Taxation of the internet is controversial among those who seek a freer way to fund state functions, and with good reason. The normal knee-jerk reaction to any new or proposed tax is outrage: given the spider’s web of confiscatory taxes that already exist, any more come across as unacceptable from the get-go.
Recently, the National Center for Policy Analysis weighed in and released a report on the Marketplace Fairness Act (MFA). Passed by the US Senate but languishing in the House, this would require internet companies to tax online sales and then remit the revenues to the buyers’ home states — what many states have already attempted to do on their own, with little success (see the image). Colloquially, this is known as the “Amazon tax,” after the ubiquitous online retailer that has managed to avoid state sales taxes in many instances.
The problem is that such taxes do not exist in a vacuum. A sound, fair tax system tends to maximize certain qualities that are not present in the current system.
First, transparency: a tax should be clear to the person paying it, not hidden, such as the employer side of Social Security and Medicare taxes.
Second, simplicity: a tax should be understandable to all payers.
Third, a broad base: no specific carve-outs for favored activities, products, or groups.
Finally, a low rate: this minimizes the overall tax burden and the associated deadweight losses.
All these principles lean towards a broad, consumption-based tax model (as opposed to income based) and comparatively low rates with minimal carve outs — ideally with an an easy-to-administer framework.
Does that sound like anything you’ve heard of? Yes, a sales tax applied to effectively all goods and services sold in a state. There is, therefore, a reasonable argument that extending state sales taxes to online retailers is a good thing for those who truly support free markets.
Well, not quite. State tax systems are not nor will they ever be perfect with nice, pretty consumption bases and low rates. Compliance costs also enter the equation and are too often forgotten.
The MFA would, as the NCPA study notes, force online companies to collect taxes for nearly 10,000 different jurisdictions. This is not a problem for the oft-mentioned giant of online retail, Amazon. For small online retailers, though, the story is far different.
Imagine being a young entrepreneur, attempting to sell your product online, but you need to send taxes to every single jurisdiction in every state that one of your customers orders from. Without a doubt, the MFA would raise the cost of entrepreneurship and barriers to entry, something that most can agree is a terrible thing.
Online sales taxes aren’t all bad, but this proposal for one definitely is. The NCPA study ends with an excellent quote that distills the situation well:
States may have legitimate concerns in collecting sales tax from online vendors and leveling the playing field between them and brick-and-mortar stores, but the Marketplace Fairness Act is not the way to accomplish those goals. The MFA essentially punishes vendors by requiring them to collect taxes, which is government’s job. States with use tax laws on the books should use their own taxing authorities to enforce compliance rather than burden the private sector with the task.
EspañolOn Thursday, April 10, the Colombia President Juan Manuel Santos surprised the nation with an unexpected announcement. In order to combat the trafficking of illegal drugs, Santos has ordered the demolition of houses in which these drugs are distributed. He further justified this decision by alleging that these places are the centers of all sorts of illegal activity. Paraphrasing Fréderic Bastiat, let's start with the basics, with what is seen, and make two objections. On the one hand, this measure is not going to work: does the president really believe that by demolishing these sites where drugs are sold, that this sort of business — production or consumption — is just going to go away? If that is what he believes, it reeks of naivete. However, the truth is that it isn't. It is clear that this is politically motivated and meant to ensure his reelection. Therefore, it does not matter if it works or not. The important thing is that it generates media coverage that helps Santos distract from his image as a weak executive when it comes to matters of national security. On the other hand, there is the legal debate. Every decision that is made in Colombia generates a long, boring legal debate. Whatever the topic or the action that is to be undertaken, there will always be a discussion on whether it is legal or not. What is surprising is that these legal debates are never well defined, so whoever makes the first move always get his way. Legal uncertainty in Colombia is striking, and this case will be no exception. However, the fact is that this latest policy measure has not generated much criticism or calls for rejection from either social or traditional media. Surprisingly — perhaps even more surprising than the measure itself — it seems that Colombians in this case are stuck in the "what is seen" paradigm. Many people in Colombia must be thinking, in fact, that by destroying these houses, government agents will indeed discourage criminals from committing more crime. Others, still, will be satisfied in the knowledge that when these houses are demolished, others will surely be built later on. In other words, this is exactly the type of thinking that Frédéric Bastiat warned us about more than a century ago. It is worrisome that the debate at hand has not gone beyond the two aforementioned points. That is to say, we have not even begun to discuss "what is not seen." The citizenry's passivity in this case is disturbing, because the appropriate reaction to such a proposal should be alarm. First, what this demonstrates is that despite the gains made in recent years, there remains much to be done when it comes to making the protection of individual rights the primary role of all state action in Colombia. This policy represents an overt infringement of private property rights, the source of all other rights, and the principal safeguard for individual liberties against state coercion. This is without even mentioning the importance of property rights in the process of wealth creation. Second, it is appalling that what will result from this measure will be new justifications for state intervention. Surely, the state will decide that it should rebuild what it destroyed, and grant rebuilt homes to people that government officials consider worthy of this state benefit. In order words, another violation of individual rights, more market intervention, less individual decision-making, and more of the sort of paternalism that those who rise to power enjoy. Third, this decision illustrates the large, and dangerous, concentration of power that one person wields. The president gave the order and the next day the government began to demolish. Keep in mind, this power can be used in more ways than just providing security. There is no guarantee that there will always be elected presidents who use this concentration of power for "the greater good." Citizens will come to lament their inability to prevent these measures from going forward when unpopular government decisions are made. Fourth, as I have referenced in a previous article, by not limiting the power of the state, we have effectively allowed certain individuals the power to create tension between freedom and security. This decision is one more example of this problem. In fact, this becomes just another reason to end drug prohibition altogether. What more must we, as individuals, sacrifice — in addition to property rights — so that future governments can continue to conduct a war that they will never win? The government, incapable of catching criminals, is instead now destroying property! Instead of helping Santos get reelected, this decision could finally make many people recognize just how badly, and without precedent, this government has been transformed: this latest violation of property rights being only the most recent example. Before this, it was subsidies, allegations of fraud, and the weak position taken against countries like Venezuela. Previous examples, along with this growing trend, suggest it is best we not consider a second term for Santos. Translated by José Niño.