Questioning online sales tax

If you used to be a frequent Amazon buyer since they never ask you for sales tax, then your happy life may burst. According to a piece of recent news from the Economist, California has started to collect sales tax from Amazon, the worlds’ biggest online retailer . Congress also begins to pass laws to allow state governments to impose sales tax.

If government begins to charge sales tax from online retail, California will get $250 million and $500 million tax revenue a year . It looks like a really big cake for state governments which are in difficult financial situation. However, I would argue that it is unwise to collect sales tax from online retailer. Government should protect online retailers rather than hurting the online retail economy.

You may notice that physical retail stores have complained that skipping sales tax let online retail constitute unfair competition towards them. A top executive from the National Retail Federation said that “stores do all the work, and then online competitors steal the sale because they don’t have to charge state and local sales taxes.”  However, this is not true. Compared to physical retail, online retail sales is still in a very small proportion of the national retail sales. According to the Harvard Business Review, “only about 9% of U.S. retail sales are online today, and that rate is growing at only about 10% a year.”  Although online retail has many advantages, physical retail to be still remains to be people’s primary choice. Moreover, many online retailers are individuals or small business, especially for those on eBay. Changing the tax would greatly change the business environment they used to have. Collecting sales tax will greatly impact the online retail environment since online retail is still in its infancy.

What is behind the secret of online retail having a lower price and better service? After removed traditional links, online retailers can have higher asset turnover rate, which means their goods do not have to wait in the store for a long time. Online retails also consume fewer resources. For example, an online retailer does not need to build physical retail store and only need a single warehouse. Physical store is not necessary for online retail, and they can sell items through the internet to national-wide even world-wide. Thus, online retail is a far more efficient than traditional retails. This new kind of economy Online retail is a form of commerce, not economy will benefit our society in long run much more than the physical retail. But as I mentioned before, online retail is still young and fragile, it would be necessary to provide preferential policies in order to encourage the development of online retail.

Since most of the online retail sales are interstate business, the sales tax would reduce the efficiency of interstate transaction and give no benefits to our economy. If our policy makers know that tariff will hurt free global trading, they should also notice that collecting sales tax on out of state online retailers is a another form of local protectionism.

In brief, for these reasons, online retail should be given tax-free in order to encourage the development of this efficient form of economy.

Policy Memo

 Introduction:

On August 2, the Chinese State Council had passed a new policy that during four national holidays, all expressways within the country are requested to offer toll-free access to passenger cars that have fewer than seven seats. I will argue that this toll-free policy will cause more harm than good to the society for the following reasons:

1. Toll-Free policy will produce greater social loss than its benefit;

2. Toll-Free policy is unfair to private expressway firms;

3. Toll-Free policy will harm expressway firms and bring inefficiencies in allocation of resources

I will suggest the government to cancel any price control in expressway toll.

Analysis:

The new policy first took effect on September 30th which is the first day of the National Day holiday week. Problems occurred when huge amount of people rushed into the expressway and the traffic became extremely blocked. According to Xinhua News, the Beijing Traffic Management Bureau reported that “long queues of cars appearing at 6 a.m. on Sunday in front of toll gates for all 17 expressways in Beijing, as many outbound passengers hit the road before dawn.” 

The logic behind holiday toll-free policy is that the expressways are always considered to be public infrastructures. Many people think that expressways should be built to benefit the public. Thus, charging the public for using it is contradictory. During national holidays, there will be numerous people driving out of town. Offering holiday toll-free policy appears to be a good welfare for the public.

However, expressways are not “public goods” like public parks. They are more similar to so-called “private goods” in economics. It means the property owner can exclude people from using it, and when more people use it, people will get fewer benefits. Expressways can become congested when the number of cars increases to a certain amount. Once it is free to use and as the property owners lose their power (price) to exclude people from using it, it will cause an effect called “tragedy of commons.” This term means that people will overexploit resources when the resources are shared by individuals. As seen in the news, cars rushed into expressways and caused traffic jams. This will cause huge economic loss. Millions of people wasted their time in the huge traffic jam, and the police and traffic bureau had to clear the roads and maintain order. The social loss included the decrease of social efficiency and the increase of expenditure for traffic control. Apparently, the social cost will be much greater than the benefits drivers get from the toll-free policy.

In fact, most of the expressways in China are not provided by governments. They are mostly built by private firms and heavily depend on investment from private firms. These expressway companies are self-financing and they seek revenues mainly from tolls. In this sense, the expressways in China belong to private firms. Their rights of charging users shall not be deprived by the government.  It is unreasonable to let private property owners pay for government’s welfare policy. On the other hand, private firms invest a huge amount of capital in constructing expressways and they should deserve the right to receive revenues. Forcing the firms to provide free tolls on holidays is just like directly taking money from their pockets. It is also unfair to the firms to bear the maintenance cost of traffic jams. It will hurt the expressway firms’ interest, as well as damaging the firms’ confidence. In addition, private firms may reconsider before they step into new expressway projects since the government can easily decide how much toll they can receive or even force their expressways to give free access to the public.

Toll-free policy, in fact, will create economic inefficiency in expressway market. The expressway construction in China is a highly efficient market; the expressways are planned by the government but are constructed, operated, and maintained by private firms, which seek their profits from tolls. Thanks to this efficient market process, China’s expressway network became the longest highway system in a short 24 years, while it took the United States over 50 years since the Congress passed the Federal Aid Highway Act in 1956. Their doctrine is called “users pay,” in which drivers will pay for their usage of expressways but not the general taxpayers. The expressway is a scarce resource, the usage of expressway should be decided by the market, more specifically, the price system. Those who really need to use the expressways will want to pay the tolls. Free access to cars will attract people to squeeze into the roads instead of taking airplanes or trains. Since the expressway market is highly efficient, any interruption of a perfectly functional market will disturb the economic process in which the resources go to where they are most needed.

If it is really necessary for government to introduce holiday toll-free access in expressways, subsidizing the expressways firms may be an alternative way to offer the “holiday welfare” to the public. The subsidization will protect the expressway firms from loss. However, this action will raise another question: should the tax payers who do not own a car pay for the welfare of car owners?

In my opinion, cancelling all expressways price control would work best for the whole society. Government intervention will cause inefficiency and social loss in a fully functional market. The intervention in expressway toll pricing will not increase any economic welfare but instead will lead to chaos in the market of expressways and will obstruct the future in the construction and operation of the expressway network.