Second Life and the Virtual Property Tax

Published April 1, 2007

Late last year, a congressional committee began examining the idea of taxing property inside digital gaming worlds such as Second 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.

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.

Taxing Virtual Reality

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 Internal Revenue Service 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 Congress’s Joint Economic Committee, told Reuters.

Of course, individuals are already obligated to pay taxes on money they make through the real-world sale of Linden dollars. But when it comes to Second Life, some Congressmen want to go further and impose a real-word tax on the land, homes, and other digital property you “own” inside the game environment. That’s a loopy idea that should be shot down on sight, but it does reveal the insatiable greed of government.

Government: Keep Out

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.

Some people believe that just because goods are being generated, government automatically has a right to a piece of them. That’s simple politics.

But government does not automatically have such a right. It’s a good bet that if Congress thinks it will get away with taxing property inside Second Life, 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 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.

Members of the congressional committee examining digital games are wasting their time, taxpayer money, and their own energy. They 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 ([email protected]) is director of technology studies at the Pacific Research Institute. This article is reprinted with permission of TechNewsWorld and the ECT Network.