Taxing internet sales

A central argument for subsidy reform is that it "levels the playfield" for the many different ways that one can provide a specific good or service.  With large subsidies, the main beneficiaries tend to be the ones with the best lobbying and political connections, not necessarily those with the best products.  For this same reason, it is better to have a lower tax applied equally to all activities than to have higher taxes applied to only some.

People get all hot and bothered over the idea of taxing sales on the internet.  In the internet's early days, perhaps this argument made sense.  Consumers were not comfortable with e-commerce, and web tools to measure, track, and collect taxes from multiple states were not effective.  These arguments no longer apply.  The internet should be taxed in the same manner as sales taxes are applied to other consumer venues.  Doing so would help cut down the gaping budget deficits in many state governments (and indirectly in local governments as well), as shown in this article. Many states already require use taxes (generally the same rates as sales taxes, just applied to purchases made out-of-state but used inside); they simply can't collect them.  Whether the taxes raise exactly the amount predicted by proponents, or somewhat lower, doesn't really matter much.  People normally shift behavior to avoid incurring a tax, so lower take at least initially should be expected.  Nonetheless, the preference for buying through a computer rather than through a store should be ended.  A good summary of related issues to internet taxation is here.

Opponents of internet taxation argue that it a useful venue for tax competition between states, forcing them all to become more efficient.  Perhaps this is true to some degree.  But at the same time, the exemptions also subsidize the export of jobs in businesses that own local stores, pay the taxes that help our towns and state run, and hire our state's citizens.  And the losses may be made up through higher taxes on remaining groups, hardly a good dynamic for local economic growth. 

The implementation of neutral sales taxes won't end tax competition either.  Robust competition on income and property taxes -- generally much larger tax bites for most people -- would remain.

It's not just about the internet either.  Mail order sales have also long been exempt from sales taxes, though use taxes would again apply.  And there are all sorts of services that pay zero sales taxes as well (though some, such as cell phone calls, are taxed at very high rates).  If the tax base could be broadened substantially and rates brought down for all payers, the economy overall would be more efficient.  The challenge is to make sure that the when such a change is implemented, the governments would not be able to keep the tax rates high and simply boost spending to fill their higher credit lines.