The Internet is currently our best example of the free market at work. Since the government has not been able to capture the Internet under its thumb, the Net illustrates how well the market really functions when the government stays out of the way.
But have no fear. Control freak politicians never rest, and a few of the more dedicated ones are working relentlessly to slap chains on the world’s most unfettered market. Of course, no exercise in the destruction of free markets would be complete without a rhetorical flourish of socialism’s ostensible raison d’etre: fairness. Yes, something must be done to stop the free flow of information and commerce that is the Internet because it’s not FAIR.
The Marketplace Fairness Act is being pushed by three US senators, Dick Durbin, an Illinois Democrat, Mike Enzi, a Wyoming Republican, and Lamar Alexander, a Tennessee Republican. What is the injustice that the Marketplace Fairness Act addresses? Under current US law, states are prohibited from forcing Internet retailers who have no physical presence within their borders to collect sales tax on Internet transactions. This policy gives Internet retailers an advantage over traditional brick-and-mortar retailers who must tack, in some cases, up to 10% onto transactions due to sales tax.
While it is obvious that on-line retailers do have a tax advantage in this particular area, politicians sure have a perverted sense of “fairness.” After all, taxes are a creation of the government. Not all states impose sales taxes and sales tax rates vary among the states and sometimes even on different items within a particular state. So this has nothing to do with the market, but everything to do with government interventions in the market. If politicians were truly interested in fairness, they would eliminate coercive taxation from the marketplace altogether. Granted, US Senators have no power over state sales taxes (yet), but the Marketplace Fairness Act would make these taxes that much more inescapable. For Durbin, Enzi, and Alexander, the definition of fairness means that the iron fist of the government should crush all of us equally.
By giving state governments the power to tax Internet retailers, the Marketplace Fairness Act further undermines our already moribund system of federalism. One of the key components of federalism is competition between the states. The idea is that the better the state, the more attractive it will be to individuals and businesses. Folks have the ability to “vote with their feet” for the system of government and level of freedom that they prefer. Conceivably, if on-line retailers were capturing sales from brick-and-mortar retailers due to sales taxes, the brick-and-mortar retailers would pressure local officials to lower their tax rates to allow them to be more competitive or, if possible, move to states with lower tax rates. We see this happening all the time when consumers go across state lines to buy products that are cheaper in an adjacent state due to lower taxes there. The Internet represents another competitor for state governments in regard to commerce and taxes. Unfortunately, if there is one thing politicians won’t tolerate, it’s competition.
At the state level, the effort to tax Internet commerce is being led by Alexander’s fellow Volunteer, Tennessee Governor Bill Haslam. Haslam claims that the state of Tennessee is losing between $300 and $500 million a year on untaxed Internet sales. Haslam says, “it’s not going to begin eroding the state’s tax base; it already is. Something has to happen nationally…It has to be addressed on a national level or we’re going to keep playing these kinds of move-around games.” What’s next, Governor Haslam? Would you support restrictions on individuals and businesses physically moving from higher tax jurisdictions such as California to lower tax jurisdictions such as Tennessee? Isn’t that a “move-around game” as well?
In addition, Haslam’s estimate of $300 to $500 million in lost tax revenue is problematic. If folks are forced to pay more for their purchases on the Internet, they will have less money to spend on other purchases. This means that they might not buy as much. Thus, tax revenues may drop in other areas. While tax-and-spend politicians like Haslam are always looking for ways to tighten the onerous net of taxation, they ignore the reality that the more burdensome the tax load becomes the less money they actually collect. Meanwhile, higher taxes further stifle and suffocate the economy. As the great Austrian economist Ludwig von Mises said, “capitalism breathes through those [tax] loopholes”.
Likewise, many brick-and-mortar retailers may be surprised to find that taxing their Internet counterparts may not necessarily result in increased sales in their own stores. Again, higher taxes mean that consumers have less money to spend on other items. In some instances, consumers will pay higher prices for certain items, in other cases they will simply do without, wait for bargains, etc. Thus, higher revenues for all brick-and-mortar stores are not a guaranteed outcome of the Marketplace Fairness Act. Brick-and-mortar retailers should also realize that the Internet offers consumers more convenience and more choices than traditional shopping does. Put simply, the game has changed, and this controversy about taxes is just one aspect of this evolution.
Advocating higher taxes, even on your competition, ends up hurting everyone. But the people that are hurt the most are consumers, everyday working families. The Marketplace Fairness Act will end up forcing consumers to pay higher prices for the goods they desire. It will limit consumer choice. As with all tax programs, it will transfer resources from the productive sector of the economy to the parasitic sector, thereby inhibiting capital formation and investment. It will put shackles on one of the economy’s fastest growing sectors, Internet commerce.
As the debt crisis caused by the spendthrift Congress intensifies, Congress will look for more ways to extract tax dollars from Americans. The Marketplace Fairness Act is particularly terrifying because Congress is insinuating itself into an area that has traditionally been left to state governments. Will a national retail sales tax be next? What about a value added tax? Or a “wealth” (property) tax? The Marketplace Fairness Act may be the camel pushing its nose under our tent.
Don’t be fooled by its title, the Marketplace Fairness Act is anything but fair.