July 2012

The U.S. Senate holds hearings Wednesday on the so-called Market Fairness Act (S. 1832), which would be better dubbed the “Consumer and Enterprise Unfairness Act,” as it seeks to undo a critical requirement that prevents states from engaging in interstate tax plunder.

In a series of court decisions that stretch back to the 1950s, the courts have consistently affirmed that a business must have a physical presence within a state in order to be compelled to collect sales taxes set by that state and any local jurisdiction.

That meant catalogue and mail order businesses were not required to collect sales tax from customers in any other state but their own. The three major decision that serve as the legal foundation for this rule, including Quill v. North Dakota, the case cited most frequently.

Quill left room for Congress to act, which indeed it is doing with the Market Fairness Act. The impetus for the act has nothing to with the catalogue business, however. Rather, it’s the  estimated $200 billion in annual Internet retail sales, a significant portion of which escapes taxation, that’s got the states pushing Congress to take a sledgehammer to a fundamental U.S. tax principle that has served the purpose of interstate commerce since 1787.

That year, of course, is when the U.S. Constitution replaced the Articles of Confederation. One of the flaws of the Articles was that it permitted each of the states to tax residents of others. Rather than get the budding nation closer to the nominal goal of confederation, it was endangering the expansion of vital post-colonial commerce by creating 13 tax fiefdoms and protectorates. The authors of the Constitution wisely addressed this by vesting the regulation of interstate commerce in the federal government.

Continue reading →

On CNET today, I’ve posted a long critique of the recent report by the President’s Council of Advisors on Science and Technology (PCAST) urging the White House to reverse course on a two-year old order to free up more spectrum for mobile users.

In 2010, soon after the FCC’s National Broadband Plan raised alarms about the need for more spectrum for an explosion in mobile broadband use, President Obama issued a Memorandum ordering federal agencies to free up as much as 500 MHz. of radio frequencies currently assigned to them.

After a great deal of dawdling, the National Telecommunications and Information Administration, which oversees spectrum assignments within the federal government, issued a report earlier this year that seemed to offer progress. 95 MHz. of very attractive spectrum could in fact be cleared in the ten years called for by the White House.

But reading between the lines, it was clear that the 20 agencies involved in the plan had no serious intention of cooperating. Their cost estimates for relocation (which were simply reported by NTIA without any indication of how they’d been arrived at or even whether NTIA had been given any details) appeared to be based on an amount that would make any move economically impossible. Continue reading →

[Update II: The petition has now expired, about 2,500 signatures shy of the 25,000 needed to require a White House response.]

[Update: The D.C. Circuit Court of Appeals has accepted CEI's amicus brief and ordered the TSA to answer EPIC's petition. It is common for courts to simply reject petitions of this kind, so this is important progress in the effort to get TSA to follow the law.]

Will the White House give us a substantive answer or not?

A few weeks ago, we ‘celebrated’ the one-year anniversary of a court order requiring the TSA to do a notice-and-comment rulemaking on its policy of using strip-search machines for primary screening at airports. It’s been a year and the TSA has shown no action.

The Electronic Privacy Information Center, which brought the original case, filed a petition asking the D.C. Circuit Court of Appeals to require action on the TSA’s part. The Competitive Enterprise Institute and many other friends of the court chimed in with an amicus brief highlighting issues in the case. I emceed a Cato Capitol Hill briefing on the topic.

But the real fun has been with a petition on Whitehouse.gov asking the president to make the TSA follow the law. When I put that up there, the issue took off. Stories and links went out on Ars Technica, Wired, and the Washington Times, just to name a few. People sent notices out to their email lists. And there was plenty of Tweeting, blogging, reTweeting, reblogging.

The petition is nearing 16,000 signatures (of 25,000 needed to require a response from the White House). That would be great to have, though not essential. The PR value has already been gained.

PR value is real value in Washington, D.C., and to illustrate that value, inveterate friend of liberty Will Hayworth whipped up a little code to grab the locations of the people that named their location when they signed the petition, and he put them on a Google map. It’s a nice illustration of the nationwide distaste for the TSA’s policy—and its refusal to implement the policy consistent with the law.

Take a look and see how many people from your state or town have signed on. Do your friends need a reminder? Send them the link to the petition page!

Locations of Signers to “TSA—Follow the Law” Petition

Petitioning isn’t going to upend government, but it is an organizing idea with a constitutional pedigree—the First Amendment. So if you think TSA should follow the law, well, maybe you should join in the fun!

If we get 25,000 signatures by August 9th, the White House will have to respond.

As budget deficits have increased, public investment in our nation’s infrastructure has declined. In just the last four yours, the “United States has fallen sharply in the World Economic Forum’s ranking of national infrastructure systems,” from 6th in 2007-2008 to 16th in 2011-2012. Our roads, bridges, rail networks, and ports are all straining to handle demand, but due to budget concerns, lawmakers have little interest in increased funding. Continue reading →

I’m working on a project looking at libertarian views on copyright (more on that soon), and I’d like to solicit your feedback on an analogy I’m developing. I’ve set up [a comment thread at Google+](https://plus.google.com/u/0/117169003326996777677/posts/TjzX6ZHLTK6) and I’d sincerely appreciate your thoughts on this post. Email feedback is also appreciated. Here goes…

Libertarians, conservatives and other supporters of a free market tend to be critical of government programs that subsidize particular industries. For example, the loan guarantees that allowed Solyndra to set up shop. We don’t like them because they distort the market and tend to lead to rent-seeking, if not corruption.

