No Tax a Bad Economic Situation?

May 23, 2005

The internet continues to provide shoppers with an outlet to purchase goods and avoid paying sales taxes. Although this saves consumers money on each purchase they make, it may not be an economically ideal situation. Richard Posner argues for the taxation of internet sales on his and Gary Becker’s blog .

The non-taxation of internet sales might be inefficient because (1) it creates economic distortions and (2) is non-neutral. The Tax Foundation argues that for a tax to be economically efficient it must be non-distortionary and non-neutral. (Click here for a description of the Tax Foundation’s other tenets of sound tax policy). The lack of internet taxation is distortionary because it provides incentives to consumers to purchase goods based on tax considerations instead of purely market based realities. It is non-neutral because it provides benefits to on-line vendors over brick-and mortar operations.

Although the lack of internet taxation is non-neutral and creates distortions, it may provide an anchor on state sales tax rates. Since there is no tax on the internet, states cannot raise their tax rates too high; otherwise they will lose more sales to on-line stores. Tax policy makers need to be aware of these situations on both sides of the issue as they look to update current laws.


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