Copyright 2000 The Denver Post Corporation
The
Denver Post
February 15, 2000 Tuesday 2D EDITION
SECTION: DENVER & THE WEST; Pg. B-07
LENGTH: 740 words
HEADLINE:
Cyberspace tax dodge
BYLINE: Paul Krugman,
BODY:
CAMBRIDGE, Mass. - Last week's attacks on the
Internet are an exciting subject, about which I have nothing to say.
But they did make me think about a less exciting but still important
subject: a tax on the Internet. (Apologies to Groucho Marx.) You
see, Internet taxation is one of John McCain's signature issues,
second only to campaign finance reform. And it so happens that
his position is wrong.
Right now, if you buy a book at your
local bookstore, you probably pay sales tax. If you order it from
Amazon.com, you don't. This unequal treatment is largely due to
administrative issues: state and local governments haven't yet
figured out how to collect taxes on catalog shopping, let alone
e-commerce. But there is also a legal impediment: theInternet Tax
Freedom Act of 1998, of which John McCain was a chief sponsor,
imposed a three-year moratorium on Internet taxes. And McCain is the
only presidential contender promising to make that moratorium
permanent.
Why is this a bad idea? A basic principle of taxation is
that different ways of doing the same thing should face more or
less the same tax rates. Suppose that there are two bridges
connecting the suburban community of Sprawlville to Anytown U.S.A.
And suppose that the bridge authority needs to levy tolls to pay
for maintenance, interest on its bonds, etc. Should it collect
tolls on only one bridge? No. Not only is this unfair to those who
have to use that bridge, but it leads to wasted time and money,
because some people will take a longer route to work in order to use
the toll-free bridge. If revenue must be raised, charging the
same toll on both bridges minimizes the associated distortion of
incentives.
The same principle applies to any tax. If I really
prefer roaming the aisles of a physical bookstore to browsing the
Web, but I nonetheless decide to order from Amazon to avoid
paying sales tax, my decision has been distorted. So
why exempt the Internet from the taxes imposed on
the material world?
McCain likes to talk about consumer savings,
exulting in the taxes cybershoppers saved this past Christmas. But
those savings (which, like tolls saved by drivers who go out of their
way to avoid them, are partly offset by hidden costs) are also
lost revenue. The only way to regard them as a net benefit is
to suppose both that the loss in revenue will force governments
to spend less rather than tax other things more and that the
spending forgone is of no value. It is, in short,
the slash-taxes-to-starve-the-bureaucrats theory - which is
precisely the theory McCain rightly derides in his critique of George
W. Bush's tax plan.
McCain also argues that the Internet
deserves special treatment because it is nifty - it's an 'engine of
growth,' cyberspace is the new frontier ('President Jefferson did not
send a revenue agent to ride herd on Lewis and Clark') and all
that. And of course e-business does claim to be special - but
that's what they all say. When I buy from Amazon instead of my
local bookstore, should I feel proud because I am helping settle
the electronic frontier or guilty because I am undermining
an institution that I will miss when it is gone?
Anyway,
conservatives are supposed to be against the idea of 'picking
winners,' a.k.a. industrial policy - that is, having the government
second-guess the market, according some sectors special treatment
because it thinks that they are more equal than others.
McCain is not
alone in his position. Right-wing think tanks like the Heritage
Foundation have blithely brushed aside the normal principles of
taxation and their usual opposition to industrial policy - not to
mention their usual solicitude for states' rights! - when it comes to
the Internet. I have always assumed, however, that this is basically
a fund-raising ploy. Opposing Internet taxes panders both to crude
anti-tax conservatives - who don't really want to live without a
government but can't bring themselves to admit that any tax is
necessary - and to the new money of the cyberelite, which like any
elite thinks that it deserves special treatment.
I'd like to
think that McCain isn't engaged in that kind of pandering. So let's
hope he's just confused.
Paul Krugman writes on economic issues for the
New York Times.
LOAD-DATE: February 15, 2000
