I’m either a total optimist or a glutton for punishment. I recently explained the benefits of “tax havens” for the unfriendly readers of the New York Times.
Now I’m defending a different form of tax competition for CNN, another news outlet that leans left. In this case, the topic is whether states can reach beyond their borders for tax revenue.
Here’s some of what I wrote about the so-called Marketplace Fairness Act that was just approved by the Senate and presumably will soon be considered by the House. I start by explaining that the powers of governments should be constrained by borders.
Let’s assume you live in Utah, Hawaii or South Carolina, and you go to Nevada for a vacation. While in Las Vegas, you spend some money in the casinos. Gambling is illegal in the state where you live, so should the cops in your home state be able to track your activities and arrest you for what happened in Nevada? The answer, needless to say, is no. Or at least it should be no. Common sense tells us that state laws should only apply to things that happen inside a state’s borders. But this sensible principle is being tossed out the window by the U.S. Senate, which has approved a proposal that would give states the ability to impose their taxes on out-of-state sellers.
I also explain that this issue isn’t about whether the Internet should be taxed. Indeed, as a fan of the flat tax, I don’t want special favors or special penalties in the tax code. Internet profits and Internet sales should face the same (ideally low) taxes as all other sectors of the economy.
Instead, the fight is really about whether a state government has the right to force out-of-state merchants to act as deputy tax collectors. If you believe that borders should limit the power of governments, the answer is no.
But that rubs politicians the wrong way.
…some governors and state legislators don’t like this system because many states don’t bother imposing any tax on sales to out-of-state consumers. And even if states levied taxes on sales to out-of-state consumers, what about the five states that don’t have any sales tax? Wouldn’t those states become “tax havens” for Internet sales? For these reasons, some politicians fret that the Internet will put competitive pressure on them to keep their sales tax rates from getting too high.
But this is exactly why politicians shouldn’t be allowed to tax beyond their borders. We want tax competition in order to limit the greed of the political class.
States with no payroll income taxes, such as Nevada, Florida, Tennessee, Texas and New Hampshire, help restrain the greed of politicians in states that have punitive income tax systems, such as California, Illinois, New York and Massachusetts. And if politicians in the high-tax states refuse to adjust their bad tax policies, then people should have the freedom to escape and earn income in other states. The same principle applies to sales taxes. If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate.
So what’s the bottom line?
Politicians can choose to maintain uncompetitive tax systems, of course, but they also should be prepared to accept the consequences. I don’t think California and Illinois should try to become the France and Greece of America, but that’s something for the voters of those states to figure out for themselves. In any event, they shouldn’t have the right to force out-of-state sellers to act as deputy tax collection officials if they decide to impose bad tax policy. …To be blunt, a sales tax cartel is bad news for tax policy and bad news for privacy. Let’s limit the power of state governments so they can only screw up things inside their own borders.
Let’s close on a light note. Here’s a clever cartoon from Nate Beeler.
I agree with the cartoon’s message, at least to the extent that onerous taxes can be very deadly to an industry. But, as noted above, I don’t want special tax-free status for the Internet.
So the ideal cartoon would show lots of surfers from all industries exercising the freedom to pick the waves with the smallest and least destructive sharks. Some might even call that federalism.
