Taxation by regulation and regulation by taxation: The case of local cable TV regulation

Until late 1986, municipalities played a major role in cable television regulation. Municipalities not only regulated pricing and quality decisions but also taxed cable systems in the forms of in-kind and in-cash concessions. These activities appear to fit well with the concept of taxation-by-regulation, which concludes that consumer welfare is reduced because of the rent seeking behavior of local politicians. At the same time however, the notion of regulation-by-taxation is equally plausible. That is, politicians may use taxation as a means to regulate the activity of a monopoly by limiting monopoly rents and improving consumer welfare. This article empirically separates these two effects and investigates the implications for consumer welfare.