A System Dynamics Approach to Simulation of Tax Policy
for Traditional and Internet Phone Services
Chao-Yueh Liu
Rockefeller College of Public Affairs and Policy, University at Albany
14 Niblock Ct Fl 2
Albany, NY 12206
212.404.7651
Chaoyueh.liu@gmail.com
Wei-Tsong Wang
School of Information Science and Policy, University at Albany
840 Washington Avenue, Albany, NY 12203
212-404-7657
ww8256@albany.edu
Abstract
Voice Over Internet Protocol (VOIP) is the fastest-growing market in the United States. VOIP
technology provides telephone-like service without the restrictions of telecommunication
regulations. State governments fear that more calls traveling over Internet protocol (IP)
enabled phone services will impact on the heavily-taxed fixed line phone service, which
means less tax revenue to support crucial public services. However, states are struggling with
how to tax VOIP services and reduce the impact of VOIP development. In this paper, we build
a system dynamics model to gain insight into interactions between the VOIP market,
traditional phone market, and tax policy. Two tax policy tests reviewed in this paper show tax
policy does not significantly affect market competition. In addition, we show government is
able to collect sufficient funds when applying new tax policy. We believe the model can help
policy makers find a better way to collect maximum tax revenue with less impact on the
market.
Key word: System dynamics, Tax, VOIP, PSTN, Broadband, Telecommunications
1. Introduction
Technology development usually brings competition to the market. Some of these are
“destructive technologies”, which can dramatically change market balance, such as the
impact of information technology (IT) on knowledge dissemination, and Internet trade on
purchasing behavior. In the telecommunications industry, telephony was the great “natural
monopoly” of mid-20" century United States. Since 1950, the Federal Communications
Commission (FCC) began a very “cautious” initiative to introduce competition into the
telecommunications market to break up this monopoly situation (Faulhaber, 2001). With the
development of VOIP, however, this legislative approach to changing market balance is
being overtaken by the rapid development of this new destructive technology.
The FCC’s long-term strategy will be serious disturbed by the new VOIP technology,
because of the dramatic growth of customers for this service. According to a recent press
release issued by Vonage Holdings Corporation (the first and the biggest VOIP company in
the United States), the company continues to add more than 15,000 lines per week. This
means of course, that traditional phone companies may lose 15,000 customers per week
(Vonage, 2005a). In addition, the total VOIP subscribers have grown from just 10,000 lines at
the end of 2002 to 1,000,000 lines two years later (Dalrymple, 2005). We do not want to
make the careless conclusion that VOIP will win this market war, but we can expect that a
huge number of customers will move over to VOIP in the next few years.
Market competition is the nature of the business world. However, in the telecommunications
market, states and local governments seem very concerned about this competition because
there are no regulations governing VOIP services, which is of particular concern in the area
of taxation policy. In fact, a U.S. district court recently barred the state of Minnesota applying
telecommunication rules to VOIP companies (Sullivan 2004). So, on the one hand,
governments fear their tax revenues will decline and affect the delivery of public services. On
the other, governments also want to protect this infant technology. On December 03, 2004,
President Bush extended until 2007 the Internet Tax Freedom Act (IFTA). This act stops
governments imposing tax on Internet enabled activities, but VOIP was excluded. Although
Senator Sununu and Congressman Pickering introduced versions of the "VOIP Regulatory
Freedom Act of 2004", the legislation has not yet been reintroduced (CNET Networks 2005).
In the near future, governments will find a way to impose tax on VOIP but the question is:
Where is the balancing point? Until now, both sides of the debate have not compromised. No
doubt, taxation of VOIP will be a critical and controversial issue to governments.
This paper is broken into three parts. We begin with a review of VOIP technology and
current government policy, to understand the potential effects on the traditional phone market.
We also consider the problem of telecommunications taxation on the traditional phone and
emerging VOIP markets. Secondly, we describe the conceptual basis of our model and the
base case simulation results. In the third section, we simulate different policy combinations
and describe the results we find. It is hoped this model can provide valuable insight for policy
makers.
