importers in an attempt to reach agreement on what taxes should be levied on what products. In the event that these representatives fail to agree, which seems highly likely, the bill provides for compulsory arbitration. The recommendations of the Arbitration Board would then be sent to the Register of Copyrights, which is to solicit written comments and then to confirm or reject the recommended rates. If the Register rejects the rates, the arbitration procedure is begun again. parties may appeal for judicial review of the. Register's decision. Finally, The distribution of the tax revenues is left to the Copyright Royalty Tribunal. The bill does not specify in the same detail the procedures to be used by the CRT. Unless all copyright holders voluntarily agree, however, similarly complicated and protracted proceedings likely would be required before the tax revenues could be distributed. Others on this panel will address the constitutional and legal problems with this approach. As an economist, however, I can say that resolving the serious legal, constitutional, and economic questions will involve substantial costs. In addition to the expense, delay, and uncertainty engendered by litigation over the legality of the entire program and ancillary antitrust suits, there is the prospect of similarly protracted suits over the validity of individual rates and assessments and over the distribution of revenues. Difficult issuses would have to be resolved to decide what taxes should, be levied and how the revenues would be distributed which makes litigation quite likely. Complications would be increased by the bill's specification that different taxes may be placed on different kinds of recorders and tape and by the fact that, especially on the video side, the technology that would be taxed is changing. Just what are the video recording devices that would be taxed? The VCR records material on a videotape cassette and plays material contained on a videotape cassette; it often also has built into it a television tuner. At the same time, the market offers as separate components television tuners, display monitors, sound systemes, and tape recorders.* The trend to separate components is likely to accelerate once the Federal Communications Commission allows stereo sound for television broadcasts. Would the tax be levied on the video cassette decks that no longer have a tuner, on separate tuners, which will be as necessary for real-time viewing as for taping? Such issues already are plaguing those few countries where a tax has been tried. However they would be resolved, decisions of what to tax and what not to tax would influence and distort how products are designed. Taxes on audio products present similar problems. In much audio equipment recording is only one of many functions. Should the entire value of an expensive console system be taxed because recording capability is built in? Should a "boom box" that has all functions in a portable, integral unit be taxed in its entirety as a "recorder"? Should a portable Walkman-type device that does not record escape tax entirely, while one that does is taxed on its full value? If the full value of the least expensive recorders is taxed, the resulting penalty on the recording function will encourage its elimination on the very devices most suitable for several creative, personal taping practices, such as recording letters and childrens' projects. The flexibility that the bill allows to set different taxes on different equipment and tape and to exempt particular recorders and types of tape may seem a reasonable attempt at fairness. In fact, however, it will make the procedures more * In 1983 sales of the portable VCR (with a detachable tuner) will account for as much as 30% of all VCR sales according to industry estimates. (Electronic Market Data Book, EIA, 1983). It would be a simple step to offer the tuners as completely separate units that could be used either with a VCR or a television display monitor. Such monitors already are growing in popularity for a variety of reasons, including their superiority over standard TV sets when used with home computers. Street Journal, August 24, 1983, Section 2. See Wall complicated and costly without solving the fundamental dilemma: video and audio recorders and tape are widely used for purposes other than home taping of copyrighted material. Recorders and tape are not designed for single purposes but to be versatile, because that increases their value to consumers. It will not be possible to define neat categories of equipment and tape that are or are not used to make home tapes of copyrighted material. On the other hand, if S. 31 is passed and tax-exempt categories of equipment and tape are defined, those definitions will distort the design of products. Manufacturers will be given incentives to design products to meet these definitions instead of consumer demands.. Thus, the flexibility of the bill, however wellintentioned, will create both new issues to be argued over and litigated by interested parties and new distortions such as definitions of types of equipment and tape that are or are not subject to any tax or to this or that level of tax. Finally, the bill provides little guidance that will make the task of setting tax levels easier and less subject to litigation. The bill does list factors that the Arbitration Board and the Courts are instructed to consider in setting these taxes. The list is so long, however, and so many of the factors potentially conflict with others on the list that, instead of providing helpful guidance, the list if anything increases the difficulty of reaching nonarbitrary decisions and increases the likelihood of judicial challenge. Conclusions The complexities of administering the proposed tax and the costs to those who would bear the tax both the costs from distortion of technology and the costs added to activities unrelated to copyrighted material make it unlikely that the bill offers American consumers any net benefits. As I have noted, the process will create legal and administrative costs, some incurred by the government and some by private parties. These costs, together with those of technological distortion and of the discouragement of noninfringing uses, must be netted against any benefits that might be produced. If S. 31 had a potential for any benefits to the public, it would flow from the encouragement of creative activities. But, it is very doubtful that S. 31 would provide much such encouragement. Supply of a product can be encouraged in the market when suppliers confidently expect an increased reward for supply. The reward promised to copyright holders by S. 31 will not be one that creators can confidently expect. Any distribution of revenues that they would receive would come many years after the fact. Revenues whose receipt is highly uncertain and long-delayed are unlikely to encourage much creative activity. In short, any revenues ultimately distributed, if this bill were to pass, would simply be windfalls to those who win them, rather than a stimulus to additional supplies of creative activities. The consumer can only lose from such payments. The survey on home audio taping, "Home Taping in America: 1983, Extent and Impact," prepared by Audits & Surveys and submitted by the Recording Industry Association of America, Inc. ("RIAA"), is so seriously flawed that it is entirely inadequate as a basis for sound public policymaking. The survey purports to estimate the volume of home taping of music, the volume of lost sales of records and prerecorded tapes, the relative proportions of tapes used to record music and noncopyrighted material, and the extent to which "premium," in contrast to "regular," tapes are used to tape copyrighted music as opposed to noncopyrighted materials. As discussed below, however, the validity of each of these estimates is open to serious question. Therefore, the conclusions which RIAA draws from the survey are similarly unwarranted. A critical failure of the survey is its incomplete assessment of taping in America. attempt to obtain information regarding - or to evaluate no business or educational uses of audio tape, though a substantial percentage of tapes sold are not destined for residential or personal uses. Because RIAA is attempting to persuade Congress to impose a tax on all tapes and all tape recorders its failure to take all uses into account leaves many of the most significant questions unanswered. |