NCPA - National Center for Policy Analysis

E-Commerce May Propel Tax Reform

June 21, 2000

In a new paper, economist Murray Weidenbaum explains why the type of consumption tax produced by the flat tax is far better suited to the emerging Internet economy than the old-fashioned sales tax. The problems the European Union is having trying to apply the Value Added Tax (VAT) to e-commerce underscores this fact.

Weidenbaum, chairman of the Council of Economic Advisers under Ronald Reagan, says it is impractical to tax purchases directly in a world in which sales increasingly take place across state borders and national boundaries. Indeed, not only do buyers and sellers lack a physical presence in cyberspace, so do goods and services.

The European Union is trying to get U.S. companies with no physical presence in Europe to withhold VAT on sales of music, videos and other "goods" delivered over the Internet to Europeans. There is no way to compel U.S. companies to withhold taxes on sales of digital goods, nor is there any practical way for them to do so.

The July issue of WIRED Magazine says a group of entrepreneurs are attempting to create an actual country existing almost entirely in cyberspace. They are building a "country" on an old World War II antiaircraft platform in the North Sea that would become the host to a myriad of e-businesses.

Most of the "population" of this new nation, called Sealand, will be computers, servers, electric generators and telecommunications equipment. Theoretically, people and businesses will be able to conduct their affairs entirely free of taxes and government interference.

Instead of fighting this trend, exerting enormous effort to make obsolete sales tax systems apply to the Internet, governments of the world need to adapt to it. Getting rid of their outdated sales taxes regimes in favor of taxes on consumed income, such as the flat tax, would be a start.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 21, 2000.


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