If there is anything that gets demagogic politicians and pundits riled up, it’s the closing of tax loopholes, and the tax-hike demagogues might just be getting one of their wishes come December.
Bloomberg reports that most online consumers will pay sales taxes in some shape or form in the next few months.
Currently, consumers pay taxes on goods purchased straight from Amazon, but they can avoid paying taxes on goods if they purchase them through Amazon’s third-party merchants. By the start of December this could all change, as several merchants are expected to start collecting taxes in return for partial amnesty from alleged back taxes.
No stranger to inciting controversy, President Donald Trump has even jumped into the fray by stating in an earlier tweetthat Amazon has brought “great damage to tax paying retailers.”
Those in favor of closing sales-tax loopholes contend that retailers such as Amazon are supposedly responsible for tax-base erosion and other fiscal imbalances in the states that they operate in. Although often well-intentioned, calls for closing tax loopholes miss the mark. The underlying problems that are overlooked in this discussion are the burdensome tax policies and profligate spending programs already present in many states.
Unbeknownst to many pro-tax politicians, tax hikes not only hurt the businesses themselves through lagging production, they also hurt consumers as companies pass the costs onto consumers via higher prices on goods and services.
Most of the states that have clamored for the closing of loopholes are characterized by their already byzantine tax systems and unsustainable spending programs. Art Laffer of Laffer Curve fame has demonstrated that raising taxes does not necessarily lead to increasing tax revenue.
With labor and capital being more mobile than ever, raising taxes or even adding more forms of taxation can have a contractionary effect on state budgets and economies. In effect, many businesses must seek greener pastures in low-tax jurisdictions, thus denying their home state potential tax revenue and possibly exacerbating budget deficits.
This type of dynamic ensures tax competition among states, which is optimal for taxpayers. Pro-tax politicians obviously despise tax competition because it creates a “race to the bottom” of sorts that incentivizes state governments to keep taxes low. In turn, this creates a climate of fiscal discipline where states must respect the ability of taxpayers to shift economic activity to friendlier tax districts.
In the same vein, overspending does not give state governments a blank check to raise taxes wherever they want. Most of the spending problems that certain states face is due to the government’s overreach in many sectors of the economy such as education, healthcare, and transportation. Instead, these sectors would be better served through privatization and other cost-cutting measures.
States already possess the power to tax internet sales, on firms actually present in their states. Given the dismal track record of the current federal tax system, a federal solution to sales tax issues will only further complicate matters.
A much more reasonable way to tackle this problem is for state governments to implement territorial-oriented systems of taxation. As the economist Dan Mitchell aptly noted, there should be a connection between taxes and government services. For example, a Virginia-based business should be paying Virginia taxes. Said business uses infrastructure, security, and other public services provided by the Virginia government; thus it makes sense for them to pay a reasonable tax rate for the public services they enjoy.
All in all, closing tax loopholes for out-of-state retailers that operate online would hurt businesses, consumers, and taxpayers alike. Just like the federal government, state governments would be best served by a simplified tax system with a broader tax base. At the end of the day, the taxpayer is a customer, and he has every right to take his business elsewhere if he feels that his government is not providing quality services and friendly tax policies.
