Second Life Tax Man?

Late last year, a congressional committee began examining the idea of taxing property inside digital worlds such asSecond Life. If that happens, a digital Boston Tea Party should break out, perhaps making it the only place in America where a real revolution could still happen.

Over the holidays, an article in Esquire magazine lamented that Americans will probably never have a revolution again. On the whole, the author argued, Americans are too fat and content to care if their taxes go up or if they are lied to about weapons of mass destruction.

That may be the case in the physical world, also known as the “meat world,” but perhaps it is still possible to see revolution in a digital space.

Virtual Property Tax

Second Life is the massive multiplayer online game (MMOG) where users get to own whatever they create. This commitment to strong property rights within the game has spurred a vibrant economy that’s growing as though on steroids.

Once people create something inside the game, they can sell it for “Linden dollars.” Because the Linden dollar trades with the U.S. dollar, there are a number of people making a lot of money creating digital goods.

In December 2006, there were more than 14 million total transactions ranging from 1 to 500,000 Linden dollars. One U.S. dollar equals approximately 266 Linden dollars, but that price can change, of course, depending on the market. This activity has sparked the interest of the IRS and lawmakers who see an opportunity for a tax grab.

“Right now we’re at the preliminary stages of looking at the issue and what kind of public policy questions virtual economies raise — taxes, barter exchanges, property and wealth,” Dan Miller, senior economist for the Joint Economic Committee, told Reuters.

Of course, individuals are already obligated to pay money on income they generate as part of any job, including items they create in Second Life, so it is not income tax that Congress is contemplating. Instead, some Congress critters want to tax property that people own inside the game, such as land and homes. That’s a loopy idea that should be shot down on sight, but it does reveal the insatiable greed of government.

Second Life is a game where people go to escape the real world. It is a rich and vibrant world because its creators understand that incentives matter. If users can make money creating interesting things inside a game, there will be more interesting things inside the game than there otherwise would be. That’s simple economics.

Government: Keep Out

The simple politics is that some people believe that just because goods are being generated, government automatically has a right to a piece of them. That’s not the case, and it’s a good bet that if Congress thinks it will get away with taxing property inside Second Life, then there will indeed be a digital revolution.

The federal government has no claim to property inside Second Life. It provides no fire or police services inside the game. It builds no roads. It provides no utilities or schools — and no one needs it to.

The company running the game and the players inside take care of all these things. In fact, to the extent that a firefighter were ever needed, it would be because a user created the fire in the first place.

Users also build the roads and the schools. The game administrators are the police, and they do a good job. In short, government is not needed or wanted in the game, and if it tries to muscle its way in, there will be approximately 2,494,243 angry denizens.

By creating digital goods, these players are exhibiting creativity, not greed. The greed comes on the part of politicians who believe they have a prior claim to what people create in the digital world — without providing anything in return.

The congressional committee examining digital games is wasting time, taxpayer money, and its own energy.

The members should apply that energy to such real-world tasks as cleaning up Congress, trimming waste, and finding creative ways to lower, not raise, our taxes. That will promote the economic growth they seem intent on quashing.

Sonia Arrison, a TechNewsWorld columnist, is director of Technology Studies at the California-based Pacific Research Institute.

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