Who’s Afraid of an Internet Tax?

Judging from the last two Republican presidential debates, the new big issue in this campaign is taxation of Internet commerce. Or rather, since none of the candidates wants to tax Internet commerce right now, the issue is who is most committed to extending the current congressional moratorium on taxing Internet commerce, which runs out in 2001. Writing in the Wall Street Journal on Dec. 6, John Simons and John Harwood identified Internet taxation as a “21st century wedge issue” for George W. Bush, who says he wants to extend the moratorium but won’t rule out Internet taxes in the future. In the zany context of the Republican nomination race, this makes Bush a tax-and-spend liberal. Here’s how Simons and Harwood explained Bush’s political dilemma:

The issue pits traditionally Republican Main Street business proprietors against the highflying Silicon Valley entrepreneurs who have contributed more to Mr. Bush’s campaign than any other. It also pits the GOP’s vocal band of antitax economic conservatives against many of the Republican governors whom Mr. Bush is relying upon to support his primary campaign. … The reason that Mr. Bush and his gubernatorial backers are loath to support a permanent ban is they tend to rely heavily on sales taxes to fund their state governments.

The Republican governors, of course, have it exactly right. It’s totally unfair that Internet businesses can sell their wares without making customers pay state sales taxes, given that bricks-and-mortar stores are obliged to make their customers pay state sales taxes. A reasonable alternative to taxing Internet commerce would be for all 50 states to eliminate sales taxes altogether and make up the lost revenue with increased or new state income taxes. But don’t hold your breath for Republicans (or even Democrats) to embrace that redistributionist solution anytime soon. (Indeed, Orrin Hatch and Alan Keyes are headed in the opposite direction: They propose eliminating the federal income tax and replacing it with a national sales tax.)

In pressing for a tax-free Internet until the end of time, Bush’s detractors are ignoring or minimizing whatever costs that would impose on traditional retailers. Check out this exchange (from the Dec. 6 Arizona debate on CNN) between John McCain, justly praised for being stirringly responsible on many other issues in this campaign, and Orrin Hatch:

McCain: Orrin, you and I have worked on … the Internet tax moratorium act. As you know, this was stoutly resisted by governors, Republicans governors as well. Don’t you think we ought to make the Internet tax moratorium permanent?

Chatterbox translates: “Orrin, don’t you think governors in general, especially Republican governors of big states bordering New Mexico, Oklahoma, Arkansas, and Louisiana, are tax-loving jerks who would make bad presidents? I would never say such a thing, of course, but perhaps you’ll do it for me.

Hatch: Yes, I really do. I really think that we ought to do it, because I think it’s far overblown to think that the fact that people buy over the Internet is going to reduce mainstream USA. I think mainstream USA can compete very, very well.I mentioned [in the New Hampshire debate] last week, I asked my wife about that, I said: Elaine, what would you do if you could order everything right over the Internet and have it delivered right to your home? She said: I still want to go to the stores, I want to test things, I want to look at them, I want to enjoy it. I think she’s not alone.

Chatterbox translates: “Even though usually I’m a big Internet booster, I am going to pretend now that Internet commerce will never amount to much. And I’m going to flatter bricks-and-mortar retailers by telling them they’re so powerful that they can subject their customers to my new national sales tax and still trounce the tax-free Internet! Whoopee! It’s a good thing I have no chance of getting elected!”