[…] neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax […]
[…] observers see this issue as a fight over taxing the Internet, taxing online sales, or a battle between Main Street merchants and Silicon Valley tech firms. Those are all parts of […]
[…] observers see this issue as a fight over taxing the Internet, taxing online sales, or a battle between Main Street merchants and Silicon Valley tech firms. Those are all parts of […]
[…] tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) […]
[…] neither of his points address my concern that extraterritorial tax powers give too much power to governments and undermine tax […]
[…] banks be required to enforce bad U.S. tax law?), and it’s why I don’t like the so-called Marketplace Fairness Act (why should merchants in one state be required to enforce the sales taxes of other […]
[…] be required to enforce bad U.S. tax law?), and it’s why I don’t like the so-called Marketplace Fairness Act (why should merchants in one state be required to enforce the sales taxes of other […]
[…] and local governments should not be allowed to impose laws outside their borders. That’s why I’m opposed to the so-called Marketplace Fairness Act. And they shouldn’t seek federal handouts to […]
[…] Speaking of which, proponents of the so-called Marketplace Fairness Act are using a destination-based scheme in hopes of creating a nationwide sales tax cartel so that […]
[…] tax competition. Some state governments with high sales taxes in the United States are pushing a destination-based system for sales taxes because they want to hinder consumers from buying goods and services from states with low (or no) […]
[…] it’s worth noting that the so-called Marketplace Fairness Act, which is designed to undermine tax competition and create a sales tax cartel among American […]
[…] is why politicians in many states (especially those with punitive sales taxes) are pushing for the so-called Marketplace Fairness Act in hopes of forcing merchants in states like Delaware to become deputy tax collectors for states […]
[…] is why politicians in many states (especially those with punitive sales taxes) are pushing for the so-called Marketplace Fairness Act in hopes of forcing merchants in states like Delaware to become deputy tax collectors for states […]
[…] is why politicians in many states (especially those with punitive sales taxes) are pushing for the so-called Marketplace Fairness Act in hopes of forcing merchants in states like Delaware to become deputy tax collectors for states […]
[…] Another wonky point is that the effort by states to tax Internet sales is actually an attempt to implement and enforce the kind of “destination-based” tax regime […]
[…] Another wonky point is that the effort by states to tax Internet sales is actually an attempt to implement and enforce the kind of “destination-based” tax […]
[…] as the statists are smart to push for a nationwide sales tax cartel. And just as the statists are wise to push for an end to international tax […]
[…] I want states to have the lowest-possible rate for the sales tax, but with all goods and services treated equally. Alabama definitely fails on the […]
both senators from my state voted for this bogus legislation… one democrat one republican… bipartisanship.. and at a time when creating jobs nationwide should be a top priority… these ass clowns are trying to make it more difficult for small business people to survive and grow… as long as democrats and republicans embrace profligate spending at all levels of government the pressure to come up with insane new tax schemes will continue… next election cycle… if you really want change… close your eyes… hold your nose… and vote for the libertarian… yeah I know…. creepy………..
Years ago while in California I had the misfortune of have the sales tax people report to me. People have no idea of how complicated sales tax already is to calculate. For example, if I have a business here in Souther Utah, and sell a $25 item to a person in New York. Does Utah really care if I collect the sales tax? They would only care if New York paid they to collect such taxes, even so is it worth the time of the state of Utah to come visit me, how about the state of New York coming to visit. Imagine the cost of New York visiting every business in every county and by county of ship to location. Just to keep track of this will bankrupt every small business in the United States. Companies like a Wal-mart already do this because they have a location in every state and every body wants their money from such large companies. The only way to make this work it to have a national sales tax rate audited and collected by the federal government. That sure doesn’t sound good, more taxes mandated by and collected by the Federal Government. And of course we all know that the Federal Government would never want their cut of this tax collection process and would never want to increase taxes. And this it just the tip of the iceberg
of an internet sales tax
The cost of having internet sales tax would cost more to collect than the amount collected. So why have internet taxes at all. Big companies (Wal-mart, Best Buy, Sears, and any national chain that has an operation in most states) Already pay and always have paid (even prior to the internet) sales tax based on ship to locations. The net impact of internet sales tax is to make sure that small business increase their costs without large business increasing their costs. Yea, lets crush small business so big business can do better.
I am not a liberal, I am not a conservative, I am not a libertarian, I am a pragmatist. The glass is not have full or have empty, the glass is twice as big as it needs to be. The first rule is no matter something sounds, if it won’t work don’t do it. Understand stand sales tax and you will understand is you support internet sales tax you need to have your head examined.
Sorry for the rant.