Content-type: text/html ~ Stephen's Web ~ Internet Taxation

Stephen Downes

Knowledge, Learning, Community

Dec 05, 1999

Posted to A List Apart, 6 December 1999.

It is hard to know where to begin with Alan Herrell's ill-conceived diatribe on internet taxation, save perhaps with the observation that if it were possible to waste pixels, this article would be a prime example.

Herrell's article is littered with half-truths and blatant falsehoods, irrelevant observations, poor reasoning and good old fashioned huckersterism. And while it is a bit of a struggle to extract even a point to his remarks, a refutation is in order if only to set the record straight.

Herrell on the Evil of Taxation

Taxation, Herrell seems to be saying, is an evil which must be resisted. Were non-governmental agencies to engage in the practice, he writes, it would be called extortion. But non-governmental agencies require that we pay money all the time - these amounts are usually called 'rent', the 'grocery bill' and the 'phone bill'.

Taxation is no different from any of these charges; as even Herrell recognizes, we receive in return a variety of services including roads, weather prediction, national defense, and more. And lest Herrell be concerned about the monopolistic nature of government, let me point out that most of our essential services are provided by monopolies.

Yes, governments have a right to impose taxes (the fact that this comes prior to freedom of speech in the U.S. constitution is completely irrelevant). But this is a right we as a population voluntarily bestow to government (what did he think, that the constitution is a magical document that simply arose from the aether without the advice and consent of those governed?).

If we did not want taxation, we could as a population vote to eliminate taxes. But that's not going to happen, because we value the services taxes purchase. Or sure, we may grumble a bit about the price, but dollar for dollar it's a better deal than a Big Mac and healthier for society too.

Herrel on Current Taxes

Herrell points out that we already pay telecommunications taxes. This much is true. But these taxes are not used to pay for the Spanish-American war, as he implies, nor are they are used to subsidize "favored customers". And the "access charges" are not even taxes at all.

And while Herrell talks about taxes being "piled on" to telecommunications charges, creating some mythical "burden", he does not consider the fact that the alternative is to do without 911 or other emergency services such as poison control, nor does he consider the fact that the taxes "siphoned" from the consumer's phone bill are what paid for the internet in the first place.

Herrell's imaginative calculations show the level of telecommunications taxation rising dramatically between the years 1986 and 1999. But many of the taxes he cites do not apply to telecommunications at all, while the remainder of the increase is accounted for by falling prices. He has no grounds for asserting that taxes are pricing people out of the broadband market (his one source is a web page which in turn cites an unpublished report).

We next turn to Herrell's confused discussion of taxation. Online sales impact two major types of taxation, as Herrell correctly observes: it allows people to avoid tariffs if they purchase electronic goods (the 'widget' shipped to your doorstep is still taxed at the border), and they allow people to avoid local and state sales taxes. So far so good.

But then, to show that governments are having difficulty dealing with the problem, he cites a 'tax authority' talking about people moving "off-shore" to avoid income taxes. But this has nothing to do with internet taxes! And while it is true that the internet does allow people to move to tax havens more easily, such moves are neither a response to nor a cause of internet taxation.

From this Herrell somehow concludes that the best response is to simplify the tax system, making it more "fair", say, by imposing a "flat tax" based on 17 percent of sales.

Herrel's Argument for a Flat Tax

One wonders what Herrell is thinking. That "off-shore" nations would be forced to pay this "flat tax"? That the United States would impose this "flat tax" on all electronic commerce? Or that "flat tax" is the new poster child of the new right, so he had better get it in there somewhere?

Nobody knows. But Herrell's argument in favour of a flat tax is childlike. He writes, "... it is truly fair. You don't tax income. You tax sales. More income, more sales, more tax, more jobs." What Herrell ignores in his reasoning (if a string of phrases can be flattered with that title) is that the more money a person earns, the less of it he spends. A person earning minimum wage spends one hundred percent on the necessities of life. A person making $100,000 spends only fifty percent of his income, and salts away the rest in savings and investments.