2. A Review of the Issue
VOIP technology provides telephone-like service without the restriction of
telecommunication regulations, particularly taxation. Local, state and federal governments
argue that their tax revenues from telephone companies will decline because Internet Protocol
(IP) phone services erode the traditional telephone market. In this section, we will review the
issues relating to this problem.
2.1 VOIP Technology
VOIP is a technology that allows users to make phone calls via the Internet instead of regular
phone lines. Because VOIP requires high speed Internet to ensure voice quality, its
development was slow when it was first introduced in the mid-1990s (Sullivan, 2004).
However, recently expansion of broadband Internet access has successfully improved quality
and attracted more customers to adopt VOIP.
There are several types of VOIP services, PC to PC, PC to Phone’, and Phone to Phone. All
of the services allow users to call anyone who has a telephone number. Some of services also
provide a physical phone number which allows others to call VOIP users (FCC 2004a). In the
discussion of communications market competition, we focus on the customers who use VOIP
with a physical number.
' Phone includes both traditional phone and Internet phone
2.2 Government attitude to VOIP technology
Government’s attitudes to VOIP technology are formed from two points of view. One side
wants to support VOIP development with less regulation. Chair Michael Powell has said that
Internet-enabled services like VOIP should enjoy a “comprehensive, yet minimal, regulatory
environment,” to promote the development (Powell 2004). The other side prefers to impose
regulations on the service. Most of those supporting this stance are local and state
governments.
However, the FCC has announced a notice of proposed rulemaking to consider five public
policy issues that may impact the obligations of VOIP service providers. These issues are:
access charges, universal service fund fees, emergency 911 service, disability access, and
public safety. Therefore, as we can see, the FCC will impose at least some regulation on VOIP
providers and subscribers (Nagel and Lev, 2004).
2.3 Government regulation of telecommunications
Telecommunication is a comprehensively and heavily taxed service in the US, attracting
taxes, fees, and surcharges on its services. These charges are not always fixed, with some fees
adjusted each quarter. Moreover, fees are levied by various levels of government (federal,
local and state), and by companies. Overall, 20% to 30% of each telephone bill is made up of
taxes or fees (FCC, 2005b).
2.4 The current problem
Right now, Federal and State governments are still struggling with how to tax VOIP services.
Several state governments want to apply telecommunication taxes on VOIP service providers.
However, the FCC rejected this option because it defines VOIP as an information service, not
a telephone service, and so cannot have telecommunication taxes applied to it. Some states,
such as California, Ohio, and New York, have tried overturning this through appeal to circuit
courts but have failed (CNET Network, 2005). Therefore, governments need to find a new
way to tax VOIP enabled services, which will take time to achieve. Before new tax policy to
VOIP released, we can expect tax revenue from telecommunications will continue to decline.
3. Model Description
3.1 Model purposes
At present, governments prefer to support Internet technology development, including IP
phone technology. Unfortunately, the most important policy in this area, the Internet Tax
Freedom Act (ITFA), signed by President Bush on Dec 03, 2004,bans taxing of Internet
related technologies, but excludes VOIP. On the one hand, this policy should help the growth
of broadband customers, which will increase the potential customers of VOIP. On the other
hand, taxing VOIP may affect its development. In either case, the eventual affect of this new
tax policy on VOIP development is still unknown. How does tax policy affect market
competition? It is hard to find the truth of this controversial issue. Therefore, we will build a
model to assist us to understand this complicated issue. There are four purposes in building
this model.
1. To understand market competition between traditional phone companies and IP phone
companies
2. To understand how current tax policy affects telephone market competition.
3. To understand the possible trend of declining tax revenues
4. To provide a method to test telephone tax policies
3.2 Target audiences
The target audience of this project are local, states, and federal government officers who are
involved in the development of telecommunications regulations and taxation policy. These
people can use the model to test various policy settings to assist with policy formulation. In
addition, the audience also includes those people conducting market research for the
telecommunications companies, who can use the simulation results to indicate to them the
outcome of future changes.
3.3 Model boundaries
Our model is based on the specific situation in the United States, such as tax policy, regulations,
and market competition. The model cannot be applied to other countries. However, some
concepts and structure in the model may be useful for other countries when building similar
models.
