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

Defeating ISIS: AEI experts weigh-in before the president’s address on Wednesday
image Degrading, defeating, and destroying the Islamic State
image Wealth Building Home Loan: Building wealth through homeownership and retirement savings
image The $3 iPhone
AEI on Facebook
Events Calendar
  • 15
    MON
  • 16
    TUE
  • 17
    WED
  • 18
    THU
  • 19
    FRI
Tuesday, September 16, 2014 | 5:00 p.m. – 6:00 p.m.
The Constitution as political theory

Please join us for the third-annual Walter Berns Constitution Day Lecture as James Ceasar, Harry F. Byrd Professor of Politics at the University of Virginia, explores some of the Constitution’s most significant contributions to political theory, focusing on themes that have been largely unexamined in current scholarship.

Wednesday, September 17, 2014 | 8:10 a.m. – Thursday, September 18, 2014 | 1:30 p.m.
Third international conference on housing risk: New risk measures and their applications

We invite you to join us for this year’s international conference on housing risk — cosponsored by the Collateral Risk Network and AEI International Center on Housing Risk — which will focus on new mortgage and collateral risk measures and their applications.

Thursday, September 18, 2014 | 2:15 p.m. – 3:00 p.m.
Speaker of the House John Boehner on resetting America’s economic foundation

Please join us as Speaker John Boehner (R-OH) delivers his five-point policy vision to reset America’s economy.

Friday, September 19, 2014 | 9:15 a.m. – 11:00 a.m.
Reforming Medicare: What does the public think?

Please join us as a panel of distinguished experts explore the implications of the report and the consumer role in shaping the future of Medicare.

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