Internet and cellphones

When I arrived in India I was surprised to see that this country with incredibly high growth rates was actually poorer and worse off in many respects than Mexico. But 2 things caught my attention as a major difference between the 2 countries: cell phones and local airlines. A widespread use of cell phones and internet at competitive rates and the surprising number of airlines and low cost flight to travel across the country help explain India's economic success and Mexico's stagnation. Connectivity and Information.

These days the Mexican Congress is debating the fiscal package for the upcoming year. Because of the financial crisis and persisting inefficiencies in tax collection, the government (that promised in the 2006 campaign to LOWER taxes) is proposing a tax increase for many articles.

One of the proposals is a 3% tax on internet connection and cell phone usage. The argument is that they are luxury goods, and that in fact only the top 20% of the income distribution consumes them. In addition, the demand for internet and cell phones of this group is highly inelastic. That is, no one will cancel their line or contract because of the tax. This argument makes economic sense if all you're trying to do is maximize revenue for the government at a particular point in time.

What the Mexican Government is failing to see are the positive externalities associated with the consumption of these two goods. Every day there are more development applications related to cell-phones having to do with governance, information, service provision, making markets more efficient; the list goes on. While in Brazil and Finland internet access is heavily subsidized by the government to the point of being defined as a Constitutional Right, in Mexico we think these goods are unnecessary. Something the rich consume. And in a country where inequality is large and the rich-poor discourse is rampant, what could be easier than taxing the rich?

Instead of going forward on how to reduce poverty and encourage growth, we will tax the rich and leave the poor as they are: hoping to get some scraps of the inefficient government subsidies. Way to go.