The time horizon for this model is the 30 years from 1990 to 2020. Since broadband and
VOIP are recent developments, no long-term historical data is available. We decided,
however, that the data from 1990 to 2005 should be long enough to see historical behaviors.
In addition, due to the rapid growth of Internet technology and VOIP, a dramatic change has
appeared in a short period of time and, therefore, we think 15 years should provide enough
data on which to model the market.
The model focuses on the influence of tax policy on market competition between traditional
telephone market and VOIP market. The model is designed to capture the basic behaviors but
not increase its complexity. Therefore, some factors are ignored, such as the wireless phone
market and the benefits to government of using VOIP. The factors we used in the model are
listed in the table 1. The values of exogenous factors we listed can be adjusted in our
simulation model which means policy makers can use their preferred values to test results.
Included Excluded
Endogenous Exogenous
PSTN with no broadband | PSTN tax (Policy test) Wireless phone market
household VOIP tax (Policy test) International competition
PSTN with broadband Household growth normal Price competition within PSTN
PSTN price PSTN growth normal service providers
VOIP household Broadband household growth | Benefits of VOIP to the
VOIP price normal governments
Broadband household
Tax revenues
US Household
Broadband household
Table 1. Model causes and excluded factors
3.4 Reference Modes and Preferred Behaviors
In the model, there is three reference modes: traditional phone subscribers, VOIP subscribers
and tax revenues. Figure 1 shows the historical traditional phone subscribers since 1990 to
2004. The dotted line shows the possible behaviors without introduction of any new policy.
Figure 2 shows the preferred behaviors if we introduce new policy after 2005. The preferred
behavior is that the traditional phone companies do not stop losing subscribers, but there is a
slowing down the rate of decline, in order to give policy makers more time to prepare new tax
policy and traditional phone companies to adjust their business strategy.
Traditional Phone subscribers Traditional Phone subscribers
7 oo.
Sy se) oO 2 “v ce) > Sa oe S > oO. Sv 5 Sa S &
SK FELL SPs SP LIF HEE SS
Figure 1. Reference mode of traditional phone Figure 2. Preferred behaviors of traditional
subscribers phone subscribers
In Figure 3 presents the historical data of VOIP subscribers for the three years since 2001.
The graph shows the dramatic growth of these subscribers. We expect this trend will continue
until market saturation is reached or new competitors enter the market. We also believe that
tax policy will moderate its growth and therefore not suddenly cause disruption of the
traditional telecommunications market, because this disruption to taxation revenues may
cause social problems (figure 4).
VOIP Phone subscribers VOIP Phone subscribers
ZL =
‘) u ‘4 :: ~~ v4 > o
SPSS YF ey SST Pe ey
Figure 3. Reference mode of VOIP subscribers Figure 4. Preferred behaviors of VOIP subscribers
Figure 5 shows the tax revenues from the historical data since 1990 to 2004. However, this
tax revenue may start to decline if no new tax policy is introduced to the VOIP services or
traditional phone companies. We hope new policy can help to maintain tax revenue in a
certain level without decline (Fig 6).
Telecommunications Tax Revenue Telecommunications Tax Revenue
——— oo...
PDP CDM © SS Sm CSD GW © SOY &
Figure 5. Reference mode of tax revenue Figure 6. Preferred behaviors of tax revenue
3.5 Model concepts
The model includes two important concepts: success-to-successful archetype (figure 7) and
escalation archetype (figure 9). These two archetypes have been discussed by Daniel Kim
(1992) and Peter Senge (1990).
3.5.1 Success to successful archetype
Success to successful archetype suggests that the outcome of a situation largely depends on
the support from the third party (Kim, 1992). For example, if A received more resources than
B, A has more chance of success. Because of A’s success, he will gain more support from the
company. In other words, B will get less resources, which reduces his chances of success
(figure 7). This is important when government tries to find a win-win solution between
government policy and market development. Sometimes, government ignores its negative
effect on the market. In our model, this archetype can be applied to government policy to
support VOIP development rather than traditional telecommunications.
