When online sales tax means less income tax

Art Laffer

Art Laffer

Today’s issue of USA Today has an interesting piece by Art Laffer on how changes to the tax code can lead to economic growth. His main suggestion? Close the online sales tax loophole.

He writes:

Because state sales taxes generally have fewer loopholes and lower rates — and therefore have a lesser impact on growth and employment — pro-growth policies should favor sales over income taxes where possible.

The governors of Wisconsin, Iowa, Maine, and Ohio are already planning to put this idea into action.

If the Marketplace Fairness Act passes and these states are allowed to require online retailers to collect sales tax, the governors say, they’ll cut income taxes by an equal amount. So if online sales tax generates, say, $1 million in revenue, the cut in income taxes will equal $1 million in revenue.

There are multiple benefits to this approach, for both small businesses and taxpayers. First, it helps out the mom-and-pop businesses on Main Street, which are having a hard time competing with online retailers who don’t have to collect sales tax. The Marketplace Fairness Act levels the playing field by requiring all retailers to play by the same tax rules.

At the same time, it’s a win for taxpayers, who won’t see any increases in their overall tax bills.

For those who worry that enforcement of online sales tax will lead to more government spending as state and local governments see tax revenue rise, there’s another benefit: Since these states won’t see an overall change in their tax revenue, there’s no opportunity for increased spending.

And Laffer offers solid statistics on how online sales tax will help grow the economy:

Gross state product would increase from 1.2% in Alaska to 4.6% in Washington state over 10 years. States would see jobs created, anywhere from about 2,000 in Vermont to more than 180,000 in California. Gross domestic product would grow by more than $563 billion, creating 1.5 million jobs nationwide.

We think this idea is a win for everyone, especially in more conservative states that want to support local small businesses and avoid more government spending at the same time.

Of course, it’s dependent on the passage of the Marketplace Fairness Act. We hope that Congress—especially the representatives from Wisconsin, Iowa, Maine, and Ohio—is listening.

17 Responses to When online sales tax means less income tax

  1. Ken Miller says:

    Mr. Laffer hasn’t been heard from much lately, so this may be why he’s advocating a policy which has been wrong forever, and any reasonable 9th grade student would conclude, given the facts, that an increase in sales tax is the most regressive form of taxation. Even his famous curve would refute any increase in sales taxes.
    The obvious caveat here is that the states that want the sales tax revenue thru taxing internet sales would reduce similarly their income tax revenue. How ridiculous can that be, given the fact that these very states are wanting more revenue? So the GOVERNORS say they would cut income tax rates. Last I heard, governors don’t cut, or raise, taxes without a legislative body weighing in.
    As to helping out Mom and Pop outfits, that’s a crock of you-know-what. I AM a Mom and Pop outfit and I compete with online and in- state businesses all day every day. I do it with SERVICE, PRICING, and doing what I promise to do. As for competing with other state businesses, sales taxes don’t compare with what shipping costs are.
    Let’s face it, this to-do on sales tax is a crutch for state governments that ARE TO INEFFICIENT AND WASTEFUL to do the right thing and clean up their own house.
    Ken Miller

  2. Ken Miller says:

    I don’t know who “FedTax” is, but at least I’m not afraid to put my name on my messages. Anonymous messages on the internet are like scribblings on a men’s latrine wall.
    As far as Mr. Laffer’s “study” is concerned, it has been truly said that you can “prove” up is down and vice versa if one starts with an erroneous conclusion in the first place. IE: that states would reduce their tax take by an amount equal to the increase in revenue from the sales tax. “Ain’t gonna happen”. It’s an interesting theory to debate in starry-eyed acadamia but in the real world, not a chance.
    It has been correctly observed that if one were to lay all the economists side by side, they’d still point in all directions. It’s not the “dismal science” for nothing. Mr Laffer and colleague projecting out 10 years from 2012 is the precise point I’m making, in that 10 years out nobody knows what the economy will be like. If they were so smart, why didn’t they project the dot com bust, or the economic struggles of the last 6 years?
    How about this idea?…….Why don’t the states compete for business by having a LOWER tax rate so their businesses would benefit from shipping? Gosh, they might have to reduce their subsidies to their favored constituents, etc. Maybe even have a more efficient state government.
    On page 14 of the “study” it speaks about Henry George and his conditions for taxes. How about the states meeting those conditions FIRST, before increasing taxes. And please spare me the bit about the sales tax being already in effect, etc. etc….It’s a citizen’s duty to prevent their government from taxing any more than the government needs, so the shippers are only doing their duty in not handing over to the greedy politicians money that is not theirs in the first place.
    I could go on and on, but my grill calls me for my week end bar-b-que. One other observation, however…. How is it that Laffer, et al can speak of “jump starting the economy” by INCREASING the amount of money taken from the pockets of the citizenry? Have we come so far down the road to government controlling everything in our lives that we need to suck on the public tit? There are numerous quotations from the founding fathers warning us about a government getting too big.
    Ken Miller

    • FedTax says:

      Mr. Miller;
      You know exactly who FedTax is, and I believe we have had this exchange before. I am the CEO of FedTax. I am not an economist at all, I am an e-commerce guy. Accordingly, I cannot defend Dr. Laffer’s studies – I do not have more economic knowledge than him. I think it is awesome that you do – go nuts! BTW: what national economic credentials do you possess?
      Thanks again for your passionate interest on this important issue.

