Monday, December 4, 2006 - The Progress & Freedom Foundation Blog

(Virtual) Taxation without Representation?

Over at CNet today, Daniel Terdiman reports that "IRS taxation of online game virtual assets [seems] inevitable":

That's because game publishers may well in the not-too-distant future have to send the forms--which individuals receive when earning nonemployee income from companies or institutions--to virtual world players engaging in transactions for valuable items like Ultima Online castles, EverQuest weapons or Second Life currency, even when those players don't convert the assets into cash. Most governments are only beginning to become aware of the substantial economic activity in online games, but the games' rapid growth and the substantial value of the many virtual assets changing hands in them is almost certain to bring them into the popular consciousness. "Given growth rates of 10 to 15 percent a month, the question is when, not if, Congress and IRS start paying attention to these issues," said Dan Miller, a senior economist with the Congress' Joint Economic Committee, who is also a fan of virtual worlds. "So it is incumbent on us to set the terms and the debate so we have a shaped tax policy toward virtual worlds and virtual economies in a favorable way."

My problem with all this is not just that I am a rabid, anti-tax libertarian. It's that we're putting the cart before the horse in the sense that we haven't even figured out what sort of governance structures will be imposed within most of these virtual worlds yet. Despite that, we're already having a discussion about how "Meat Space" (tangible world) taxes should be applied to cyberspace worlds. Sounds like old fashion "taxation without representation" to me.

We first need to figure out a lot of other basic things about virtual world governance before rushing to impose real world taxes. What sort of property rights will apply? What about copyrights? (See my previous essay on that issue here). How will contracts be enforced? Etc, etc. And, to the maximum extent possible, these things should be decided by the Net-izens living in those virtual worlds before any Congress critters or IRS bureaucrats try to impose taxes on virtual worlds they likely have never even visited.

posted by Adam Thierer @ 10:19 AM | Mass Media , Taxes