Back in January I wrote a Backspin column titled “2007: The Year of Being Outraged?” in which I took the IRS and the Joint Economic Committee to task for even considering taxing virtual earnings of the players of on-line games. In February I got a response from Dan Miller, Senior Economist, Republican Staff, Joint Economic Committee. Dan pointed out that I misunderstood the nature and role of the Joint Economic Committee and then he clarified the thinking behind the proposal to tax virtual income. This latter issue still seem to be wrapped in bizarre bureaucratic thinking: Dan notes in his message that “it seems clear that under existing definitions set forth in law and by IRS regulation, the IRS could choose to impose income taxes on income earned in virtual worlds. So Dan is saying the IRS can do anything that legal precedence allows them. I get that but the online game world context is actually wildly different than any real world context we’ve ever levied taxes in and I still think it is ridiculous to think that virtual income has any kind of value until it is realized as real world income — until you can buy real gas or real groceries or pay your taxes with your money it has no real value. Dan’s final point is that the JEC is opposed to such a proposal and their consideration of the issue is to head off any attempted taxation of virtual wealth which means that the IRS has a frightening degree of autonomy combined with what the JEC must consider to be a serious lack of sound thinking when it comes to deciding what gets taxed. On this topic I am no longer as outraged but I am more fearful than ever that “government by the people, for the people” has lost its meaning. [mg] Dan’s response and my reply follow …
From: Miller, Dan (JEC) Sent: Thursday, February 08, 2007 8:35 AM To: backspin@gibbs.com Subject: Outrages column Mr. Gibbs, I read with interest your 1/5/07 column “2007: The Year of Being Outraged?” in which you criticize the Joint Economic Committee for taking up the issue of virtual income and taxes. Specifically, you wrote “Are we outraged that the Congressional Joint Economic Committee, which sets policy for the Internal Revenue Service, had nothing better to do than consider, in public, whether virtual income in online games should be taxed? Most people laughed at this but outrage was needed.” Although you are, of course, free to disagree and criticize, I feel compelled to correct an assertion you made and respond. First, the JEC does not, as you say, “sets policy for the Internal Revenue Service.” The JEC is a non-legislative committee of Congress. When I am asked to describe the JEC, I often say that we are a sort of internal think tank for Congress. We analyze issues of public policy, hold hearings and make recommendations to lawmakers. We have absolutely no oversight authority over the IRS. I am not sure how you came to that particular conclusion, but it is, in fact, incorrect. Second, I would respectfully suggest that perhaps the outrage here is not that the JEC is examining the issue of virtual income and taxes, but that virtual income could theoretically be subject to income taxes. I have spoken with several tax law experts, as well as conducted my own research, and it seems clear that under existing definitions set forth in law and by IRS regulation, the IRS could choose to impose income taxes on income earned in virtual worlds. Although the thought of taxing a gamer for gold earned playing World of Warcraft seems far-fetched, such a proposition seems much more realistic in the context of an entrepreneur in Second Life who generates significant amounts of real income. Finally, and most importantly, you did not mention the fact that we are approaching this issue generally opposed to such taxation. The October 17 press release (attached) clearly states that “The goal of the forthcoming JEC study is to help lawmakers understand the issues involved and head off any premature attempt to impose a tax on virtual economies.” The headline alone should be a clear indicator of our position: “Virtual Economies Need Clarification, Not More Taxes.” In my experience, there are two ways to approach an issue like this. One way is to be proactive and try to prevent the implementation of bad policy before it gets off the ground. The alternative is to ignore the issue until the policy is set and then try to change things. I can assure you that if the IRS starts issuing rulings and regulations on its own, it becomes much more difficult to change the course initiated by the IRS. For my part, I prefer the former approach, especially since IRS attention to virtual worlds is simply a matter of time and growth. If you have any questions or comments, please feel free to contact me. Dan ======================== Dan Miller Senior Economist, Republican Staff Joint Economic Committee U.S. Congress
Unfortunately I fumbled the message ball so replying to Dan got delayed …
From: Mark Gibbs Sent: Thursday, March 22, 2007 6:09 PM To: ‘Miller, Dan (JEC)’ Subject: RE: Outrages column Mr. Miller, My sincere apologies for not replying sooner. Thank you for clarifying the nature of the JEC, I will cover your comments in a future correction. As for how I came to my conclusions the articles I read seemed to imply the role for the JEC I portrayed and it isn’t clear from the JEC Web site what the committee’s role or authority involves (indeed the About section is a roll call rather than a description of mission, role, scope, and authority). You note that “Although the thought of taxing a gamer for gold earned playing World of Warcraft seems far-fetched, such a proposition seems much more realistic in the context of an entrepreneur in Second Life who generates significant amounts of real income.” Unless the IRS was willing to accept virtual money it would seem unreasonable to tax such an entrepreneur in real money until he converts the virtual funds to some real world equivalent. At the point where real money taxation is reasonable as the entrepreneur’s profit is a real income which obviously falls under the tax code and how he earned the money is only relevant in as much as considering the basis of taxation (earned or unearned, short term or long term, etc.). To be completely reasonable the entrepreneur’s investment to realize any gains must be considered thus he should be able to amortize his computer, deduct the cost of his Internet connection, and so on. Again, my understanding from what I read was that the JEC were considering the possibility of taxation not the inadvisability of taxation but I stand (or rather sit) corrected. I also appreciate your position that it is better to head off bad ideas (particularly where the IRS are concerned) than to fight them once they become policy. What irks me is that virtual earnings should even be under consideration – it looks very contrived and political to treat game money as real until real money is involved. I very much appreciate you writing and again, my apologies for both my misunderstanding of the JEC’s role and for such a delayed response. Yours sincerely, Mark Gibbs.
