News Center

September 7th, 2012

Taxing Fairness

By Nathan Tucker

Republican governors such as Chris Christie (NJ), Terry Branstad (IA), and Paul LePage (ME) have voiced their support for a bi-partisan effort on Capital Hill to pass the Marketplace Fairness Act.  While claiming that this internet sales tax is necessary to close a “loophole,” members of both parties have shown their eagerness to manipulate the tax code in order to achieve “soft socialism.”

Since the Supreme Court’s decision in Quill Corp. v. North Dakota, states have been unable to force “remote sellers” (i.e., online and catalogue retailers who have no presence within a state’s borders) to collect their sales tax.  In the absence of congressional authority to the contrary, the Court held that the imposition of a sales tax on such companies was an unconstitutional trade barrier.

The Marketplace Fairness Act is the latest attempt to gain congressional authorization for states to commandeer remote sellers as their tax collectors.  It isn’t a new tax, but merely a change in how the tax is collected.  The sales tax is still currently imposed on goods purchased online, but the onus is on the individual consumer to pay it directly to the state rather than through the retailer.

To the surprise of no one, consumers are loath to serve as their own tax masters, resulting in few internet sales taxes actually being collected.  Iowa, for instance, estimates that it loses $27 million a year in lost revenue, and Maryland reports that it loses $184 million annually.  Because of this, warns Senator Enzi (WY), “states will be forced to raise other taxes—such as income or property taxes—to offset the growing loss of sales tax revenue.”

Most Republicans, however, are reluctant to acknowledge that this bill raises revenue to avoid even the impression that it might be a new tax.  Instead, they talk about how the legislation “would level the playing field and fairly apply sales tax laws across every type of retailer.”  As Governor Branstad put it, “The application of sales taxes only to ‘brick-and-mortar’ retailers, many of which are small businesses, puts those very entities at a competitive disadvantage.”

They are more right than they would like—the imposition of an unfair sales tax system hinders economic productivity, and hence employment and wages, by manipulating the free market.  Unfortunately, these same politicians who push the bill in the name of fairness have no qualms with creating unfairness in the form of tax subsidies, rebates, deductions, credits, exemptions, etc.

For instance, the legislation itself provides a “small seller” exemption to online businesses that make less than $500,000, an exemption not shared by in-state retailers.  The legislation also incorporates the Streamlined Sales Tax which includes fifteen pages of sales tax exemptions on such things as animal lab tests, solar panels, newspapers, and the sale of prosthetic devices.

There is nothing wrong with requiring both online and brick-and-mortar retailers to collect sales taxes, so long as the costs of compliance are roughly equal.  The government should work to level the playing field by eliminating all competitive advantages, intended or inadvertent, caused by government action.

But there is everything wrong with politicians acting as crusaders on behalf of the businesses within their respective states.   Unfortunately, there are too many politicians today on both sides of the aisle that engage in the soft socialism of picking winners and losers in the free market by exploiting the tax code.  They are Marx-lite—seeking the same goal of “fairness” through government planning but using manipulation rather than force, the lure of money rather than coercion.

In the end, however, all this political cronyism cloaked as fairness results in unfairness for everyone.  Iowa consumers, for instance, pay $2.8 billion in sales taxes in order to give away $2.4 billion in exemptions for government favored behavior.  They, and the economy, would be better off if all exemptions were eliminated and the tax was cut in half.

Additionally, by using the tax code to redistribute wealth to subsidize the inefficient rather than the efficient, total productivity and, consequently, wages and jobs are reduced.  The economy slows rather than grows, resulting in a net loss for everyone.

If politicians were really concerned about an “equitable tax policy that supports job creation and increasing family incomes,” they would get out of the tax manipulation business altogether.  Eliminate deductions, cut taxes in half, put that money back in the economy, and let the free market create innovations, wages, and jobs.

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About the Author

Nathan W. Tucker
Nathan W. Tucker is a Davenport attorney and author of We The People: The Only Cure to Judicial Activism. He can be contacted at [email protected]

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