Why do we have loan guarantees for renewable energy projects like Solyndra’s solar power technology? Quite simply it’s because we’d like to see more renewable energy technology developed; more than is profitable to develop right now. So, the government offers a subsidy to incentivize the creation of such technology, which will eventually benefit the public at large. So far so good, but there are problems with this kind of [government privilege](http://mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism).

First, there is a [knowledge problem](http://en.wikipedia.org/wiki/Local_knowledge_problem). How do we know that we’re not already getting the right amount of investment in renewable technologies? Without a government subsidy, there would still be investment in renewable energy technologies. We just think it’s not enough. But even putting aside how we can know that, the other question is, how much investment is optimal? Without a market process to guide investment, we don’t know how much is enough. So when the government offers subsidies, it’s guessing. It’s likely offering too little or too much, with each error introducing its own inefficiencies. Continue reading →

In my [last update on WCIT](http://techliberation.com/2012/06/20/wcitleaks-gets-results/), I noted that due to pressure generated by WCITLeaks, the Secretary-General of the ITU promised to make a recommendation to the ITU’s Council to open up access to WCIT preparatory documents. Here is what has happened since then:

- Secretary-General Touré indeed made his recommendation to the Council.
- The Council responded by releasing a single document, TD-64, which has already been on WCITLeaks for weeks. Indeed, it was the first document we posted.
- The ITU issued a [press release](http://www.itu.int/net/pressoffice/press_releases/2012/46.aspx) declaring this to be a “landmark decision.”

As I [told Talking Points Memo](http://idealab.talkingpointsmemo.com/2012/07/un-telecom-agency-releases-secret-treaty-critics-unswayed.php), I am not impressed by the ITU’s landmark decision. In fact, I am more convinced than ever that the ITU is too out of touch to be trusted with any role in Internet governance.

Consider these quotes from Secretary-General Touré at May’s WSIS Forum, [highlighted by Bill Smith](http://www.circleid.com/posts/20120723_itu_landmark_decisions/) at CircleID:

- “The ITU is as transparent as organizations are.”
- “The transparency of the ITU is not something that you can question.”
- “We don’t really have too much to learn from anybody about multi-stakeholderism because we almost invented it.”

Troubling, no?

If you would like to see first-hand how transparent the ITU is, you can [visit its site and download TD-64](http://www.itu.int/en/wcit-12/Pages/public.aspx), the “draft of the future ITRs.” Then go to [WCITLeaks.org](http://wcitleaks.org/) to read all the other documents it wants to keep from you.

Parmy Olson, London Bureau chief for Forbes, discusses her new book We are Anonymous: Inside the Hacker World of Lulzsec, Anonymous and the Global Cyber Insurgency. The book is an inside look at the people behind Anonymous, explaining the movement’s origins as a group of online pranksters, and how they developed into the best known hacktivist organization in the world. Olson discusses the tension that has existed between those that would rather just engage in pranks and those that want to use Annoymous to protest different groups they see as trying to clamp down on internet freedom, as well as some of the group’s most famous campaigns like the attacks against the Church of Scientology and the campaign against Paypal and Mastercard. Olson also describes the development of LulzSec which became famous for a series of attacks in 2011 on high profile websites including Fox, PBS, Sony, and the CIA.


Download

Proponents of higher taxes have taken to calling the exemption that out-of-state online shoppers enjoy a “loophole,” as if it were an unintended flaw in two established court rulings that addressed the power of one state to tax residents of another.

My latest commentary at Reason.org looks at the so-called Marketplace Fairness Act, a bill that the House Judiciary Committee has scheduled for hearings tomorrow. The bill aims to help states collect sales taxes on out-of-state purchases, typically made via catalogue or, to an ever-greater extent, the Internet. Two Supreme Court decisions, Quill vs. North Dakota and National Bellas Hess vs. [Illinois] Department of Revenue, both of which pre-date Internet shopping, protect out-of-state consumers from the taxman’s reach.

As I write:

Editorials and op-eds supporting the bill, such as in the Arizone Daily Star and the Chicago Sun-Times, say it will close a “loophole” that allows Internet purchases to escape taxation. This is akin to saying the Supreme Court’s Miranda decision is a loophole for defendants to escape prosecution. No doubt some overzealous prosecutors may think so, but in truth, Miranda sharpened and affirmed the right of due process already present in the Fourth and Fifth Amendments. Likewise, in Quill and Bellas Haas, the courts sharpened and affirmed the Constitution’s commerce clause that prevents one state from taxing residents of another.

Seeing it as counterproductive to an interdependent economy, the Founders did not want states plundering each other’s residents and enterprises with taxes. Yet that’s exactly the environment the Marketplace Fairness Act sets up. New York State can tax residents of Illinois and the Prairie State can tax Hoosiers.

