It is widely acknowledged that mobile phones promote economic development in less developed countries. In areas with unreliable transport and postal systems, mobile services can lead to substantial improvements in communication and thus facilitate market transactions. Many countries in Africa have relatively high taxes on mobile phones, with handset tax rates above 30 percent and air time (service) tax rates above 25 percent. These high tax rates discourage the use of mobile phones and impede economic development. In addition, the taxes encourage the development of illegal markets as a means of tax evasion.
What are the consequences of cutting the taxes on handsets and services? When Kenya cut its tax on handsets, prices dropped immediately by 16 percent. A study of the mobile phone market suggests that a decrease in the tax rate on mobile services would increase usage and promote economic development. In addition, although a tax cut would decrease total tax revenue in the short run, revenue would increase in the long run as the quantity of services used (and taxed at a lower rate) increased.