Robert Hahn is director of economics and professor at the Smith School, University of Oxford. Peter Passell is a senior fellow at the Milken Institute and editor of The Milken Institute Review. They co-founded Regulation2point0.org, a web portal on economic regulation.
The Financial Times recently published commentary by Jacob Weisberg deploring Amazon.com's use of political and financial muscle to avoid collecting sales taxes on out-of-state purchases. Amazon, he notes, only recently relented because the company sees greater advantage in positioning warehouses closer to customers.
Wall Street Journal writer Gordon Crovitz responded with a column entitled, "9,646 Tax Burdens on the Internet," in which he argued that the crazy quilt of state and local tax rules would be unmanageable for Internet retailers – especially smaller ones. Crovitz offers the example of a 1,400-word Wisconsin regulation differentiating taxable ice cream cakes from ones that are exempt by virtue of contents.
Who's right? Neither and both. Forgive our pedantry here, but it's important to get back to economic basics in judging the merits of Internet sales taxes. Here, we offer three criteria.
So how does the Internet tax bill stack up by these criteria?
Start with the fact that sales taxes are, in general, lousy ways to raise revenue because they are inefficient and regressive. Yet, sadly, state legislatures seem determined to shift their tax regimes toward sales taxes in an apparent effort to attract businesses that are unaffected by local sales levies.
That said, it's hard to defend the Internet exemption that drives customers away from local merchants – especially in the case of big-ticket items like consumer electronics. A decade ago, one could plausibly defend the exemption on the grounds that Internet merchants needed extra help in convincing consumers to try purchases at a distance. Today, the convenience of Internet stores and the ease of comparison shopping have erased that issue. By the same token, the red tape in following the tax rules of thousands of individual localities has been cut by computerization.
In the best of possible worlds, states and localities would reduce or eliminate their use of sales taxes, rendering the argument moot. In this world, we seem to be stuck with high sales taxes, and Congress needs to level the playing field.