Regressivity of taxing internet sales

North Carolina was trying to tax Amazon and other internet vendors on the nexus of commissions they paid local people who linked to the out-of-State company that made sales from those links. Amazon and Overstock are cancelling those commission deals and proclaiming we can’t touch them. That preposterous “no nexus” dodge, based on the legislative power of the Supreme Court, is a topic for another day, maybe, but the claim that taxing internet sales is regressive is worth a moment. That claim is often made without analysis, as in http://forums.slickdeals.net/showthread.php?t=794298 and http://www.bluenc.com/amazon-sucks (“new or added sales taxes are regressive”).

Well, sales taxes in general are regressive. Taxing salt, for example (see http://en.wikipedia.org/wiki/Salt_Satyagraha), is way on up there. But not all sales taxes are regressive: what is a luxury tax other than a sales tax?

About internet sales, I'm not buying the regressivity argument. The kinds of things I buy via the internet are not necessities. Those things have a high value to weight ratio, not the characteristic of most necessities. Food, for example, is a necessity, but food ordered over the internet will tend toward expensive, luxury items. (Prescription drugs are a necessity and cut the other way, but they must make up a small fraction of internet sales.)

There’s some interesting data from 2008 at http://blogs.zdnet.com/ITFacts/?p=14001, which says that of folks who had bought online then, 19 percent had incomes over $100k, while 13 percent had incomes below $25k; of folks who had not bought online then, 7 percent had incomes over $100k, while 19 percent had incomes below $25k.

I don’t know enough about regressivity to make much of a conclusion. Amazon probably has a lot of data – ZIP codes would tell a lot – about the demographics of its customers, but I’m not holding my breath for disclosure.

Anyway, if you don't have a fixed address, computer access (OK, the library can supply that), internet literacy, and a credit card, I don't see how you can buy stuff over the internet.

Taxing services

Every country seems to making its own decisions on what items or services bear a Value Added Tax.

Europe “allowed the application of a reduced VAT rate to certain specified labour-intensive services, but only for an experimental period of three years so as to test its impact [extended time and time again, now until 2010 at least], in terms of job creation and in combating the 'black' economy.

“The list of categories to which Member States were authorised to apply the reduced rates were:

• The repairing of:
• bicycles
• shoes and leather goods
• clothing and household linen (including mending and alteration)
• Renovation and repairing of private dwellings, excluding materials which form a significant part of the value of the supply
• Window cleaning and cleaning in private households
• Domestic care services (e.g. home help and care of the young, elderly, sick or disabled)
• Hairdressing.”

http://ec.europa.eu/taxation_customs/taxation/vat/how_vat_works/labour_intensive_services/index_en.htm

That’s just an example.

Now North Carolina faces an analogous issue as the Legislature considers imposing tax on more services. The issue of which services to tax seems like just what legislative branches are called to do: log rolling and politics about issues that people can understand. I think it’s fine to consider every service on its own merits (or connections or whatever), and for States to come up with unique sets of services to tax. See http://www.taxadmin.org/FTA/pub/services/services.html (the spreadsheet shows the variety).

Since everyone can have an opinion:

Start with tattooing, I’d say, on the hunch that tattooed folks don’t vote and other folks wouldn’t mind. After tattooing, I nominate legal services. It’s OK to discourage writing fine print and designing golden parachutes. But legal services seem to off the table here:

“While about 50 new services would be taxed, professional services by attorneys and accountants would not be.

“Sen. Dan Clodfelter, co-chairman of the Senate finance committee, said these professional services were excluded because most of their costs are tied up in health care and real estate, and the higher taxes would raise these industries' costs substantially.”

http://www.charlotteobserver.com/local/story/790665.html

I don’t follow that argument. The professionals don’t pay the tax, the user does. Now maybe there is an economic argument that the professionals bear the burden, but I haven’t seen it. By analogy, it would seem a new and fresh idea to determine sales taxes on the basis of whether the seller’s gross margins are close to its net margins (grocery stores have lots of assets tied up in real estate and inventory, but we tax food more lightly to fight regressivity and to enable survival), and I don’t see why services should be different. Maybe I’m missing something.

Which services to tax is an inexhaustible topic. I tend to oppose taxing tuxedo rentals, which do not seem like a luxury. That tax would hit every high school kid for whom the prom is the biggest event so far. I'd tax 'em if they rent a limo, because that seems like a luxury, but a tuxedo is a necessity for that rite of passage. Wealthy folks own tuxedos, poor folks rent. Still, the purchaser of a tuxedo pays a sales tax.

And you soon get into the capillaries of policy: are massages a luxury that should be taxed, or therapy that should be exempt? Our should we try to distinguish? And so on.

VAT

A tax on value added makes sense to me.

The other developed countries use it, and they give it back at the border to help exporting.

It's simpler than a lot of taxes (well, the income tax, for example).

It's regressive, yes. We could balance it out with other measures. Or, in Theoryland, we could avoid the regressivity (while creating other problems) with a single-factor unitary income tax using sales to source income. See, by analogy, http://www.taxfoundation.org/blog/show/505.html: "[T]he Commerce Clause requires a state to fairly apportion income. Does single-sales factor apportionment meet this requirement? The Supreme Court answered ‘yes’ in the case of Moorman Manufacturing Company v. Bair."

Death or taxes

The American Republic may survive without new taxes, but I doubt it. Without increases in taxes, I think we can stave off default, but, or so, I'm thinking we're about to experience hyperinflation, which tends to bring death to republics.

So here goes.