In doing so, the Marketplace Fairness Act ignores the constitutional underpinnings of the Quill and Bellas Hess decisions and treats the Internet sales tax issue as a procedural issue when the in fact the constitutional bar is set much higher. The giveaway, however, is the portion of the bill that requires states to simplify their state tax collection procedures before launching cross-border taxation. It’s an unusual quid pro quo, perhaps because Congress has to offer states the prerequisite of a buy-in. That’s because any attempt to impose a tax collection structure wholesale on the states would likely face a constitutional challenge on 10th Amendment grounds of state’s rights.

In reality, the states, struggling as they are with debt crises of their own making, are angling for a greater piece of the $200 billion Americans are spending with Internet merchants each year. Of course, not all of this goes untaxed; on-line retailers who have brick-and-mortar stores within a state must collect tax from residents in that state. Besides creating a mess of competing state tax grabs, this law stands to increase paperwork and complexity for thousands of small online businesses and catalogue firms, who would now be obliged to calculate taxes on some 11,000 sales tax jurisdictions throughout the country. Whether or not it’s “simplified” in line with some Congressional definition, it still stands to be the burden as noted in Quill and Bellas Hess.

But all the talk of loopholes, level playing fields and what does or does not constitute a “burden” diverts attention from the real issue. The Marketplace Fairness Act is not about the Internet, e-commerce, the marketplace or fairness–it’s about what the Constitution says about the power of state governments to tax citizens beyond their borders.

I’ve argued (here and here, for instance) against worrying too much about the monopolization of Internet access. Broadband is pretty clearly an industry in which there are increasing returns to scale, and when returns to scale are severe enough, that results in natural monopoly. There are not clear welfare gains from regulatory solutions to natural monopoly problems generally, and broadband in particular is a case where many of the problems associated with monopolization are ameliorated by price discrimination.

Nevertheless, I accept that most people are not persuaded by this logic. Let me try a different tack, explaining what I would expect to see if profit-centered monopolists were really as bad for consumers as their critics claim.

The answer can be summed up in one word: mutuals. Mutual companies are not especially common in today’s economy, but they are worth pondering at some length. Mutuals are firms in which customers, in virtue of their ongoing patronage of the firm, are also its owners. A mutual company generally has no other shareholders to please, and it does not typically distribute dividends. Instead, if it makes a profit it will distribute it to its customers in the form of lower prices in the future.

Continue reading →

By Ryan Radia and Berin Szoka

A new version of the Cybersecurity Act of 2012 was introduced last night (PDF), and a vote on the Senate floor reportedly may occur as early as next week. Although we’re still digesting the 211-page bill, its revised information sharing title stands out for its meaningful safeguards regarding what cybersecurity information may be shared by providers and its limits on how government may use shared information. Such prudence is of utmost importance in any bill that gives private entities blanket immunity from civil and criminal laws, including the common law, for activities such as cybersecurity information sharing.

By way of background, our organizations—the Competitive Enterprise Institute and TechFreedom— joined several other free market groups in sending a coalition letter to House leadership back in April regarding CISPA (which ultimately passed that chamber). While we support legislation streamlining federal laws to ensure cybersecurity information flows freely among private companies and, where appropriate, to and from the government, we urged important changes to CISPA to limit potential governmental abuses and meaningfully protect individuals’ private information. Unfortunately, most of our suggestions were not reflected in the final version of that bill.

We’re very glad to see that many of our free market principles are now reflected in Title VII of the Cybersecurity Act (the part of the bill that deals with information sharing). The bill’s sponsors adopted many significant, positive changes to Title VII to better protect privacy and individual liberties, including:

  • Allowing individuals harmed by governmental misuse of shared cyber threat information to sue the federal government for actual or statutory damages of $1000 (whichever is greater);
  • Proscribing all governmental use and sharing of cyber threat information for purposes unrelated to cybersecurity, except to avert imminent threats of death or serious bodily harm or sexual exploitation of minors;
  • Barring the federal government from conditioning the award of a federal grant, contract, or purchase on a private entity’s sharing of cybersecurity threat information (except in limited circumstances);
  • Immunizing only private entities that share cybersecurity threat information upon a reasonable and good faith belief that such sharing is authorized by the Title;
  • Providing for meaningful oversight of information sharing and use by the Privacy and Civil Liberties Oversight Board.

We also applaud Senators Franken, Durbin, Coons, Wyden, Blumenthal, and Sanders, whose efforts made these important revisions to the Cybersecurity Act possible. It’s not every day that CEI or TechFreedom praise members of Congress—or government in general!  We do so here because the changes to Title VII of the Cybersecurity Act will meaningfully reduce the likelihood that the bill, if enacted, will enable government to impermissibly access and abuse citizens’ private information. (For more on changes to the Cybersecurity Act, see this ACLU blog post by Michelle Richardson.)

To be sure, we still have serious concerns about Title VII of the bill — and even greater concerns about other provisions in the bill, especially those regulating cybersecurity of “critical infrastructure”. We’ll offer plenty of criticism about those provisions in coming days, but for now, seeing a few rays of light from Capitol Hill is enough to give us pause.