June 13, 2006

The Irony of Transparency: Consequences of Wireless Truth-in-Billing

  • Jerry Ellig

    Research Professor, George Washington University Regulatory Studies Center
Key materials
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The Study

  • Examines both the explicit and the hidden costs to consumers and society of taxes, universal service contributions, and regulatory charges on wireless phone bills.
  • Using 2004 data, the study estimates how various tax, universal service, and regulatory reform proposals would affect consumer costs and overall economic welfare.

Our Findings

  • "Costs" include higher prices, but they also include the value of services that consumers forego as a result of the price increases.
  • These latter costs, termed "deadweight losses" by economists, are substantial because most taxes and surcharges vary with wireless minutes, and usage of wireless minutes is very sensitive to price changes.

By the Numbers

  • Taxes, universal service charges, and other regulatory costs take $18.8 billion annually from consumers. That's equivalent to $110 per subscriber annually, $9.20 per month, or 15.5 percent of the average wireless phone bill.
  • The true cost to the economy is about 50 percent higher than that. The charges create an additional deadweight loss of $9.6 billion annually. This $9.6 billion is wealth that consumers and wireless firms give up because consumers purchase less wireless service than they would have used in the absence of these charges.
  • Turning federal universal service charges into a flat fee per phone number instead of usage-based charges, as FCC Chairman Kevin Martin has proposed, would reduce the deadweight loss by $530 million annually.
  • Reducing state taxes on wireless to the average state sales tax level would save consumers $3.9 billion annually and increase overall economic welfare by $2.2 billion annually.
  • Repealing the federal excise tax on wireless telecommunications would save consumers $3.1 billion annually and improve overall economic welfare by $1.7 billion annually.
  • Ensuring that all regulations on wireless produce benefits at least equal to costs would produce at least $2.9 billion annually in consumer benefits and improve overall economic welfare by at least $760 million annually.

Conclusion

  • The FCC's 2005 "truth-in-billing" rule made taxes and surcharges more transparent, but it did nothing to make the hidden deadweight losses more visible.
  • The hidden deadweight loss caused by taxes and surcharges is more than three times the size of the $2.9 billion in add-on charges that prompted consumer advocates to petition the FCC for the truth-in-billing rulemaking.
  • Decision makers can best remedy this problem by transforming taxes and surcharges into numbers-based charges, reducing their size, and ensuring that regulation produces benefits at least as valuable to consumers as the regulatory costs.