TCS Daily

Sales taxes aren't fair!

By James K. Glassman - March 6, 2000 12:00 AM

You like to think that governments, just like people, can learn from their mistakes. In the Internet economy especially, you like to think that mistakes from the old economy will not be repeated online. That's why it's so discouraging to watch state politicians clamor for new sales taxes online.

Of course these taxes would be bad for the new economy. Of course they would slow the growth of e-commerce. Of course they will hurt online consumers. But what's lost in this fight over online taxes is that sales taxes of all kinds are bad for consumers. In fact, until this Internet squabble began, sales taxes had been thoroughly discredited as an unfair burden that hits the poor harder than any other government program.

A sales tax is a kind of consumption tax, and it's true that we should always tax consumption instead of savings. But an easier, fairer way to institute a consumption tax would be to take annual income and deduct annual savings and investments, then apply the tax rate (both federal and state) to what is left: consumption.

For several years, Rep. Billy Tauzin (R-LA) has been trying to pass a national sales tax to replace the income tax. The idea has gone nowhere, for lots of good reasons. For one, the European version of this idea, the Value Added Tax, or VAT, has proven to be a nightmare of bureaucratic complexity.

Whenever there are new taxes on retail sales, lots of people try to figure out how to avoid them by buying at wholesale or purchasing the goods in another jurisdiction. Then the government has to add new regulations to close the escape hatches, and new requirements on business to help the government collect the money.

On the Net, it would take about five minutes for websites offshore to begin selling tax-free goods to US consumers and about another five minutes after that for a web entrepreneur to create a system for people to gather in cyberspace and buy as wholesalers. Then a new round of regulation would begin and the vicious cycle would begin anew. (If you want to get really depressed, imagine the Internet being regulated by a taxation system developed in France.)

The biggest reason to oppose sales taxes is that they demand the highest percentage of income from the people who make the least. Sales taxes are the exact reverse of income taxes - the less you make, the higher your tax rate. If Bill Gates and a factory worker both want to have a Miller Lite at the end of a long day, they both must pay the same amount of tax. Even though Bill's income is many times that of the factory worker, and his net worth is perhaps a million times as large, the worker gets hit with just as high a tax bill.

Repeal all sales taxes. They're unfair, they hurt consumers and they'll hurt our economy if they're expanded to include cyberspace. Don't believe these politicians who say that you won't have fire and police departments without sales taxes. Only 16% of local government revenues come from sales taxes. At the state level, several governments impose no sales taxes at all and 45 states receive most of their revenue from other sources. So we can do without sales taxes. And we should.

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