Increasing distortions and feeding Leviathan: The Internet sales tax

A policy shift that weakens the link between taxes imposed and benefits received by definition yields wealth transfers, and the vast array of perverse incentives attendant upon them.

The debate over state taxation of Internet sales has brought to the surface an important difference among economists over approaches to tax reform. Many (including some of my colleagues at the American Enterprise Institute) support the traditional argument for policies promoting neutrality, or the elimination of economic distortions caused by tax policies. This perhaps is summarized crudely by the phrase "equal treatment of equals": if brick-and-mortar sellers (and their customers) must pay sales taxes, then an exemption for Internet sales represents an artificial advantage, and thus a distortion. In this view, the government budget - both its size and composition - essentially is independent of alternative mixes of taxes, and the central question is how to finance that budget at the lowest possible economic cost.

Subscribe to
The Ledger
Get AEIecon's weekly snapshot of news, views, and economic cues.

First Name:
Last Name:
Email:
Zip Code:

But if the budget is affected by the choices among taxes, then the neutrality approach is too limited. There is an alternative view, dominant among public finance economists oriented toward the political ("public choice") analysis of government behavior: the size and composition of the budget are affected by the tax system. Alternative tax regimes lead to different spending outcomes, as driven by the pressures that are created by political competition under democratic institutions. Moreover, government itself is an interest group with powerful incentives to display Leviathan-like growth, in particular in the context of the wealth transfers among interest groups that result from choices among alternative spending and tax policies.

Accordingly, a more useful perspective for the Internet taxation question is this: would rational individuals striving to maximize their well-being choose to tax Internet sales? The answer turns out to be no, if we view the relationship between the citizenry and the state as contractual (or constitutional): taxes are prices paid for the aggregate costs of delivering public services, and those prices should reflect the differing valuations placed on those services by taxpayers. In this orientation, the citizen/state relationship is analogous to that of individuals engaged in voluntary market transactions. That is the only view consistent with the preservation of liberty. 

Read the full tex of this article on the American website.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Benjamin
Zycher

What's new on AEI

Rebuilding American defense: A speech by Governor Bobby Jindal
image Smelling liberal, thinking conservative
image Stopping Ebola before it turns into a pandemic
image All too many reasons for pessimism about Europe
AEI on Facebook
Events Calendar
  • 20
    MON
  • 21
    TUE
  • 22
    WED
  • 23
    THU
  • 24
    FRI
Monday, October 20, 2014 | 2:00 p.m. – 3:30 p.m.
Warfare beneath the waves: The undersea domain in Asia

We welcome you to join us for a panel discussion of the undersea military competition occurring in Asia and what it means for the United States and its allies.

Event Registration is Closed
Tuesday, October 21, 2014 | 8:30 a.m. – 10:00 a.m.
AEI Election Watch 2014: What will happen and why it matters

AEI’s Election Watch is back! Please join us for two sessions of the longest-running election program in Washington, DC. 

Event Registration is Closed
Wednesday, October 22, 2014 | 1:00 p.m. – 2:30 p.m.
What now for the Common Core?

We welcome you to join us at AEI for a discussion of what’s next for the Common Core.

Thursday, October 23, 2014 | 10:00 a.m. – 11:00 a.m.
Brazil’s presidential election: Real challenges, real choices

Please join AEI for a discussion examining each candidate’s platform and prospects for victory and the impact that a possible shift toward free-market policies in Brazil might have on South America as a whole.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.