E-Letter To Veronique de Rugy And The Cato Institute Re: "Internet Tax: The New OPEC for Politicians"

Your recent daily commentary, "Internet Tax: The New OPEC for Politicians," was so good that it took my mind back to something we had written over 2 years ago at BlackElectorate.com. As you may know, we are totally against the growing efforts to tax e-commerce, for many of the reasons that you have listed as well as a few other reasons that are a little more germane to the nature of the U.S. Black political economy. I have written about this issue for my clients for over a year now.

Here is what we wrote in an editorial dated May 2, 2000, called, " The Internet Taxation Dilemma:"

The Black Political Establishment, led by the Mayors, sees taxing the Internet as a means to generating the necessary income to pay for government programs for its constituents. But a review of the taxation issue leaves considerable doubt as to whether their efforts will really result in measurable revenue increases that can achieve what the mayors desire. Furthermore, such revenue comes at a great cost in that it will stifle innovation and slow the Internet economy that is spurring the entire U.S. economy. It is economic growth first and foremost which causes tax revenues to increase. And in this area, state sales tax revenue pales in comparison to what is generated by federal corporate and income taxes, which the Internet has surely increased.

To put the amount of energy on taxing the Internet that the Mayors have and at the same time not devise policies that increase the economic growth that the Internet fosters would appear to be counterproductive. Economist Victor Canto of La Jolla Economics says such a strategy hurts those with the lowest incomes. He says "There are two immobile factors in the U.S.: real estate and poor people in the inner cities, the land can't move and neither can the poor in their efforts to seek jobs due to their lack of money and means of transportation. Therefore you have to make the inner city attractive to businesses, especially Internet businesses. You have to bring jobs to those in the inner city so they can increase their mobility." Canto believes the Mayors and Governors can devise policies that reduce crime and provide fiscal incentives for Internet businesses to setup shop in the poorest areas. He believes that the Mayors, in particular, should use the Quill decision to their advantage. Canto believes that Mayors can actively promote their cities as vehicles that Internet start-up companies can use to sell products to consumers in other states and thus avoid paying state sales taxes. This practice is currently being used by many Internet companies nation wide.

In fact, the CEO of Amazon.com., Jeff Bezos, has admitted that he deliberately based his company in a relatively small state, Washington, in order to be able to tap into the markets of populous states like New York and California with the competitive advantage arising from not having to charge sales taxes on books he sells in those states. " How do we make our area attractive to the likes of a Jeff Bezos? How do we make our cities a place for Internet businesses to go? How do we market the tax advantages of doing business here?," Canto says Big-City Mayors should ask themselves. Canto believes that whatever sales tax revenue states may lose because of the Internet will be more than made up by increased real estate and property taxes (which often fund school districts) and increased state income taxes. These new property and income tax streams will be generated by thriving Internet businesses that create jobs, and which create wealth and attract new residents to the areas where these businesses are located. Rather than attempting to redistribute tax revenue Canto believes that the Mayors should focus on producing more of it via economic growth policies that embrace the Internet.

It was former Dallas Mayor Ron Kirk who was foremost in advocacy for Internet taxation. That is partially why it was difficult for me to get but so excited about him becoming the first Black U.S. Senator from Texas. The same with New York gubernatorial candidate Carl McCall. These gentleman are Brothers, as part of the Black family, but they sure don't think like Brothers when it comes to economics. These gentlemen and others play up their Black skin for selected audiences but they don't display a Black enlightened self-interest in their campaigning and promised policy prescriptions. Nor do they display the intellectual freedom necessary to solving root problems in this country. It is always a White person at some think tank (Center On Budget Policy and Priorities, Brookings Institution, Heritage Foundation and yes - CATO) and or within the partisan intellegensia - a consultant or strategist - who is coming up with all of the economic ideas that come out of the mouth of Black politicians and bureaucrats.

While professional Black politicians handle get-out-the-vote and the rhetorical appeals necessary to enthuse the masses to support politicians and policies, they let non-Black people make the policies and come up with the creative ideas that are supposedly in the best interests of the Black community. Black politicians, so desperate for party resources and so driven by unbridled ambition, swallow whole the fiscal policy marching orders of their party and the ideologues that intellectually direct it. They are either too scared or ignorant to offer a Black alternative or compliment to what is being rained down from above. This process, headquartered in Washington D.C., happens every single day. It is humiliating as well as disgusting to anyone who seriously wants to see the Black community overcome the legacy of slavery and material poverty.