Indeed, sales taxes have been called "regressive" because, as a percentage of income, the poor pay the most tax and the rich pay the least. This is why the Value Added Tax and Canada's Goods and Services Tax are the darlings of right-wing pro-rich conservative governments.

Herrell also argues (?) "If you are not a producer, you are a consumer." I really have no idea what concept this observation is intended to support, but it is a false duality masking the fact that all of us to some degree both produce and consume. Sometimes we do neither. And sometimes the black-white categorization simply doesn't apply at all.

Herrell also argues that the advent of the computer age, governments will have to spend less on roads. Well - true, but again, what does this have to do with a flat tax?

But the flat tax will never succeed, writes Herrell. Why? It's those evil lobbyists! And how do we know the lobbyists are to blame, and that they are wrong to oppose the flat tax? According to Herrell, it's because the lobbyists make a lot of money!

Well, true, the lobbyists make a lot of money, and also true, they argue (on behalf of large corporations) for lower taxes (because large corporations don't need the services - like 911 services or social security - that governments pay for). But these lobbyists aren't arguing against a flat tax per se. They are arguing against taxation generally.

The Issue of Multiple Jurisdictions

Herrell almost has a good point to make in this section, and that point is that there are too many different types of taxes in the United States, and that it would be a lot easier to levy internet taxes were a single tax rate imposed. In Canada, only the federal and provincial governments levy sales taxes; cities obtain revenues from property taxes and provincial grants. But while such a system is simpler, it is no more fair (unless you buy the child-logic that simple is the same as fair).

But Herrell's understanding of taxation, and the purpose of taxation, is too shallow to sustain such a point.

For if we apply his much vaunted solution to the real world - one in which there are many nations, not merely the United States - we can see that his proposal will, if you will, fall flat. The world is not about to accept a flat tax imposed by the United States, and it is certainly not going to follow American taxation logic.

Nations tax their citizens at different rates and for different reasons. In Canada, for example, a significant proportion of tax revenue goes toward health care; in the United States health care is a private industry. Canadians prefer this system because it means that, as a nation, we pay less for the same service, and because it means that every Canadian, regardless of income, can obtain high quality medical services.

Americans disagree with this reasoning and that is their right. But the result is that Canadians pay higher taxes (but - thankfully - are not bled through the nose by private health insurance companies). A single tax regime would force a resolution of the health care issue: does the whole world follow the American model of condeming twenty percent of the population to an early death, or does it follow the Canadian model of much higher taxes?

Obviously, no such choice can be made; this is why there can be no single tax system on the internet. Different nations have different social priorities (this is why we should be very worried about the W.T.O. as well, but that's a different issue). Playing with the tax laws will not solve the problem of internet taxes.

Multiple Jusrisductions and Social Policy

It's too bad Herrell made no attempt to address the real issues concerning online taxation.

The most significant of these involves jurisdiction. In a traditional retail transaction, the physical location is easily determined, and therefore, so also are the laws governing that transaction. But in an online transaction, the buyer is in one nation, the seller is in another, and the financial institution brokering the transaction is in a third still.

Which laws prevail? So far, online vendors have said that the laws where the seller is located prevail. But that means that purchasers in high-tax Canada pay taxes at a rate established in low-tax Texas (or purchasers in high-tax Texas pay tax at a rate established in low-tax Cayman Islands); such a principle would eventually undermine any program which involved taxes.

The issue of jurisdiction also applies to such matters as child labour, fraud and misrepresentation, currency exchanges, 'offensive content', and more. While it may seem like a boon to pay taxes at the Cayman Island rate, do you also want to be governed by Cayman fraud statutes? Or Thai child labour laws?

The issue of online taxation is only the tip of a very large iceberg, an iceberg created not by pixel-mongers but by increasing globalization on a very unequal globe. We will have to decide two sets of questions: first, should there be global standards on such things as social policy, health care, child labour, environmental issues, and more; and second, should local or regional law prevail over international, trans-national, or global legislation?

These are hard questions. Confusing the matter with ill-conceived rants like Herrell's does not help.

Stephen Downes Stephen Downes, Casselman, Canada

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