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Grover Norquist Is Right to Oppose Internet Sales Taxes

Sales taxes — of whatever stripe — fall harder on poorer than richer customers. And they squeeze smaller retailers more than big ones.

When I visited my brother in London a few years back, I toted a suitcase packed with tennis balls. I paid New York City’s 8½ percent sales tax to help my brother’s tennis-mad family avoid the UK’s 20 percent value-added tax, or VAT, Europe’s big brother to our sales tax.

In the last 40 years, mostly at Republican initiative, many U.S. states and localities have dramatically increased sales taxes at the expense of property taxes. Only four states, Delaware, New Hampshire, Oregon and Montana, have no sales taxes; southern states generally charge the most.  Arizona tops out with a combined state and local rates up to 13.7 percent.

Europe’s VAT, introduced by France in 1954, is a national tax. European Union “tax harmonization” rules require member countries to charge a minimum of 15 percent; most EU members charge over 20 percent. Hungary wins with 27 percent.

Sales taxes are simply terrible taxes.

So far the United States has resisted a national VAT, despite support from both right (businessman Steve Forbes) and left (economist Robert Frank). That may change with the expansion of sales taxes on Internet sales.

The U.S. Senate has just passed the Marketplace Fairness Act, enabling state governments to make Internet companies like Amazon collect sales taxes from their customers — just as local businesses have long done. Is this truly a victory for tax fairness? While Grover Norquist, the Heritage Foundation, and other extreme anti-tax ideologues continue to oppose the measure, many Republicans are waffling.

Many good liberals positively jump with enthusiasm.

“It is nothing short of amazing to me that this proposal is controversial,” writes New York Times business columnist Floyd Norris writes. “What this would do is make tax compliance easier and provide badly needed revenue — from their own citizens — for struggling states and cities. It would also mean that local merchants — the ones who pay property taxes — would find it a little easier to be competitive with Internet merchants.”

Alas, Floyd Norris misses the big picture: Sales taxes are simply terrible taxes. As Europe’s gasping economy sinks into another recession, I think there’s good case that the VAT aggravates the damage of misguided austerity policies.

Europe’s national ‘value added tax’ may be aggravating the damage of misguided austerity policies.

As most of us know, sales taxes are “regressive.” That is, when sales taxes are “passed on,” they fall harder on poorer customers than on richer ones. That’s why many states exempt food and medicine, as does New York, except for restaurant food. But sales taxes are also “passed back” onto retailers and service providers. In fact, sales taxes are shared between customers and retailers in inverse proportion to their ability to shop or sell elsewhere.

It’s the “passed back” portion of sales taxes that do the most damage, because — unlike profit taxes — they take a bite from gross revenues before expenses. Moreover, a uniform tax rate does not mean uniform impact. As Anatole France wrote, “The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.” Sales (and VAT) taxes fall hardest on small, labor-intensive retailers, with high volume and low profit margins.

Consider two New York City businesses: One is a furniture store; the other is a Sabrett’s hot dog cart. Assume for simplicity the “passed back” portion of the 8 ½ percent sales tax is 5 percent. The furniture store invests $9,000 a year in an inventory of sofas, which it sells for $10,000, earning a $1,000 before-tax profit. A 5 percent sales tax is $500, half of profit, and 5.5 percent of the $9,000 investment.

The hot dog cart invests $200 a day in buns, dogs, and labor. It earns $210 a day, or $76,650 a year in sales and $3,650 in profit. A 5 percent sales tax collects $3,833, wiping out profit and amounting to 1916 percent of the $200 investment! Moreover since most of the cost of the cart is labor, the tax adds 5 percent to the 18 percent or so in payroll taxes!

In short, sales taxes kill small businesses — precisely the kind of businesses that provide the most jobs per dollar invested. And by killing competition, sales taxes may drive prices up by more than the tax rate.

Sales taxes kill small businesses, precisely the kind of businesses that provide the most jobs per dollar invested.

Sales taxes are also insidious — it’s always so tempting to politicians to raise them another quarter cent, and hope no one notices. Up to now, the threat of tax competition from neighboring states and localities has kept those politicians in check. That is, as long as customers can easily shop elsewhere, most of the tax will be “passed back” onto merchants —whose complaints will make politicians think twice about increases. The European VAT has crept so high precisely because shoppers can’t avoid it by crossing borders. (Tennis ball smuggling isn’t cost-effective).

In recent years, the rise of effectively untaxed internet sales has helped check increases of state and local sales taxes. If the Marketplace Fairness Act passes the House, it will release that check on sales taxes and lubricate our way towards European-style VAT taxes! “Fairness” shouldn’t mean raising sales taxes on internet merchants, but reducing them on local businesses. For once, though for the wrong reason, Grover Norquist is right.

 

  • Why

    But aren’t the lack of sales taxes are benefitting companies like Amazon, while huring small retaliers like local booksellers or even brick-and-mortar stores where you can see the product and pick it up instantly (like Radio Shack)? Maybe if online companies paid their share of sales taxes, we could lower the rates, which would ameliorate your concerns. In any case, people are still supposed to paying local sales taxes on Internet sales (my Mass. state tax form even has a line item for it!), but most times don’t. This would force the collection and make it easier.

    • Polly Cleveland

      Two wrongs don’t make a right. And actually many brick-and-mortar stores oppose internet sales taxes because they too sell on the web. The availability of untaxed internet sales discourages politicians from shifting taxes from more progressive sources like property and income.

  • emjayay

    There are a lot of things we could do to make taxes more progressive. Fine. Some states exclude food, for example. That’s a start. But privleging internet sellers over brick and mortar sellers makes no sense and never did. Your arguements are specious. “Two wrongs don’t make a right”? In other news, a stitch in time saves nine.

    The nice thing for consumers with a VAT is that the price on an item is what you pay. The real question is if it is more or less progressive than the kind of sales taxes we have.

    By the way, the typical markup on a sofa is multiples of 10%.

  • European Taxpayer

    In the example of the two businesses when you calculate how much represents the tax collected over the investment you should use the same period in both cases. Instead of that, in the case of the furniture store you divide the amount of tax ($500) by the investment of a year ($9,000), and in the case of the hot dog cart you divide the amount of tax ($3,833) by the investment of A DAY ($200). Please, be fair!

  • ajaxthegreat

    The only reason I would support the Marketplace Fairness Act is that, if we must have a sales tax, it would be better and fairer to have a broader base (and hopefully a lower rate as a result). But that is a very big “if” indeed. Ditto for any proposal to replace any existing taxes with a VAT in the USA.

    That said, a much better alternative to sales taxes (or any other tax) is the Universal Exchange Tax (UET), which is literally the lowest possible rate on the broadest possible base–0.1% (or less) on all electronic transactions, period. And though it may not seem progressive at first glance, it is actually highly progressive in practice since the rich make a disproportionately higher volume of transactions than the rest of us, while the poor have a very low volume of such transactions. And everyone has skin in the game, while only speculators would consider it a significant burden.

    http://universalexchangetax.com/

    Of course, it would be even better if it were paired with the following change to the income tax. A massive cut (or even an elimination) in the income tax for those making less than $100,000 per year, and a massive hike in the income tax for those making more than $1 million per year. But let’s not drink from the bubbling VAT of toxin if we can help it.

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