Congress is once again considering taxing the Internet. A 28 December 2015 Wall Street Journal article has the heading “The Internet Tax Hostage.” The Internet Tax Freedom Act of 1998 has kept the Internet tax-free, although of course the states can tax Internet usage and sales within their geographical jurisdictions. But now Senator Alexander of Tennessee seeks to empower the states to extend their tax jurisdiction to companies in other states.

Goods and people can travel from one state to another without going through customs and paying tariffs. The Constitution created a great common market that enabled the USA to thrive. Now some Senators seek to terminate both interstate free trade and geography-based sovereignty.

Currently, a firm that has a physical presence in a state is subject to the state’s taxing powers. The Constitution of the United States empowered the federal government to regulate commerce among the states, and prevented the states from erecting trade barriers on interstate commerce. Goods and people can travel from one state to another without going through customs and paying tariffs. The Constitution created a great common market that enabled the USA to thrive. Now some Senators seek to terminate both interstate free trade and geography-based sovereignty.

If the Internet tax ban is removed, the states would be able to impose taxes on any Internet transactions passing through the state. Perhaps a tax on text messages! There is no limit on Internet taxes once Internet Tax Freedom is ended.

The states have the power to tax communications. State and local government tax telephone and Internet services. But they do not tax Internet messages that happen to pass through servers in the state. If the Internet tax ban is removed, the states would be able to impose taxes on any Internet transactions passing through the state.

We can now mail physical letters paying for postage tax-free. Perhaps the state tyrants would also like to impose a sales tax on the postage. Perhaps a state tax-revenue stamp in addition to the postage stamp! Perhaps a tax on text messages! There is no limit once Internet Tax Freedom is ended.

There are people who want to make products more expensive. They think that we should be taxed when we have an activity, such as buying something, or getting paid. One rationale is that a transaction implies the ability to pay. Another rationale is that if I am doing nothing, I should not be taxed for just sitting there. Tax me only when I do something.

Any economist will tell you that the concept of taxing anything that moves, and only when it moves, imposes economic damage. If we tax something that moves, it moves less. Maybe it will run away, or hide underground, or shrink because of the burden. To prevent the waste of resources due to the deadweight loss, we need public revenue from a source that is not a transaction. This would be a tax on capacity, rather than action. There is a resource with the capacity to generate revenue, and that is real estate.

Any economist will tell you that the concept of taxing anything that moves, and only when it moves, imposes economic damage. Economics calls this a “deadweight loss” and an “excess burden.” If we tax something that moves, it moves less. Maybe it will run away, or hide underground, or shrink because of the burden.

To prevent the waste of resources due to the deadweight loss, we need public revenue from a source that is not a transaction. This would be a tax on capacity, rather than action. For example, suppose a person could be a doctor earning $200,000 per year, but chooses to sit at home and do nothing. If we tax his income, we get nothing, and discourage him from doctor doings. But what if we tax his potential rather than actual income? Suppose tax him $50,000 regardless of what he does. Unless he can tap his savings, the doctor will get to work so that he can at least pay the $50,000.

On moral grounds, I am not in favor of a “faculty tax” that taxes one’s potential income, one’s faculty, i.e. capacity and ability to obtain income. A person should be able to freely choose between buying more leisure (by getting less wages) or buying more goods. Why tax goods and not leisure? Let both be equally tax-free.

There is another resource with the capacity to generate revenue, and that is real estate. A property tax on the market-value of the rental paid by tenants is properly based on the potential rental, not the kinetic or actual rental. If a landlord happens to charge a favored tenant only $1 per month, the property tax is not based on that charge, but on the market rental paid by a typical tenant.

Buildings don’t easily move, but in the overall economy, there is new construction that can move to more favored locations, and there is maintenance and upgrading that can move away from rent-controlled slums towards gentrifying communities. What moves not at all is land.

Like a tax on the faculty of workers, a tax on the faculty of land will push it towards the most productive use. A land value tax is good for the economy precisely because it is not based on any movement, whether the sale of property, a rental payment, or making some improvement.

Some people object to a tax on their home’s land value because the property value can rise faster than their income. If the economy has sound money, an increase in the land rent is due to either a greater population density or to economic development. From an efficiency viewpoint, if the current land users cannot afford the rent, they should move to a location where the rent matches their income. But that sounds a little heartless to people not trained to value economic efficiency. On political if not humanitarian grounds, the tax collecting agency could allow homeowners to delay the payment of additional taxes, plus interest on the debt, until the property is transferred.

Some people object to a tax on their home’s land value because the property value can rise faster than their income. If the economy has sound money, there is no price inflation that pulls up the market rent. If most of the land rent is tapped for public revenue, then there is no speculative demand for land that pushes up the price and the tax. Most of the increase in land value has been due to inflation and speculation. Without these, an increase in the land rent is due to either a greater population density or to economic development. From an efficiency viewpoint, if the current land users cannot afford the rent, they should move to a location where the rent matches their income.

But that sounds a little heartless to people not trained to value economic efficiency. On political if not humanitarian grounds, the tax collecting agency could allow homeowners to delay the payment of additional taxes, plus interest on the debt, until the property is transferred. Another way to not suffer unexpected increases in the land rent is a market for rent insurance, so that a buyer pays a monthly insurance addition to the rent in exchange for the insurance company paying the unexpected extra rent.

If we oppose taxes on the Internet and communications, we should propose an alternative. A location with good communications has a higher land rent and land value. Rather than taxing messages that move, tap the greater land rent due to that movement. Tap land’s capacity rather than stifle the actuation of that capacity.

If we oppose taxes on the Internet and communications, we should propose an alternative. A location with good communications has a higher land rent and land value. Rather than taxing messages that move, tap the greater land rent due to that movement. Tap land’s capacity rather than stifle the actuation of that capacity.

© Text Copyright Fred Foldvary, Ph.D. rights reserved.
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