Yesterday, I wrote an op-ed for Crain’s Chicago. Here it is if you don’t have a link. I have added one minor point to it here.
There is a bill working it’s way through the Senate that will tax internet sales transactions. President Obama has said he endorses the bill to raise taxes and will sign it.
Before being “for” or “against” the bill using heuristics from your personal beliefs or talking points from the competing factions, it’s important to know what a government tax is.
Put simply, it’s a hurdle or roadblock. If you want less of something, tax it. Taxes make marketplaces less efficient. Taxes are also a limit to personal freedom.
Some see taxes as a revenue generator for government. But, governments can’t invest, they can only spend taxpayer money. If they don’t have the money from taxpayers to spend, then government can’t grow. This is why lower taxes lead to less government intervention into our daily personal lives. Passing an internet sales tax will cause our government to continue growing.
Right now, almost every government entity is broke. That’s because they have grown too large for the tax base that supports them. They refuse to cut the size and scope of their largesse, and refuse to bring fiscal discipline to microeconomic issues like public pensions. Gerrymandering by both political parties has made it almost impossible to unseat incumbent politicians. Passing an internet sales tax will cause budget deficits to grow, because government won’t cut their size or scope. They will get bigger, and spend the tax revenue.
That’s why this tax is working its way through the Senate. I think George Orwell might have written the title for it: The Marketplace Fairness Act.
Who will it affect the most?
Small business people. The local merchants that have a storefront and sell things online. The person that runs a business out of their home and uses the internet as a cheap sales channel to develop their business so they can grow. They will face much higher costs to collect, accrue and redistribute the tax from their customers. Those costs will be borne by you every time you purchase something.
Consumers, meaning you. You will pay a lot more for goods and services not just because of the tax. Retailers will also be able to increase core prices on items because the tax will give them room to do it.
Ebay ($EBAY) sent a message to all of its users to oppose the tax. Amazon ($AMZN) supports the tax.
Almost all Senate Democrats and some Senate Republicans support the tax. In the House, there is bipartisan support for the bill.
Who won’t it affect? Big box retailers and national brands. The big guys will get more powerful and it will be much more difficult to compete with them if you are a small businessperson. They already have the mechanisms in place to collect the tax. They can spread the cost out over their entire operation.
What’s the economic fallout?
Some small businesses may go out of business. Poor people will pay more for goods and services because local retailers will be able to raise prices since there are higher prices on the internet. The rich will be unaffected because they are less price sensitive than others.
The tax will restrict competition. Today, people have a choice between online and physical retailers. Physical retailers know that a person can enter their shop, whip out their mobile device and order the same product online. That threat forces them to figure out better and ingenious ways to service their customers. It also puts downward pressure on all prices, making costs cheaper for consumers. Increasing the tax will put some retailers out of business limiting consumer choice.
American GDP will drop because increased taxes will cause people to buy less. That will lead to less job creation and less economic activity. An internet tax could cause unemployment to rise.
Multi national businesses might be able to use accounting tricks to avoid the tax. For example, Amazon has a subsidiary in Ireland. What if it ran the transactions through Ireland and didn’t charge the tax? Or held cash from the transactions overseas? The local small business won’t have that advantage, and has no access to that advantage. This puts them at a further disadvantage.
Locally here in Chicago, we already pay one of the highest sales taxes in the nation. How many Chicagoans shop on the internet today to avoid the tax? How many of you buy things in a different city, county or state to avoid the tax? Politicians will tell people that taxing the internet will drive business to local establishments.
They are wrong.
Taxing the internet won’t drive more business to local establishments. It will just cause people to consume less and they will figure out new ways to avoid it. Think hard before you rally around higher taxes.