SPN MacIver Institute 2012 National Think Tank of the Year
Facebook Twitter RSS Email

US Senate, Others Wrong on Internet Sales Tax

Comments | Posted in mi perspectives | By Nick Novak | Posted May 13, 2013 10:25 AM

May 13, 2013

by Joseph S. Diedrich
Special Guest Perspective for the MacIver Institute

The Marketplace Fairness Act was recently approved in the U.S. Senate. It now faces a tougher road ahead in the House.

Among other things, the Marketplace Fairness Act seeks to "level the competitive playing field" by allowing states to collect sales tax on all online sales. Presently, only businesses with a nexus (i.e., physical presence) in a state are subject to online sales taxation. If passed, the bill would change that. No new taxes would be implemented, but existing taxes would be assessed in additional ways.

While many business owners and anti-tax activists wholly reject the proposal, others support it. Among the supporters is Alan Rudnick, owner of Rudnick Jewelers in Sheboygan, who said in an interview with the Milwaukee Journal Sentinel, "We start out automatically at a 5% disadvantage, and we just would like a level playing field."

Congressman Paul Ryan also supports the Marketplace Fairness Act. "To me, I think the concept is right," Ryan said. "It's only fair that the local brick-and-mortar retailer be treated the same as the big-box online sales company out of state."

On the contrary, the act is antithetical to the free market principles Ryan professes to uphold.

The free market rewards innovators--those who invent new things, optimize efficiency, elevate quality, and reduce cost, including by deft avoidance of state influence. It was the respite from Leviathan that contributed to the growth and profitably of online retail; its tax-free nature allowed the fledgling industry to emerge from the ashes of the dot-com bubble.

Online retailers fit perfectly into capitalism's glass slipper. Punishing them for their cunning is hardly the proper (or for that matter, economically expedient) course of action. They identified and exploited a competitive advantage and should be allowed to reap the rewards, much like early automobile manufacturers eventually put carriage makers out of business.

In the same vein, proponents of the Marketplace Fairness Act drivel on and on about the benevolence it will bestow upon the "local economy" by encouraging consumers to buy from local brick-and-mortar retailers. There are a holes in the story here, however. First, as is the case with the entire "buy local" racket, we cannot know exactly what "local" means--is it a neighborhood, city, state, region, or nation? Ultimately, the answer is arbitrary because the economy is indivisible.

Ball State economics professor Tyler Watts illustrates another immanent absurdity:

"Buy-local advocates cite studies showing that 68 percent of the money spent at local businesses stays in the 'local economy.' So I spend $100 at a locally owned store. What happens to the $68 of the original $100 that is then recirculated locally? Well, only 68 percent of it, or $46, stays local. And that $46 becomes $31, then $21, then $14, $10, $6.80, $4.57, $3.10, and so on. It won't be long before there's no money left in this town!"

What gets forgotten in the rhetoric is trade. Individuals, businesses, and towns spend money in geographically distant places (i.e., on imports). Likewise, individuals, businesses, and towns in those geographically distant places return the favor. It all evens out. If a homeowner can purchase a mailbox cheaper online than in his local hardware store, that means he has more money left in his pocket to spend on other things. And that also means that the online mailbox retailer has money to spend as well--perhaps, serendipitously, at the homeowner's own online store.

What people like the Sheboygan jeweler and Paul Ryan neglect to account for is the fact that more taxes always leads to higher prices. Surely under the Marketplace Fairness Act a few marginal consumers may turn from the internet back to local brick-and-mortar retailers. But the brick-and-mortar retailers who could previously find cheaper capital goods online can no longer do so. The result is higher production costs. Affecting every stage of production, this produces the same effects as every other tax increase--higher prices, lower purchasing power, fewer jobs, more money in the hands of the government, and a weaker economy.

If the goal is to "level the playing field," the market should be made freer--not the opposite. Adding an additional layer of government intrusion always has negative effects. Instead of taxing more, tax less: eliminate the sales tax altogether. Then, brick-and-mortar retailers would not feel slighted, consumers would be able to purchase less expensive goods, businesses could hire more people, and government would shrink.

Taxes are a universal burden. If multiple tax levels are incongruous, the better course of action is always to reduce the higher, not raise the lower. The Marketplace Fairness Act, unfortunately, does the opposite. Will it help businesses and consumers? Absolutely not. Will it gorge government, feed its voracious appetite, and harm the economy? Absolutely.