I went online to [cough…] Tires, selected the tires, ordered and paid for them, and arranged for them to be shipped to and installed at the local [cough…] Tires located about 2 miles from my house. The nice thing about my order? I saved $41.25 in sales tax – 8.25% – by ordering online.
For Christmas, Tenacious G acknowledged my inner guy-ness and let me get a 46" Panasonic Viera plasma TV, and a new Denon receiver (we needed something that switched HDMI, of course!) – all in all, about a $2K purchase, with a savings of $165.00 in tax that Amazon didn’t want to collect. At the rate of sales tax that my city collects – 1.75% of the 8.25% total – that’s $43.75 out of the city budget.
I’m about to make myself professionally unpopular. I work in online technology, which is driven by two engines – advertising and commerce.
One of those engines is becoming less effective (advertising) and the other is getting a subsidy from my kid’s school, which makes me unhappy. And ought to make you unhappy as well.
Let’s toss some numbers around.
The best estimates I can find for online retail in 2008 range from $130 billion to $175 billion. The Department of Commerce estimates it at approximately $130 billion, or 4% of all retail sales (up from 2.2% in 2004). Per the Census data for 2002, California represented about 11.6% of the retail sales for the nation, so figure that California had about 11.6% of an estimated $155.5 billion in total online retail sales for $18 billion in online retail sales.
The best estimates I can find suggest that less than 10% of online sales collect sales tax, so assume 90% are not taxed – for untaxed online retail sales of $16.2 billion.
At 8.25% – the base rate statewide (many local jurisdictions have higher rates) – we’re looking at $1.34 billion dollars in taxes that were avoided because people like me made economically rational choices.
Or to look at it another way, the Best Buy down the street from me would have had to sell the same TV and receiver for 9% less than Amazon to match their pricing. Meaning that not only does my kids school lose out on the money that might have been collected, but my neighbors high school age daughter can’t get a job because business at Best Buy is too slow.
To put this into perspective, the structural deficit in the California budget is now stated to be about $14.5 billion/year. Simply collecting the taxes on things people already buy would cover almost 10% of that – not chump change.
As a practitioner in the online space, I think it’s time to level the playing field as well. For a long time, I’ve argued that the ‘hidden subsidy’ makes online merchants lazy and prevents real competition between online and offline merchants. It makes a lot of online merchandising simply regulatory arbitrage.
I’ll add some thoughts on the California finance crisis and then the national stimulus bill later this week.
There is the [cough . . .] use tax that [cough . . .] everyone pays if sales tax isn’t collected on a purchase. I once asked a revenuer who pays the use tax and I was told politicians who think they might get caught, and (cough . . .) people of high moral character.
I think you’re right though. Not to mention that this set-up is probably regressive.
A fellow named Kurt Hauser conducted a study about fifteen years ago examining the “tax yield” at various levels of taxation, and found that the yield was more or less constant regardless of the tax rate (around 20%). His study was of federal taxes, but the same probably applies in some fashion to state taxes. However, what does change with the tax rate is GDP, so at a constant tax yield the higher the GDP the more taxes are collected.
James Buchanan used to say that the thing most people omit from their consideration of tax policy is the way the market as a whole reacts to taxes… or in other words how the context itself is impacted. They assume the context won’t change much. Obviously if you increase prices the demand will generally decline. In his most recent book he argues for the “generality principle” by proposing a flat tax with a demogrant. There would be an optimal resolution of the tradeoff between the tax rate and GDP that yields maximum revenue, but all things considered that optimization would be more efficient under a flat tax/demogrant structure than under progressive taxation with redistributional entitlements. Buchanan gets down on all fours with the numbers, in case anyone wants to check it out.
If you’re feeling guilty, you could pay the sales tax on your CA tax form. Legally, you’re supposed to pay “use tax” on this sort of thing, although I suspect about 0.00001% of transactions ever pay it.
How about getting rid of the “structural deficit” by getting rid of a lot of the useless bits of the “structure”?
If Texas can have a decent state government that isn’t run by bureaucrat unions, I can’t see why we can’t.
It’s not a “hidden subsidy”, it’s an artifact of the limitations of the state’s right to tax transactions that take place “out of state”.