Success oe a, ofB
Allocation to A
instead of B
Resources to B
Resources to A
Figure 7. Success to Successful Archetype
VOIP and public switched telephone network (PSTN) both provide telephone services. VOIP
is an Internet technology and government is trying to assist the development of these
new-born technologies. In the loop R1, it shows that when VOIP gets more support from
government, the cost to VOIP service providers decreases. This result leads to an increase in
VOIP users and VOIP market continues to grow. On the other hand, the PSTN market
declines because of less support from government (Fig 8). PSTN telephone companies have
more regulations to follow, which increases their costs and the price to customers (R2 loop).
In this case, we agree that government should give more support to VOIP. However, we also
consider the shrinking of the traditional phone market. When should government withdraw its
support? When is the best time to let the VOIP providers compete fairly? The model should
help policy makers to answer these questions.
PSTN Market.
VOIP Market
f= Ts,
VOIP tsers PSTN Users
x Rt ae R2 \
Government support VOIP instead Government
Price on VOIP Support of Traditinal Phone Support
\ Loop oN Loop Price on PSTN
+ #
Cost to VOIP Nessus
Tax restriction on ax Restriction‘on Cost to PSTN
x. VOR PSIN ___ew
Figure 8.Government support to telecommunications market competiton.
The model includes the other success to successful archetype. We think the most important
factor of government support is tax policy. It directly influences the price of PSTN and VOIP
services, and government tax revenues (fig 9). Theoretically, when VOIP gets more support
and increases its market, government should get more tax revenue from VOIP instead of
PSTN (R3 loop, R4 loop). However, there is currently no tax on VOIP services. Government
wants to support VOIP but is also losing tax revenue. This is a issue between local, state and
federal governments.
VOIP Market PSTN Market.
Pi
. +}
VOIP users PSTN Users
PSTN Tax
- ; revenue -
|, Support VOIP instead _
Price on VOIP of Traditinal Phone File ca PSTN
¥ +
+
Cost to VOIP
Tax Restriction on
SS. Tax restriction on PSTN Cost to PSTN
* VoIP a
+
Figure 9. Government support to the tax revenues
3.5.2 Escalation archetype
The Escalation archetype suggests that two or more parties feel threatened by the actions of
others. Party A tries to get things under control by adjusting its own processes. However,
other parties also feel a threat from A’s action and respond with their own strategy (figure 10).
This interaction makes the problem more serious. The Cold War arms race between the
United State and Soviets was an example of the escalation archetype. Both sides built more
arms in order to respond to the perceived threat from the other. They never reached a balance
by building more arms because the action from each side just resulted in the other side to
build more arms. The other famous example of this archetype is price wars in the business
world. According to the data we have found, we believe that price wars are happening in the
telecommunications market.
B's Result.
la o ~
Results of A
Activity 2 A s a byB
Relative to B
Threat to A Threat to B
Figure 10. Escalation Archetype
Because both VOIP and PSTN provide telephone services, they have to share the same
market, which means as one side gets more customers, the other side loses customers. The
price war occurs when both sides want to attract more customers (figure 10). However in the
real situation, PSTN service provides will continue to lose customers because the costs for
VOIP service provides are always lower then PSTN service provides. When PSTN
companies lower their price, VOIP service providers can respond with cheaper price. How
long does it take to lose the majority of customers? The model should help to find this
answer.
bs Market Share VOIP
Threat from ~ related to Traditional Phone Threat fiom VOIP
traditional Phone Market
+
BI
Price
War
oe ‘OIP Market
VOIP users FSIN a
Price on VOIP Price on PSTN
Figure 11. Price competition between VOIP and PSTN services
We constructed our base model on the above concepts. The main concept is described in the
causal-loop diagram shown in figure 12. In the next section, we will describe in detail the
various model sectors.
2 Market Share VOIP
Threat from related to Traditional Phone Thréat from VOIP
traditional Phone a
(B1) Price War “sy (B2) Price war
PSTN Market.