This is so clear on this Internet taxation issue. Black leaders are being roped in by both political parties, into making a redistribution of wealth argument that exemplifies the zero-sum thinking that corrupts and taints bureacracy. The Internet is not what is producing these budget deficits at the state and local level. And whatever sales tax receipts are being lost could be easily replaced by the increase in corporate and income tax revenue that is being produced by e-commerce activity and flowing into government coffers. This is already happening whether any politician admits it or not. Common sense (which evidently isn't that common)would tell any reasonable person that if the revenue opportunities are so lucrative on the Internet, then more of the poor citizenry should be given incentives to pursue them. Perhaps, perish the thought, economic opportunity denied to Blacks in the larger society may be available over the Internet. No major Black politician, especially in the Democratic Party, is "allowed" to make such an argument, because it interferes with the the redistribution of wealth economic paradigm that protects establishment businesses and the politicians of all colors that protect them from competition. It is quite a hustle.

If Black mayors, local and state representatives were creative and really thinking in terms of an enlightened self-interest, they would leave the partisan plantation and be free enough to realize and advocate that lower taxes on capital and labor in distressed inner cities and rural areas is how economic growth can be produced, sufficient to close budget deficits and create jobs. If the payroll tax were reduced by a few percentage points; if the capital gains tax were eliminated, with a 6 to 12 month holding period for businesses (that operate in distressed rural and urban areas); and if the moratorium on Internet taxation were embraced and combined with efforts to close the Digital Divide, poor Black communities across this country could experience economic activity sufficient to reduce poverty and grow the broader U.S. economy. Instead of seeking to divide a limited pie, Black politicians should be concerned with helping to match human and financial capital within the Black community which involves embracing fiscal and regulatory policies that make Black labor and intellectual capital magnets of financial capital.

To be sure, I do think the Streamlined Sales Tax effort is a good idea in the efficiencies that it produces. And after all, something is wrong when an orange can be a fruit in one state and a beverage in another; and a marshmallow, for tax purposes, can be classified as a candy in one state, and a food in another; and the same with potato chips. With over 7,500 taxing authorities in the United States, any effort to coordinate their efforts, if it makes sense, should take place. But the motive behind the Streamlined Sales Tax effort is what is troubling.

Mayors, Governors and state legislatures are making a mountain out of a molehill. They are pursuing the most revolutionary change in the tax code in decades, in pursuit of money from a sector that is miniscule in size relative to the broader economy. In addition they have the wrong target in mind. The Internet is not the premier source of tax revenue that is slipping through their fingers, if you follow the logic of their arguments. It is the mail-order catalog businesses, which are controlled, in many cases, by the very brick-and-mortar businesses that the e-commerce tax advocates are claiming to protect by their ill-advised action. Of course, the new kid-on-the block - New Economy Internet businesses - are demonized as opposed to some of the Old Economy catalog outfits. Politicians protecting the elite status quo.

The local and state politicians really need to slow their roll on this issue. They are in such a hurry to tax everything moving that they have put the cart before the horse. They don't even have, in existence, a workable system of tax collection capable of collecting sales taxes from the estimated 45 states the program will involve, if enacted by state legislatures and eventually by Congress, which has authority over interstate commerce!

Here is what a recent Washington Post article said about that reality:

A unified revenue-sharing model envisioned in the states' plan fails to "come anywhere close to scratching the surface of the cost" of complying with the system, he said.

Internet vendors would likely bear substantial costs just in terms of the tax preparation needed to file as many as 45 separate tax returns each year, experts contacted for this story said.

Under the states' plan, online sellers would be required to purchase approved software to compute the appropriate state and local taxes or to certify with the state any in-house calculation systems already in place. E-tailers could choose to outsource tax collection to a certified third-party under the states' plan.

So far, participating states have conducted only one tax software pilot, involving four states, three technology vendors, and one online seller.

Of the technology vendors participating in the pilot, just one -- Salem, Mass.-based Taxware, working in conjunction with Hewlett-Packard -- managed to get a system up and running.

The online store in that pilot was O.C. Tanner Co., the Salt Lake City-based company that forged the medals for the 2002 Winter Olympic Games.

O.C. Tanner tax manager Jake Garn said Taxware's software worked well, but wondered whether the system would function as smoothly when subjected to a much larger volume of queries from all 45 participating states.

"[T]his was very small transaction volume compared to the level of traffic our main business generates," Garn said.

Neither supporters nor opponents of the plan have a clear idea how much the whole collection and remittance package would cost the average Internet merchant, though the participating states plan to conduct a comprehensive study in the coming months. They also are planning to run another tax technology pilot.

It all reminds me of the problems experienced by South Africa, in efforts to comply with the country's institution of a capital gains tax. The upfront cost of compliance with the tax, in some cases, was more of a burden than the actual tax itself as companies had to rework their inventory and accounting systems.

With taxes on the Internet, instead of increasing golden egg production, these bureaucrats and economically-challenged politicians may kill the goose.

Keep up the good work on an important issue; one that affects future wealth creation in Black America more than most people think.


Cedric Muhammad

Cedric Muhammad

Wednesday, November 20, 2002