South-Western College Publishing - Economics  
No Net Taxes
Subject Internet taxes, Government intervention
Topic Government and the Economy
Key Words Taxes, sales, law, revenue, retailers, Internet
News Story

A national commission set up by Congress has been considering the question of whether there should be new taxes on Internet sales. While the law requires taxes on Internet sales, the Supreme Court decided that companies could not be required to collect taxes in states in which they did not have a physical presence. Consumers are supposed to pay the taxes anyway, but they do not, and the law is not enforced.

The majority of commission members, particularly business representatives and anti-tax politicians, have now agreed that there should not be any new taxes on Internet sales until at least 2006. If Congress accepts this recommendation, the moratorium on new Internet taxes introduced in 1998 would be extended. The panel's chairman, the Governor of Virginia, stated that the recommendation was good for consumers, and a business member, the chairman of computer maker Gateway, remarked that it would "keep this new economy rolling".

The majority vote was by a slim margin, however. Public officials were mostly opposed to the recommendation because they stand to lose significant revenue: states obtain a third of their revenue from sales taxes. Lost sales taxes amounted to $525 million in 1999 and are expected to reach $10 billion by 2003. Traditional retailers would also be disadvantaged because they have to charge sales taxes.

(Updated May 1, 2000)

Questions
1. Draw a supply and demand diagram for CDs. Mark the equilibrium price and quantity in the absence of sales taxes.
  a) Most internet sales are free of sales taxes, but high-street retailers have to charge sales taxes. Which curve is affected by the charging of sales taxes? Why?
  b) On your diagram, show the effect of sales taxes on the equilibrium price and quantity of CDs. In what way are the traditional retailers disadvantaged?
2. Draw a supply and demand diagram for goods and services in general. Show the equilibrium price and quantity.
  a) Assume that sales taxes are charged on all goods and services. Show the effect on the equilibrium price and quantity. Shade in the area representing the tax revenue earned.
  b) Now assume that sales taxes are not levied on internet sales, effectively reducing the tax rate. On your diagram, show the effect on the curve that you previously shifted and on the area representing taxes.
  c) Why are governments upset? Why is it good for consumers?
3. Why is the recommendation of the commission likely to "keep this new economy rolling"?
Source Richard Wolf, "Divided panel urges no Net taxes, for now," USA Today, March 21, 2000.

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