Zl ac
} eS
+
att users * AR) PSTN Users
4, Tax Cr Tax
- revenue revenue
- Rs VOIP instead = 7
Price on VOIP of Traditinal Phone rive 0 pSTN
As) ree Gy wy
Cost to VOIP * esti
‘a Tax restriction on am Pan on Cost to PSTN
voIP — a
Figure 12. Casual-loop diagram
3.6 Model sectors
The model is separated into five sectors as below.
1. Broadband household sector (figure 13)
2. PSTN not broadband household and PSTN with broadband household sector (figure 14)
3. PSTN with broadband household and VOIP household market competition sector (figure
15, 16, 17)
4. Tax revenue sector (figure 18)
5. Tax policy test sector (figure 19)
3.6.1 Broadband household sector
Because VOIP service requires high speed Internet in order to maintain voice quality, we
assume that only users who have broadband Internet access are potential VOIP customers. In
addition, one household usually applies for one broadband service. Therefore, our first step is
to find out the population of broadband households.
From historical data, broadband households grew dramatically after 1999. Before then, only a
few households had broadband service. To simulate this historical behavior, we built a
“technology development” stock and a “ratio of broadband vs. total household” variable.
Before 1999, “technology development” stock dominated the growth of broadband households,
and limited the growth of broadband households because the technology was not mature
enough. After 1999, “technology development” improves and attracts more broadband
households. At this time, the “ratio of broadband vs. total household” begins to dominate the
growth of broadband households. When the “ratio of broadband vs total household” is still
small, it does not affect the growth. However, when the ratio becomes bigger, it will slow the
growth.
The other idea in the sector is the “subscribing ratio”. In our assumptions, in the earlier period
most people owned traditional phone services when they applied for broadband services. They
changed to VOIP service later. This situation may change in the near future as some people
may apply for broadband and VOIP service at the same time without owning a traditional
phone service at all. The variable of “subscribing ratio” gives us a chance to adjust this ratio.
Subseribing VOIP pss Subscribing PSTN plus
Broadband Household Broadband household
Potential broadband
household
Subscribing Ratio a,
growth 6 month
Broadband before
Subscribing household
broadband household
Broadband Growth Sunielh bioattiand
Normal growth rate
; Ratio of Broadbans vs
Expecied ney Total Household
subscribers
Technology growth Technology Effect of new’
normal Developing devlopment subscribers
technology a Effect of
technology
Household growth
corm Household
Incresing
a
Figure 13 Broadband household sector
3.6.2 PSTN not broadband household and PSTN with broadband household sector
VOIP provides telephone-like service but requires high speed Internet to support its quality.
Therefore, we need to distinguish the traditional phone users who also own broadband services
and those who don’t, because the competition between traditional phone service and VOIP
only exist in the customers who own a broadband service. Therefore, we include in this sector
two stocks, PSTN non-broadband households and PSTN plus broadband households. In
addition, traditional phone services use lines to calculate users. We convert this to households
in order to compute the market competition between the traditional phone market and VOIP.
<Phone lines per
household aa
<Household Sh fr
Potential PSTN
Total PSTN
household _—
Total PSTN users
household
PSTN growth
normal
PSTN PSTN plus
non-broadband Broadband
Subscribing users Subscribing PSTN users
PSTN users plus Broadband
oe lines per
household PSTN gain/
VOIP lose:
PSTN PSTN plus
non-broadband broadband
Subscribing PSTN household Subscribing PSTN plus |__household
household Broadband household
Subscribing
Ratio: <VOIP gain/
PSTN lose:
Figure 14. broadband and non-broadband users in the traditional phone market
3.6.3 PSTN with broadband household and VOIP household market competition sector
This sector presents the competition between the traditional phone market and VOIP. Because
they share the same market, as one side gains customers, the other side loses customers. Figure
15 represents this situation. Customers either flow into “PSTN plus broadband household”
stock or “VOIP X household” stock.
Effect to VOIP
X subscribers
VOIP gain’
PSTN lose
VOIP X market
share KA
2 PSTN plas
‘Subscribing PSTN plus pl
Broadband bouscholt> broadband Broadband Pas
household household hops
A New VOIP X
PSTN non-broadband subscribers
household PSTN market
share
Subscribing VOIP plus
— Broadband Household:
PSTN gain
VOIP lose
effect to PSTN
suberibers
Figure 15. Market competition
Figure 16 shows two concepts: price adjustment strategy, and relationship between price and
customer. The price adjustment strategy is based on the price war concept we mention above.
