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.

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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. 

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About the Author

 

Benjamin
Zycher
  • Benjamin Zycher is the John G. Searle Chair and a resident scholar at the American Enterprise Institute (AEI), where he works on energy and environmental policy. He is also a senior fellow at the Pacific Research Institute.

    Before joining AEI, Zycher conducted a broad research program in his public policy research firm, and was an intelligence community associate of the Office of Economic Analysis, Bureau of Intelligence and Research, US Department of State.  He is a former senior economist at the RAND Corporation, a former adjunct professor of economics at the University of California, Los Angeles (UCLA) and at the California State University Channel Islands, and is a former senior economist at the Jet Propulsion Laboratory, California Institute of Technology.  He served as a senior staff economist for the President's Council of Economic Advisers, with responsibility for energy and environmental policy issues.

    Zycher has a doctorate in economics from UCLA, a Master in Public Policy from the University of California, Berkeley, and a Bachelor of Arts in political science from UCLA.

  • Email: benjamin.zycher@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202.862.5903
    Email: regan.kuchan@aei.org

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