Thursday, May 9, 2013

Not-so-free trade

For 247 years the argument between Federalists and States-Rights has been going on.  Jefferson vs. Hamilton.  Roosevelt vs. Wilson (or Wilkie or Dewey).  Reagan vs. Carter or now Obama vs. any Republican.  The role of the Federal Government and the role of State Government has never been agreed on, let alone how to fund it.  The battle continued this week with the majority of the senate voting for federalism and further eradicating states rights. 
 
The Senate approved a massive tax increase in a 69-27 vote.  Online purchases under the bill would be subject to individual state sales taxes.   Proponents say that it’s only fair that if brick-and-mortar stores have to collect and distribute taxes to the state then so should their competitors.  Opponents say that sales taxes are designed to cover the costs of local and state government to support the brick-and-mortar stores, and for businesses with no physical presence in the state the collection and payment of a tax that they get no benefit from is unnecessary and unfair. There is also little cost differential between online sales and in person sales when considering shipping costs, so with the tax it may kill the fastest growing part of retail sales.  It's also unclear how to determine which state tax gets collected - is it billing address or shipping address?  It’s unlikely that a middle-ground exists between these perspectives. 
 
According to the U.S. Census ecommerce sales in 2012 were $145 billion versus retail sales of $3.6 trillion.  Forrester Research  projects online sales growing to $327 billion by 2016.  That would still be less than 10% of total commerce.  Using an average sales tax of 5% this tax would generate some $16 billion in revenue (under the optimistic assumption that sales stay consistent with an increased overall cost.)
I hope that the Internet remains a tax-free zone.  A number of states have bullied Amazon and other online retailers into concessions so that the battle has already largely been lost.  The larger issue is why should a product cost one thing in Massachusetts and another in New Hampshire just because of the local tax code?  In California the sales tax changes by up to 2 percent based on which county or city you buy the product in.  Border state commerce is always bustling when one state charges a higher tax than its neighbor for the same product. 
Increasing the U.S. tariff is part of the solution.  A 0.7% increase in the rate – from 1.3% to 2.0% would yield the exact same dollars, $16 billion.  Tariffs generated the bulk of revenue to the US Treasury for the first 137 years before the introduction of the Income tax in 1913 and then the introduction of the payroll tax in 1940 which together generate nearly 300 times tariff income.   Today’s 1.3% average tariff rate is the lowest in US history.  Returning to the Reagan era rate of 3.6% would generate over $100 billion dollars directly – and indirectly would spur US manufacturing by making everything just a little more expensive to import, justifying cost savings by producing products in the US.
A tariff 2% higher than today’s rate would not eradicate free-trade, it would help balance it.  The US trade deficit was reported last week  at $38 billion and has run as high as $55 billion under this Administration’s tariff policy. 
Hitting the consumer with an internet tax won’t grow the economy, spark manufacturing or help retailers.  Too bad that’s something Federalists and States Rights advocates can’t agree on.

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