In the figure 16, it is shown that VOIP adjust their price depending on the price of traditional
phone services, which is the variable of “gap between PSTN/VOIP. However, VOIP
companies cannot lower its price indefinitely. It also needs to consider costs in order to find the
maximum price they can adjust, “max adjustable VOIP X price”. Therefore, we assume price
adjustment will depend on these two factors.
Price will affect how many customers adopt their services. We use a variable of “gap between
PSTN/VOIP” to decide the ratio of customers who will change their service from traditional
phone service to VOIP service. In addition, this sector also include two kid of tax policy,
“VOIP tax $ per P” and “VOIP tax rate %’”. The detail description includes in the next sector.
Figure 17 shows than same pattern as VOIP market in the figure 16.
VOIP X
VOIP tax $ per P household
VOIP tax rate % VOIP tax a ve sis
el 1 VOIP X revenue
~~
vor én =
me a
Gap between
PSTN/VOIP Max adjustable
se f
Efectts VoIp Expected vorx AI
rice adjust
VOIP X price VOIP X profs
X subscribers |
Xa. Q
VOIP X Cost eft
VoIP gain to price adjust VOIP X cost
HSIN Eee VOIP X cost per
VOIP X market Rowsheld
‘A share KY
. VoIP x
: household
New VOIP X
subscribers
a Suibscribing VOIP plas
Broadband Household
PSTN gain
VOIP lose
Figure 16. Market competition (VOIP)
VOIP gain
PSTN lose
VOIP X market
PSTN pi we ONY
Sul TN phis hus
5 vouscholh. MY broadband Broadband ore
° household te Boupshold
PSTN nombre
household PSTN market
‘Pr cost per share
/ “skal gs
PSTN gain’
PSTN Cost effect to VOIP bse
iy . price adjust
iki iat eter PSTN
SINE nistes
Total STN
household
Adjusting PSTN
Vf J Adiesting
s pv I price price tween
PSTN/VOIP
PSTN taxrate %
PSTN bill
Se PSTN tax.
PSTN tax per P
Figure 17. Market competition (traditional phone)
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12
3.6.4 Tax revenue sector
The purpose of this sector is to compute total tax revenue. This sector includes four tax policies,
VOP tax $ per P, VOIP tax rate %, PSTN tax $ per P, and PSTN tax rate percentage (figure 19).
Policy makers can try to combine different tax policy theories and see how total tax revenue
changes over time. For each phone bill, tax per person will look like the equation below.
"VOIP tax rate %"*VOIP X price+ VOIP X tax $ per P
Total tax Revenue
oN
Total VOIP X tax Total PSTN tax
Revenue eee
/ \ PSTN non-broadband
VoIP X household: PSTN tax
household: VOIP tax
PSTN plus broadband
household
‘VOIP tax $
per P: VOIP tax rate PSTN price HaNexs
‘VOIP X price’ PSTN tax rate
Figure 19. Tax revenue
3.6.5. Tax policy test sector
This sector allows users to test tax policy combinations. On the left side of the interface, both
VOIP and PSTN include two kinds of tax policy strategies, “tax rate %” and “Tax $ per P”.
When using the “tax rate %”, the tax will be proportional to the phone bill. When using the “tax
$ per P”, the tax will be a fixed fee per person no matter what the phone bill is. After users
adjust their policy, the simulation result will show in the middle of the interface. Through the
graphs, users can see how their tax policy affects to the market competition and how much tax
revenue they will gain. Users can gain further insight by trying more policy combinations.
