be able to check their messages from anywhere in the world by dialing into their home phone over the Internet.  VoIP can include conference calling, call waiting, call forwarding and many other features currently available with existing phone service.  The difference is VoIP is expected to cost 30% to 40% less, making worldwide voice communication more affordable for everyone.

Talking as a “taxable event”

The ability to talk over the Internet promises to be the biggest improvement in the telephone since Alexander Graham Bell placed the first call in 1876.  That is, if the government doesn’t smother the idea before it even gets started.  That is a real possibility because policymakers are already eyeing VoIP services as a potential new source of tax revenue.  Governors and local officials want to apply all state and local telephone taxes to the Internet, thus “capturing lost revenue” (to use the language of government) from citizens who might otherwise make a phone call without paying a tax. 

The National Governors Association (NGA), to which Washington taxpayers pay $120,000 annually in membership fees, is lobbying hard in Congress to allow state and local taxation of Internet phone calls.  The NGA argues that a telephone conversation is a “taxable event” and that any new technology that lets people talk to each other should be taxed.  State officials fear “losing” up to $9 billion a year in money that would otherwise stay in citizens’ pockets.  It is difficult to see how state officials can lose money they never had in the first place.  But, as the NGA’s spokesman puts it, without the ability to tax Internet VoIP “there’s a real risk that the future of telecom-munications becomes tax free.”

The outcome of this approach would be to instantly shift a massive set of regulations that has developed over 100 years onto an emerging technology.  If the current telephone tax regime were extended to the Internet, VoIP users would have to pay the following:

If that happens it will artificially drive up the cost for consumers, and, more importantly, scare away investors who provide the financing needed to perfect the technology.  Without early and substantial investment, making low-cost worldwide calls over the Internet will remain a wistful dream.

An additional problem is that new taxes tend to take on a life of their own.  Once government budget makers get used to a steady revenue stream they are reluctant to give it up.  For example, Congress imposed a temporary tax on telephones to help pay for the Spanish American War.  More than a century later we’re still paying it, even though that particular war has been paid for many times over.

Conclusion

Like the Internet itself, VoIP is a case of innovation and inventiveness advancing faster than government regulation.  That’s not surprising, since government leaders are sheltered from the competition and discipline of the private sector and can afford to move slowly.  Deliberative government certainly has its place, but sometimes it is best for the regulators to stay out of the way and let a new idea reach its full potential.