The authors study the evolution of the Internet service industry and the effects of taxation and subsidy on the Internet economy. The Internet industry is evolving toward a horizontally stratified business model where content provision, Internet service provision, and bandwidth are independently merchandised. Bandwidth is already a commodity item and Internet service provision increasingly so, at least in big cities, where bewildering numbers of providers are trolling for customers. It follows that there is money to be made in providing content.

Consequently, politicians are trying to figure out what to tax. Bandwidth is already heavily taxed; content is international, mobile, and capable of aggressive avoidance behaviors; the Internet service provider (ISP) industry is left a hapless, immobile victim. (Nine states already tax the ISP industry: Connecticut, Iowa, New Mexico, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, and Texas.)

There is also a political movement to selectively subsidize Internet access. The authors convincingly argue that both the impetus to tax and the movement to subsidize will increasingly injure the Internet economy. Their analysis assumes, however, that the political process is in the public interest. In my view, a heavily subsidized and rigorously taxed Internet is a probability because of the desire of politicians to disseminate propaganda and their need for tax-derived funding.