Tuesday, April 23, 2013

Progressives should not support an Internet sales tax

Sales tax is one of the most regressive taxes. Sales taxes fall on those who spend money, not those who save it, and rich people save a gigantically larger fraction of their income than poor, working class, or even upper middle class people. Nevertheless, state and local governments prefer imposing a sales tax to raising progressive taxes, such as a land tax, because property owners, being relatively wealthy, have much more political influence than the relatively diffuse constituency of people who rent their housing and buy stuff.

Sales tax, in other words, is a plutocratic policy victory — a classic instance of relatively wealthy people successfully using their outsized influence to divert the burden of taxation onto people who are less wealthy.

This is not a trivial matter. At the federal level, taxation is relatively progressive; the thing that brings the U.S. much closer to a flat tax structure is exactly the regressiveness of state and local taxes (for example). If we could successfully make state and local taxes more like federal taxes (at least in terms of tax incidence), a huge tax burden on lower income people would be shifted onto relatively wealthy people.

As an added bonus, economics tells us that sales tax is one of the worst taxes for efficiency. Sales tax, like the payroll/income tax, discourages voluntary positive-sum economic interactions, which creates deadweight loss. Contrast that with some of the alternatives:

  • Land tax discourages passive landownership, which is zero-sum (it is, in fact, the canonical example of a rent).
  • Pollution taxes discourage a negative externality.
  • Tolls on use of public infrastructure, like highways and parking, decrease congestion (and other tragedies of the commons).

All of these effects are better than discouraging commerce (or labor, which is what payroll/income tax does).

Furthermore, on a national level, sales tax compliance is a competitive advantage for large retailers like Amazon (who can easily handle its stunning complexity) and a crushing liability for small businesses. So it is regressive in that realm as well. Internet sales tax would be a gift to Jeff Bezos and large Amazon shareholders, who would have less to fear from competing entrepreneurs and independent Internet sellers. As Declan McCullough posted on Plus:

Let's say I'm a eBay seller and I have an 6% profit margin. That means if I make $60,000 or more a year in profits, and the Senate goes ahead today and this bill becomes law, I have to deal with:
  • Audits by up to 46 different state tax collectors
  • Up to 10,000 different sales tax rates (it's not one-rate-one-state)
  • Integrating as many as 46 state government-supplied software packages into my Web shopping cart.
  • No reimbursement for my compliance costs
  • No judicial review if I feel I'm getting screwed over by one of those 46 states
These things aren't a big deal for Amazon.com etc. to deal with, but for someone making $60K a year in profits?

This is the background against which you should read proposals for an Internet sales tax. The Internet sales tax expands the reach of sales tax, and allows state and local governments to extend their addiction to their existing regressive tax structure. Progressives should not support this extension, as ThinkProgress, for example, advocates*. Instead, they should advocate for governments to eliminate sales taxes completely, and replace them with land taxes, pollution taxes, and tolls.

*Two last notes on the ThinkProgress post. First, it's sad that the author notes in passing that "the loophole also makes sales taxes even more regressive", without taking the next logical step: to consider whether further entrenching a regressive tax is a good idea, even if it makes that regressive tax marginally less regressive. Second, the post calls the non-taxation of interstate transactions which happen to have some online component a "loophole"; but this instance of non-taxation is a straightforward consequence of the U.S. Constitution's Commerce clause, which reserves the power to regulate interstate commerce to the federal government. It's not a "loophole" when a law does exactly what it was designed to do. Liberals have happily stretched the Commerce clause to justify all kinds of federal policies (policies that, as a liberal myself, I largely support!); to support those uses of the Commerce clause, while dismissing the claim that the federal government has the reserved power to tax interstate commerce as a "loophole", is an astonishing feat of intellectual contortion.

UPDATE 2013-04-23: See Twitter discussion from Tim B. Lee, Karl Smith, Ashok Rao, et al. The most substantial objection is that states and municipalities are so addicted to sales tax that we can never hope to reduce or eliminate it. In other words, the grip of the plutocracy is so strong that progressives should just give up and live with it. OK, fine, but that's a far cry from saying that progressives should help it along. Moreover, even if it's true in the short run, we should still be working to change people's minds about sales tax in the long run. Entrenched attitudes can only change when people consistently point out their preferred policies before pragmatically settling for second-best ones.