Telephone market Total PSTN users
100,000 200,000
"VOIP tax rate %" 100,000
30,000: 1990 2000 2010
Time (Year)
VOR UxSiperP 0 Total PSTN wie: Bae Run 4 pope
Tax Policy on PSTN 1990 1995 2000 2005 2010 2015
Time (Year) VOIP X household
“PSTN som bodband hosel: Base Rug jg pg tl
PSTN pub wsdold Beem pgp tg —*9 + Su || 80,000
"PSIN tax rate 74" Brean! Hold Bae Ran + 4 told
)
| 1990 2000 2010
PSTN tax S perP , . . ‘Tane (Year)
Price comparsion Tax revenue comparsion VOU X ould Base Run 44
Other Factors
40 600,000
——, ot hey STN plus broadband househol
J 20
40,000
Household growth normal | 9 i 0
1990 2000 2010 ee wa 9
‘Time (Year) 1990 2000 2010
Time (Year) a
= Time (Year)
Bioadband Growth Normal Total tx Revee: ate Ras ——g——_—-
PSTN pce: Base uw 4-4 Tota PSTN ex ei: Bas Run —B—-B—“
; VOIP Xie ise Ran BBD Tn VOI Xt Revone Base Rung — PSTN plu roan howl Base pple
‘Technology growth normal
———
Subscribing Ratio
Figure 20. Policy test interface
3.7 Simulation results
In the first 15 years, the model plots the historical behaviors, such as VOIP market growth
(figure 21) and the tax revenue decline (figure 22). Figure 21 shows how VOIP growth
affects the PSTN with broadband household. It also shows how growth of broadband
households affects the numbers of PSTN without broadband households. The growth in
broadband households is so important because potential VOIP customers will depend on how
many broadband users there are. Customers without broadband service will not be VOIP
users.
Figure 22 shows the tax revenues decline when tax policy only applies to traditional phone
companies. Therefore, when VOIP users increase and PSTN users decline, tax revenues start
to decline. In the first 12 years, tax revenues stayed at a stable level. However, as VOIP
grows, tax revenues start to decline. The simulation shows that tax revenues will continue to
decline if governments do not introduce new tax policy to VOIP.
‘Telephone market
Tax revenues
100,000
600,000
|} ++ —
75,000
450,000
5
50,000 300,000
25,000 130,000
=e
0 7 o
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 010" 301s
Time (Year) Time (Year)
*PSTN non-brosdband household” ‘Base Run. ——#——+__+__+__+ household
Total tax Revenue : Base Run —}—+—+ 4
PSTN plus broadband household : Buse Run ~@——2——2> > 2 — household
VOIP Xhouschold Base Run 2333s 3 household Total PSTN tax revenue : Base Run) —2—2—2 a2. a —
Broadband houschold Base Run ¢——+——+——+—+—+——+ household Total VOIP X tax Revenue : Base Run —$——2—3—s sas
Figure 21. Population changes in each stock Figure 22. Tax revenues
In Figure 23 the price war between PSTN and VOIP is shown. When PSTN providers reduce
price, VOIP providers will do the same immediately. However, because the cost to PSTN
companies is higher then VOIP, the PSTN companies cannot offer a price lower than their
cost. As a result, the price of VOIP will always lower then PSTN. Therefore, PSTN
companies continue to lose their customers.
In Figure 24, the market share between PSTN and VOIP companies is shown. Because they
share the same market, when one side increase market share, the other side will reduce
market share. However, one thing to note is the methods to calculate both markets are
different. The PSTN market includes two types of customers: one has broadband service
while the other does not. For the VOIP companies, the market is the people who have
broadband service. Therefore, the total market for PSTN companies is larger than VOIP
companies. The equations to calculate both market shares are listed below.
PSTN market share=
(PSTN plus broadband household+"PSTN non-broadband household")/(Broadband
household
+"PSTN non-broadband household")
VOIP X market share=
‘VOIP X household/Broadband household
Price comparsion
Market Share
40
1
30
075
20 intial Os
0 SSS 025
| aa
0 ro aaa
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 201s
Time (Year) Tine (Year)
PSTN price = Base Run PSTN market share : Base Run }—+—+ ++ +p
VOIP X price : Base Run —2—2—2 22 ss 2s 2 VOIP X marketshare :Base Run. 2—2—2 222 222
Figure 23. Price comparison Figure 24. Market share.
