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Is Obamaphone Good for the Poor? Maybe Not.

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By Scott Wallsten and John Mayo

Published in The Hill on May 22, 2013

The Obamaphone controversy-whether government should subsidize wireless phone service for the poor-has two great ironies. The first is that wireless subsidies, which are part of the Lifeline and Linkup programs, were actually begun under Republicans President Bush and FCC Chairman Kevin Martin. This irony has been well documented and thoroughly enjoyed by many liberals.

The second, which so far has flown under the radar, is that the dramatic expansion of the Lifeline program, from less than $800 million in 2005 to $2.2 billion in 2012, may not be a net benefit for the poor. It may seem counterintuitive that a program that provides subsidizes could actually make people worse off, but welcome to the convoluted world of universal service.

The problem with the program isn’t that it subsidizes phone service for the poor. In fact, academic and government research has shown time and again that the much larger subsidies to rural areas are largely ineffective while telecommunications subsidies targeted at the poor have increased (land-line) telephone adoption among low-income people.

No, the problem is that Lifeline subsidies are not funded by our relatively progressive income tax system, but by taxes all phone users, including the poor, pay to use their phones. In other words, the funding source of Obamaphone is highly regressive because the tax that funds it is the same regardless of the payer’s income.

Thus, any poor person who does not receive subsidies either because he doesn’t know about them or because he doesn’t qualify is worse off when subsidies increase because the taxes on his phone service must also increase.

A second issue is whether subsidizing wireless phones increases wireless adoption by the poor. This turns out to be a very hard question to answer, and one that helps illuminate why economics is the dismal science. Low-income people have strong demand for wireless services. Data from the Centers for Disease Control show that more than half of all poor adults live in wireless-only households.

Read More: http://thehill.com/blogs/congress-blog/economy-a-budget/301267-is-obamaphone-good-for-the-poor-maybe-not

The Technology Policy Institute

The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at http://www.techpolicyinstitute.org/.