“It’s like a tax on silverware”

After having previous attempts at copyright reform washed away by prorogation or an election, the Canadian government is once again pushing forward with attempts to update copyright law. While the exact merits of the legislation are open for debate, I’ll leave it for others who are actually experts to comment on the governments proposals.

On item that did catch my attention was the discussion around the creation of a levy on digital music devices, much like the existing levy on blank tapes and CDs. I’m not exactly sure where the Government has picked up its talking point of an “ipod tax” but it seems to have originated with a 2007 proposal from the Copyright Board of Canada to place a $75 levy placed on music devices exceeding 30GB in capacity. Since then it seems to have become a cudgel with which the Government beats the opposition. Again, I’ll leave the political discussion for “experts.”

This levy caught my interest because of a comment made by a friend of mine on twitter commenting that this levy is “like a tax on silverware. [It] [w]on’t affect those who can’t afford it.”

That is a statement I have to take issue with as an economist, because such a levy will affect people who can currently afford an iPod and the retailers in which they might by it. That’s because for a (relatively) cheap consumer good like an iPod, there’s a not insignificant number of people at the margin that will be affected by price change caused by the levy. Rinse. Repeat.

If we assume that the price of other goods broadly stays the same and that people’s preferences across all goods stay the same both before and after the implementation, then we get a number of effects. This is like a $75 price increase of iPods, so people will adjust their consumption away from them all other goods. This will result is lower iPod sales (which could hurt the business that sells them) which could eventually reduce in lower consumption of electronic music, which could result in the levy taking in less money which could result in a higher necessary levy to achieve the projected revenues.

Of course, I’ve extended the substitution of other goods for iPods pretty dramatically above, but over time that could happen. If the levy was only put on iPods above a certain size, that could also shift demand towards smaller players and change demand for file (or song) size produced.

The basic point is that the tax/levy just wouldn’t have an impact. There’s a number of flow through effects of the levy that need to be considered, not the least of which is making people who are currently at the margin and can afford iPods worse off (ie: less happy) since a levy would prevent them from buying an iPod. While it’s hard to say the exact size of this effect because of the different preferences, different marginal propensities to consume and budget sets of Canadians, it does show that things are a lot more complex than my friend assumes.

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