4. Policy Test
We use the interface to test how new tax policies affect market competition and tax revenue.
Below we list two policy tests. In the first test, new tax policy imposes 20% tax on VOIP bills
after 2005 and the tax rate for the PSTN remains the same. In the second test, both PSTN and
VOIP users will be charged $5 dollars as the tax.
4.1 Impose 20% of VOIP bill after 2005
When applying 20% tax on the VOIP bill after 2005, VOIP price suddenly jumps but returns
back to the price of the base run quickly (figure 25). In addition, total tax revenue increase but
does not affect to the market competition (figure 26). Both PSTN and VOIP household still
maintain similar growth as in the base run (figure 27, figure 28)
VOIP bill
20
10
0
1990 1995-2000». 2005-S2010-~——«-2015
Time (Year)
VOIP bill : VOIP 20% 2005. ——+——4—+—+—_4—
VOIP bill : Base Run. -2—2——2—2 33-3
Figure 25. VOIP bill (0.2% tax to VOIP after 2005)
Total tax Revenue
600,000
300,000
0
1990 1995 2000 2005 2010 +2015
Time (Year)
Total tax Revenue : VOIP 20% 2005. —t+——t——+—+—
Total tax Revenue : Base Run. ——2——2—2 22
Figure 26. Total tax revenue
PSTN plus broadband household VOIP X household
40,000 80,000
20,000 40,000
0 0
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Time (Year) Time (Year)
PSTN plus broadband household : VOIP 20% 2005 — jleople VOIP X household : VOIP 20% 2008 —-——4+——4+—4—
PSTN plus broadband household : Base Run -2——2- people
Figure 27. PSTN household (with broadband service)
VOIP X household : Base Run. —_2——2—2—2 2
Figure 28. VOIP household
4.2 Impose $5 dollar per household on both PSTN and VOIP services after 2005
In this test, we impose $5 dollar each person on both PSTN and VOIP services after 2005. At
this time, VOIP bill does not go back to the same price in the base run (figure 29). In addition,
total tax revenue goes back to the historical balance point (figure 30). Moreover, the new tax
policy still does not affect to the market competition too much (figure 31, figure 32)
VOIP bill Total tax Revenue
20 600,000
10 300,000
0 0
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Time (Year) Time (Year)
VOIP bill : VOIP PSTN 5 2008. +4444
VOIP bill : Base Run. 2223332
Total tax Revenue : VOIP PSTN 5 2005. ——+——4+—4+—
Total tax Revenue : Base Run. ——2——2——2—2—>-
Figure 29. VOIP bill ($5 tax per person in both
PSTN and VOIP service
Figure 30. Total tax revenue
16
Figure 31. PSTN household (with broadband service)
PSTN plus broadband household VOIP X household
40,000 80,000
20,000 40,000
0 0
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Time (Year) Time (Year)
PSTN plus broadband household : VOIP PSTN 5 2005 people
PSTN plus broadband household : Base Run -2—2- people
VOIP X household : VOIP PSTN 5 2005 ——t——+——+—
VOIP X household : Base Ran. —_2——2—_2—_a2 2
Figure 32. VOIP household
Through the two tests we make, we can make several conclusions.
1.
2i
33
5:
In the United States, VOIP has been considered one of the largest areas of investment in the
telecommunications market, and government activity supports its development. However,
VOIP growth causes decline in the traditional phone market and in government tax revenue.
Governments are struggling with what the solution is. Our simulation model provides an
efficient environment to assist policy makers to find a solution and assists as a decision making
Conclusion
tool.
In the future, we would like to include market competition between VOIP providers. In
addition, we would also like to introduce the wireless phone market into the model. We believe
that after we expand our model, we can plot more precise behavior changes. In addition, the
model cannot only help policy makers reach decisions, but also help companies to decide their
business strategies.
Tax policy has little influence on market competition.
Traditional phone markets will continue to decline no matter what the tax policy is.
A fixed fee for tax can ensure stable tax revenue.
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http://www.americasnetwork.com
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Kim, D. H., 1992. System Archetype I: Diagnosing Systemic Issues and Designing
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