    • Ken Miller says:

      Mr. Carlson;; You are correctomundo. I wish I had the time to spare from my own small business to quote and cite the sources you do. Congrats, and please see my e-mail to you.
      Ken Miller

    • FedTax says:

      Hi Tom,
      As I responded to Mr. Miller: I am not an economist at all, I am an e-commerce guy. Accordingly, I cannot defend Dr. Laffer’s studies – I do not have more economic knowledge than him. I think it is awesome that you do – go nuts! BTW: what national economic credentials do you possess?
      Thanks again for your passionate interest on this important issue.

      • National credentials mean very little when a study is paid for by Walmart and big money backing this legislation. The results are written for the entity paying for the study. You do not need to have economic credentials to see the flaws. In my former profession I was a federal agent. I saw the same thing happen in the courtroom. Defense attorneys would bring in their so called witnesses that had credentials. However, everything they said was what the defense attorneys wanted them to say. I am much more then “just” an e-commerce guy. Expert witnesses got OJ Simpson off, he was innocent, right?

        Why don’t you take a moment to read my response to the study? A better response to my comment might be to attack my arguments instead of my credentials. I guess as an e-commerce guy you possess no knowledge or opinion on anything outside of your niche job.

        You will agree with anything that supports your cause and tout it as the truth. The lure of big money does that to people. I know you have a business that is waiting for the MFA to pass. You are merely marketing your business. However, I think that your company and a few others that offer this “magical” software are angering many businesses that “might” be your future customers. You are constantly arguing with companies. Many of these companies see the MFA as a violation of the U.S. Constitution and a burden to small business.

      • FedTax says:

        I’m sorry to hear that you think we’re angering businesses. That’s certainly not our intent. We created TaxCloud to make life easier for online retailers. For what it’s worth, the reaction we’ve had from our retailers has been overwhelmingly positive — they’re happy to have found a free service that helps them manage their sales tax responsibilities. And while we may disagree on the merits of the MFA, we can definitely agree on wanting to limit tax compliance burdens on small businesses.

        Thank you again for your contribution.

  3. Rick says:

    Even if you believe Laffer’s study, methodology and beliefs… which is a lot to swallow… all of his conclusions regarding job and economic growth hinge on states taking the new revenue and lowering other tax rates by the same amount.

    Since only a couple states have agreed to do this, his own theories and beliefs show that for the VAST majority of states, there will be the converse: Job losses and a drag on economic growth with this new tax implementation.

    Pro-MFA forces have been trumpeting this while completely burying the central thesis of his study. And yes, I’ve read it and the other studies he references in it.

    • McKane Davis says:

      I think the fact that this post has been summarily ignored says a lot. You are exactly right. Laffer’s study actually proves that MFA will job losses and that it will hurt the economy.

  4. Anonymous says:

    OK, well,what do I think? Glad to have a name now “David” and know you are CEO of Fed Tax.
    I have to say David, that while I don’t have the tickets that Mr. Laffer does, I do have at least 60 years of observation regarding different theories on the economy, and I can tell you absolutely that an economist may hit it right one time but they are wrong more than they are correct, when it comes to specific prognostications. I know also that you are no different than most people, that when they have a vested interest in something, try diligently to put the best face on reasons their idea or course of action is the most desirable one.
    Right now, tho, it appears from the posts on this blog, that it’s 3 to one against the interstate tax issue. I think your last sentence in your last post would be correct if we only took out the word “compliance” and it would read “limit tax burdens on small business”.
    Come on, David, you must know that a sales tax is one of the most regressive taxes around, no matter how it’s collected. E-Commerce notwithstanding. The politicians love it because the merchant has to collect it, send it dutifully in to the taxing authority, who calls it euphemistically a “privilege” tax, or “use tax” and they get to USE IT, OR SPEND IT, OR GO IN SEARCH OF A PROBLEM THEY CAN SOLVE WITH OUR MONEY!
    I stand by my previous statement that it is a citizen’s duty to prevent the politicians from having any more money than they need, and WE THE PEOPLE will decide what that figure is. As Mr. Hayek says, we’re on the road to serfdom. (He’s an AUSTRIAN economist by the way)
    Ken Miller

  5. Bill Jensen says:

    Just one problem I have your software is “Not available” for all shopping carts. Like us we use OpenCart for our shopping cart I have found one CSP option to collect this new tax for the States and it is REALLY NOT FREE! It’s cost would put our store out of business.

    • FedTax says:

      Mr. Jensen,

      Thank you for your comment, and the heads-up regarding OpenCart-We will escalate our outreach to them. Have you also sent them an email or called them to ask when OpenCart will support TaxCloud? To reiterate, we work with many carts (hopefully soon OpenCart as well) to pre-integrate our service so it will not cost a single penny for online sellers like you to enable TaxCloud within your existing e-commerce environment. We will update this thread as we learn more from OpenCart.

      Thanks again!

  6. Ken Miller says:

    I noted in a last week edition of the WSJ that Mr. Boehner will not bring up the MFA this session. Good for him.

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