The law, as it’s written, does not deal well with activities that take place in two non-overlapping jurisdictions at once. Because sales taxes are remitted by sellers (because there’s relatively fewer than them, and because tax fraud on non-tracked, self-reported purchases approaches 100% asymptotically), commercial transactions are typically considered to have happened in the jurisdiction where the seller is.
You don’t WANT your state to attempt to tax commercial transactions that don’t take place in that state… not unless you want to owe 500% tax on anything you buy, due to the Texas gov’t, better not come visit if you ain’t paid up. And also to the Cali government. And to Vermont. And NH, and Nevada, and… you get the idea.
Theoretically all states could act in concert to synchronize taxes and collect them in common. I have two words to respond to that: “Delaware corporation”. There’s a decent amount of money to be had, being the jurisdiction with lax rules among other jurisdictions with tight rules. If most states went in on it, some states would cheat (or just drag their butt and not join up), and those states would get the online business. At least now it’s equally disorganized, heh.
It’s like copyright enforcement. It’s actually quite hard, and expensive as hell, to take a copyright case to court; it’s impossible to sue for casual infringements profitably, despite huge penalties for infringement, because practically nobody who’s infringing your copyright has enough money to make going to federal court worth your while. It’s a problem caused by the basic construction of our political system, most fixes would be significantly worse than the problem is in the first place, and it’s not big enough of a problem to get most people worked up over it, so nothing’s going to happen anyway. Cost of living in a system designed by 18th century farmers; deal.
And, er, in most jurisdictions school taxes are generally property taxes anyway, right?
_”Obviously if you increase prices the demand will generally decline.”_
Not just that- the more progressive the tax scheme the greater the fall off of taxes collected.
The donkey in the room is that the wealthy are far better equipped to shelter their income than the average joe. Or just not pay taxes (ahem, Mr Daschle).
The irony of this should be the current Republican rallying cry, if there was a party worth rallying around anyway.
Technically, interstate transactions are not problematic because the transaction occurs all or partially out of state. I can buy the same book from Amazon and Barnes & Noble, the book may be shipped to me from the same warehouse, using the same shipper. One will assess a sales tax. This is because one retailer has a physical presence in the state sufficient to give the state power to compel it to assess and remit a tax.
Since the problem is the power of the government over the retailer, there are two established solutions: interstate compacts and/or federal laws. E.g., “International Fuel Tax Agreement.”:http://en.wikipedia.org/wiki/International_Fuel_Tax_Agreement
States are getting more and more aggressive about collecting out of state sales tax. I don’t think people realize the incredible strain this puts on small businesses. Right now my company has to deal with 4 different state sales taxes, and every COUNTY in California has a different rate we have to assess. That means tracking down which county each town is in to figure the correct tax rate on every CA order. This is literally hundreds of hours worth of work when you add it all up and include the inevitable audits. Then you toss in tax exemptions, resellers… it’s messy. And its a hidden premium.
The more states that get in on this, the more expensive interstate commerce is going to become far over and above the tax itself.
Mark, do you have some empirical evidence (or can you explain just what you meant by)
The naive reading that increasing marginal rates reduces total tax collection is not correct, and probably not what you meant.
Mark B, if keeping track of multiple state and local taxes is difficult, then you would love a federal or interstate compact that did the work for you. They might make it easy, too easy to some.
Sorry, I didn’t clarify that. I didn’t mean that total dollars wouldn’t increase, they would (to some degree). What i meant was the higher the tax burden the more income will be protected, which means the wealthy will end up paying more taxes, but not the full amount you might expect.
IE- if there was only one tax payer with 1 trillion dollars of income, and he was paying 50% presently, you wouldn’t be able to tax him at 100% and expect to take in the full trillion. He’s going to move that money off shore, hire a legion of accountants, or just plain cheat to keep some of his income. Those with higher levels of disposable income can do this much more readily than those with less. This is why no tax increase ends up delivering the revenue its expected to in projections, dollar for dollar.
Overall, the Laffer curve indicates that there is a diminishing returns problem with taxation. The direction we are headed now, less and less people are paying the majority of the taxes. But that can only go so far and meet the expected intake, particularly if economic growth is stifled. Which inevitably means the middle and upper middle class are tapped to make up the difference. That is why we should all be extremely skeptical of promises to ‘only’ tax the rich. The rich are very good at not being taxed, which is one of the reasons they are rich. I think the current Obama appointments show this pretty well, and those are only the people outright cheating as opposed to using legal loopholes or just plain getting money out of the country.
