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Argument #1
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Internet access is already taxed
Companies with a physical presence in the country already collect sales taxes
from online purchases
At issue really are foreign businesses and those without a physical presence
o Foreign businesses
 Out of the control of a local government
 Can implement a protectionist policy for physical merchandise
 For intangible goods which are mostly information goods there are
no borders
 Some place don’t have any sales taxes or taxes at all
 It becomes attractive for companies to host their business from
these tax free jurisdictions
o Domestic online only businesses
 Mainly very small businesses
 Lacks resources to effectively perform the collection of sales taxes
 There are 7500 different taxing jurisdictions in the US alone
 Sales tax would impose such a burden on these small business that
they would not be formed in the first place
 This would eliminate creative new ideas that our economy depends
on for job creation and would leave only big business
 These companies create wealth and increase transportation taxes
o On the internet it’s hard to tell where a business is based
 Since places such a Vanuatu exist, there is no reason for a business
not to move operations there
 This become especially true when we are dealing with information
goods
The only viable option is self reporting
o This is a system similar to the one used for out of country and catalogue
purchases
o It introduces complications of its own, such as deductibles or default
assessments such 0.04% of income tax that the state of Maine uses
o Today 18 states of the US require each taxpayer to declare all of their
online purchases for the year on their income tax return
o Few people keep every receipt from online purchases and even less are
aware of this
o There is no economical method to enforce accurate reporting
o The most successful state that uses this system is Ohio
 Collected only $2.1 million in 2002
 This represents only 46,000 taxpayers out of 5.7 million
 The estimated uncollected sales tax is $597 million
o The idea of sales tax flawed and cannot withstand structural changes in the
economy
 Even if we were able to adapt the current system to current
economy it might not apply in the future
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The internet is still at its early stages
We have moved past the idea of selling pet food online and are
now beginning to see goods and services offered that work better
when sold thorough the internet
There is also the issue with goods and services that consumers have access to
through the internet, but are not available locally
o Offshore betting is a perfect example
o It is very difficult to track what goes on online
o If the government had the capability to do this then the need for a sales tax
would be reduced from all the savings on defense
Finally a quote from an MIT economics professor, “Laws that cannot or will not
be enforced are worse than no laws at all, since they breed contempt for legal
systems.”
o This was originally used in the context of intellectual property
o We find it also applicable here
Argument #2
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Sales taxes are already inherently regressive
The wealthy have been using modern telecommunication technology to escape
taxes by keeping a permanent residence in tax havens such a Vanuatu
The internet changes everything
o Common people have access to internet based businesses
o The government has no control of the businesses that are situated in one of
these tax havens
o Consumers will always have access to any business on the internet
Tax revenue lost from sales tax on the internet is insignificant
o Corporations base their headquarters in tax havens such the Cayman
Islands
o The tax revenue lost here is really significant
o Government has no control over these supposedly international companies
so they go after the people that elect them
Personal income taxes represent 32.4% of revenue, 20.7% in 1964, 4.3% in 1934
Corporate income taxes 10.5%, 15.7% in 1964, 7.4% in 1934
Payroll taxes 7.5%, 5.5% in 1964, 2.7% in 1934
Customs, excises, and sales taxes 19.6%, 30.8% in 1964, 34.9% in 1934
Taxes lost from outsourcing
o Corporations use the internet to gain access to a seemingly infinite supply
of cheap labor
o The jobs that are outsourced represent a significant loss in income taxes
for the government
o Manufacturing Goods
 Income taxes are lost
 Goods can be taxed at the border
o Information Goods and Services
 Income taxes are lost, and even more significant here because
highly skilled jobs are involved
 Goods and services cannot be taxed because the internet
effectively eliminates borders
 Once again it’s nearly impossible to control the flow of
information
o This really represent a far more significant impact that the internet has on
the ability of governments to raise taxes
By: Milovan Pejic