The Conversation

Internet tax creep

I was disappointed to learn that supply-side demigod Arthur Laffer endorsed the notion of taxing Internet sales.  Daniel Mitchell at the Cato Institute did an exemplary job of responding to Laffer's argument, while extending all due courtesy and respect to the great economist.

Mitchell makes a point I've hit every time I write about the Internet sales tax: we should be encouraging tax competition between states, which he calls "one of the most effective ways of restraining the greed of the political class."  Allowing high-tax states to draft companies in other states as tax collectors deflates one of the most important stresses that should be keenly felt by every tax-and-spend government.  At both state and national levels, we hear a lot of talk from politicians about building fences to trap reluctant investors and businessmen, when they should be talking about the growth-oriented tax and spending cuts necessary to attract business and investment.

Mitchell also mentions the "assault of sovereignty" inherent in abolishing the concept of physical presence or "nexus" for taxing authority.  In other words, a business that owns no property in a given state, and employs none of its residents, gains no benefit from the expense of state tax money there, and has no political influence to balance the tax burden that Internet sales taxes would impose.  Stated in more familiar terms: no taxation without representation.

One other criticism Mitchell levels against Laffer crystallizes something that has been bugging me about the Internet sales tax movement.  Laffer suggests, without any corroborating evidence, that the inability to tax Internet sales has led some states to increase the tax burden on local businesses, while Laffer's laudable notion of a minimal tax burden spread as evenly as possible implies that local taxes might be reduced once revenue from Internet taxation flows into state coffers.  That's nonsense - no one in the right minds thinks the states will lower any other aspect of their tax burdens once they can hit online sales.  On the contrary, every comment I've ever heard from state officials eager to tax Internet sales mentions their hunger for additional revenue, not their willingness to spread a constant burden more evenly.

Defenders of Internet sales taxes often speak as if they wish to restructure the tax system, when in reality they'll just be adding a new financial barnacle to the hull of the lumbering Big Government steamship.  We should be always and everywhere pressing for significant tax and spending cuts to shake Obama's dead economy to life.  We certainly shouldn't be taxing away the lifeblood of small online retailers, whose evolution has been one of the few bright spots in a dreary economic picture.  

If we're going to talk about restructuring the entire tax system along the lines of the Fair Tax, then by all means, let's discuss how online sales will be worked into the plan.


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