|Week of: |
February 13, 2000
|Letting the Internet Work its Magic
by: F.R. Duplantier
"State and local governments in the United States currently impose a variety of taxes on businesses and consumers, including sales and use taxes, telecommunications taxes, income taxes, and franchise fees," reports Aaron Lukas of the Cato Institute. "Electronic commerce is not specifically exempt from such levies," Lukas observes, "nor should it be. However," he emphasizes, "state and local governments are subject to congressional and constitutional limitations on the means by which they may tax cross-border commerce, including much Internet-based commerce."
Those limitations, needless to say, are not popular with the revenue agents affected by them. "Federal restrictions on the authority of state and local governments to force out-of-state telephone and mail-order companies to collect taxes have long irritated supporters of expansive government," Lukas acknowledges. "In recent years, the rapid growth of Internet-based retail sales has created a new sense of urgency," he notes, "and has prompted dire warnings from high-tax advocates of the impending erosion of state and local tax bases."
Lukas insists that "states are in no immediate danger of going broke, nor," he adds, "do they lack alternatives to the current system of sales and use taxes." Lukas urges the federal government to "ensure that states do not unfairly export their tax collection burden, thereby impeding interstate commerce. A federal commitment to that principle," he believes, "will also help guarantee . . . that individuals and businesses retain the freedom to escape punishing tax rates."
Lukas also addresses the issue of international taxation of the Internet. "Electronic commerce has the potential to radically alter the way the world does business, serve as an engine of growth and development, and bring people together across borders," he observes. "To fulfill that promise, however, electronic commerce must not be strangled by burdensome taxation," Lukas warns. "As the birthplace and the heart of the Internet, the United States," he contends, "has a special role to play in ensuring that revenue-hungry governments do not kill the goose that may lay the golden egg."
Lukas affirms that "the U.S. government has been a responsible leader in this area. It has led the fight against customs duties on digital content and opposed new Internet-specific taxes," he reports. "If the United States maintains a commitment to tax sovereignty -- to the principle that American businesses should not be forced to collect taxes for foreign governments -- then tax competition will flourish, as will electronic commerce. The Internet allows the production of goods and services to be increasingly disintegrated and freed from geographic constraints," Lukas notes. "That new reality will undoubtedly place downward pressure on government revenues over the short run," he concedes, "but will ultimately lead to productivity gains and wealth creation worldwide."
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