Online Sales Tax Doesn't Make Sense in Today's Economy

About Neil Niman:

Neil Niman is currently chair and associate professor of Economics at the University of New Hampshire. He previously served for nine years as an elected local official on the Durham Town Council.

With state budgets in tatters, it is no wonder that their elected representatives are looking wherever they can to generate revenue. However, just because a sales tax may have made sense at some point in our history doesn't mean that it is right for today's economy. In fact it can do a great deal more economic harm than good.

[See a collection of political cartoons on the economy.]

We could talk about whether or not it is fair to ask a business to bear the cost of serving as a remote tax collector for a state in which it does not have a physical presence and hence enjoys none of the benefits that the state provides. However this would mean missing the more important economic point. Economies grow (and create jobs) when businesses compete by providing the best products at the lowest possible price. In the past, geographical barriers, undeveloped transportation networks, or the value created by being a member of a community kept many businesses local. However the rise of electronic commerce has swept aside many of these local advantages and as a result, national firms and markets have emerged that can provide a comparable product or service at a lower price. By raising the cost of selling goods and artificially increasing the after tax price, online sales taxes are no different than any other government sanctioned policy designed to reduce free trade.

[Read the U.S. News debate: Is a Flat Tax a Good Idea?]

As a means of eliminating competition by making it more expensive for out-of-state businesses to gain access to its citizens, state governments are promoting economic inefficiency in order to preserve an outdated form of taxation. Whatever benefits accrue to the individual state comes at the expense of us all in the form of less choice, higher prices, and businesses that are less able to function in a competitive environment. Inefficient ways of doing things are preserved in order to hold on to an idea that no longer makes sense. As global competition has made it more difficult for U.S. firms to prosper, do we really want to support a system of taxation that is going to make us less rather than more competitive?

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Tags:

business,

shopping,

internet,

sales tax