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

Expanding opportunity in America
image Moving beyond fear: Addressing the threat of the Islamic state in Iraq and Syria
image Foreign policy is not a 'CSI' episode
image The Air Force’s vital role
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Monday, July 21, 2014 | 9:15 a.m. – 11:30 a.m.
Closing the gaps in health outcomes: Alternative paths forward

Please join us for a broader exploration of targeted interventions that provide real promise for reducing health disparities, limiting or delaying the onset of chronic health conditions, and improving the performance of the US health care system.

Monday, July 21, 2014 | 4:00 p.m. – 5:30 p.m.
Comprehending comprehensive universities

Join us for a panel discussion that seeks to comprehend the comprehensives and to determine the role these schools play in the nation’s college completion agenda.

Tuesday, July 22, 2014 | 8:50 a.m. – 12:00 p.m.
Who governs the Internet? A conversation on securing the multistakeholder process

Please join AEI’s Center for Internet, Communications, and Technology Policy for a conference to address key steps we can take, as members of the global community, to maintain a free Internet.

Thursday, July 24, 2014 | 9:00 a.m. – 10:00 a.m.
Expanding opportunity in America: A conversation with House Budget Committee Chairman Paul Ryan

Please join us as House Budget Committee Chairman Paul Ryan (R-WI) unveils a new set of policy reforms aimed at reducing poverty and increasing upward mobility throughout America.

Event Registration is Closed
Thursday, July 24, 2014 | 6:00 p.m. – 7:15 p.m.
Is it time to end the Export-Import Bank?

We welcome you to join us at AEI as POLITICO’s Ben White moderates a lively debate between Tim Carney, one of the bank’s fiercest critics, and Tony Fratto, one of the agency’s staunchest defenders.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.