Is Obamaphone good for the poor? Maybe not.

[Commentary] 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. 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. But whether the wireless Lifeline program increases wireless telephone adoption in a cost-effective manner is an empirical question and cannot be answered by ideology. Our history with targeted telecommunications subsidies tells us that it can be effective. Strong and growing demand for wireless services by all segments of society tells us that it will have to target carefully in order to make a difference.

[Wallsten is vice president for Research and senior fellow at the Technology Policy Institute. Mayo is professor of Economics, Business and Public Policy in Georgetown University’s McDonough School of Business.]