First, you are likely in violation of California law by not reporting and paying the sales tax yourself (generally called a “use tax”). California should not complain about Amazon, if it is their own citizens that are not paying the tax.
Second, there is a constitutional restriction on California taxing Amazon. The Constitution limits the ability of individual states to tax interstate commerce. In order to tax an out of state business, California must establish an nexus. The Supreme Court has stated that this means a physical presence in the state (not including US Mail or common carriers).
What you are suggesting is unconstitutional. This does not mean states will not try and push the boundaries of the Constitution, as it is politically beneficial to tax out of state resident, as opposed to auditing their own residents.
_What you are suggesting is unconstitutional._
I think that is most certainly not true. Bills for taxation have been introduced to Congress. Congress certainly has the power to tax interstate commerce. Also, states are free to enter into interstate compacts under Art. I, Section 10 of the Constitution. The SCOTUS has held that a “multi-state tax compact”:http://www.oyez.org/cases/1970-1979/1977/1977_76_635/ to coordinate taxation of multi-state businesses is Constitutional.
Right, it’s -possible- that states will enter such an agreement. It’s merely unlikely that all of them will, as there’s a considerable advantage in being the odd man out (and the more states that sign on, the more the benefits will accrue to the exceptions).
And, of course, the federal government can tax interstate commerce. They just don’t care; they don’t tax sales to start with.
California can’t legislate a tax on sales made out of California -and enforce it on the seller-. Nominally they could enforce it on the buyer – that’s what the use tax is – but in reality they can’t enforce it, and any attempt to enforce it generally would require such onerous record-keeping that it would be easier to simply massacre the entire state government and start over. In the real world, there is no method by which California, or any other state, could even pretend to make a use tax compulsory.
AL is perfectly free to pay what taxes he feels are appropriate on his online purchases, or just remit the money to the school of his choice outside the taxation system; naturally he isn’t going to do that, and neither would I. Or, rather, were we to do so, it would be an act of charity, not one of our duties as responsible citizens.
It does make me unhappy. Online commerce has enough advantages over bricks and mortar retailers without this unreasonable accidental subsidy. I avoid sales tax by buying online when I’m buying a big-ticket item, because I’m not into paying more money when I can avoid it, but the internet’s bizarre sales tax haven status needs to end. I acknowledge that my selfish behavior, rational to me, contributes to a tragedy of the commons.
The trouble with the Laffer curve is that conservatives seem to assume that the peak in revenue is always to the left (i.e., below) the current rate of taxation, whatever that might be. At least, they assume that for the purposes of arguing pro that politically difficult proposition (cough!), a tax cut.
Empirical evidence does not support this, certainly not at the current rates of income taxation.
I do agree, however, that when tax rates are high, even if the revenue increases marginally, it doesn’t increase as much as might be predicted naively, because those who are able will try harder to shelter their income, and those who are able and willing will also underpay. (I am sympathetic in this one regard to Geithner, whose argument that he was misled by TurboTax charms me: the idea that he did his own taxes compensates for a lot. But not to Daschle.) Some real enforcement against major tax cheats, by which I do not mean Daschle but, for example, the absurd and unlawful tax shelters established by a number of institutions, would be welcome. The government botched most of that case, though, largely because they were unwilling to realize that the rot was institutional and not the act of rogue employees.
I tend to agree with that. I agree conservatives oversell the likelihood of the tax cuts increasing revenues in our current tax neighborhood. Back when marginal rates topped out over 70%, it made more sense (the big chunks of taxation are gained at the top of the pyramid, it doesnt take many of the top earners changing their behavior to have a big impact on receipts).
That being said- i believe the correct conservative argument is that lower taxes do stimulate more economic _growth_ in the economy than any combination of tax and spend ever could (the leaky bucket problem) and that provides a whole range of social good (jobs, charity) that aren’t usually considered on the balance sheet when this discussion occurs.
Once government provides the things it is very good at (defense, bridges and roads, law enforcement etc) the level of government spending rapidly produces diminishing returns to society (think of what the dollars being so offhandedly bandied about would mean in the private sector, or via non-profits). There is a curve between the things provided by public vs private spending as well.