Tuesday, December 29, 2009

The Information Age Will Render Sales Taxes Obsolete

by Daniel L. Bennett

Kevin Carey has an interesting post concerning Amazon's unwillingness to collect and pay taxes for its online sales. He relates this to education by making a back-of-the-envelope estimation that $160M in education funding is being left off the table from Amazon's refusal to collect and pay sales taxes for its sales. I agree with Carey that the enforcement of sales taxes for online purchases is a thorny issue from a policy standpoint. My disfavor of the regressive nature of a sales tax aside, I question the method of financing state and local government, and hence education, via consumption taxation. In the past, collecting such taxes at the point of sale was efficient because almost all transactions occurred at bricks and mortar markets and as Carey points out, enforcement and compliance were convenient.

The internet age, however, has created not only national, but also international online marketplaces for goods and services (g&s). Consumers, as well as businesses, can now competitively shop for g&s from a much greater number of providers that often don't have the high overhead costs of a bricks and mortar shop. This heightened competition, as well as greater economies of scale being realized, leads to lower prices and more consumer surplus.

As Carey pointed out, it would cost him $25.95 plus $1.49 in sales tax ($27.44 total) to "walk up Connecticut Avenue to Kramerbooks and buy a copy of 'The Girl Who Played With Fire', whereas he could purchase a copy brand new from Amazon for $13 plus $3.99 shipping & handling ($16.99 total). Carey argues that the failure of Amazon to collect sales tax puts Kramerbooks at competitive disadvantage due the total price differential. Even if Amazon collected a 5.75% sales tax, he would still realize a $9.47 savings by purchasing the book online from Amazon. These same principles of competition and economies of scale could apply to online higher education to help lower the cost for students.

As consumers continue to be more price conscience and do more shopping online due to the costs savings, the collection of sales taxes will become increasingly difficult due to the allocation problem of which state the taxes are due - point of production, sale, receipt, etc? This could eventually render the sales tax as a means of public finance obsolete. In my opinion this would be a good thing, as sales taxes are incredibly regressive.

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