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Treasury Secretary Lawrence Summers said yesterday it is critically
important to keep the Internet from becoming a tax haven for Web
entrepreneurs who do not charge sales taxes as required by
Summers’ comments on the Internet reflect an effort by the Clinton
administration to find a middle ground between one group, which includes
GOP presidential candidate John McCain, who has called for the Internet
to be totally tax-free, and state and local government officials who
want to tap into revenues being generated by the fastest-growing part of
“There should not be any penalty taxes on the Internet, but at the
same time cyberspace should not become a tax haven that promotes evasion
or avoidance of the basic taxes in our system,” Summers said Wednesday,
according to the Associated Press.
U.S. Secretary of the Treasury Lawrence Summers
His argument is an echo of Internet tax proponents’ mantra: fairness.
“It is unfair to require brick-and-mortar stores to collect and remit
taxes to state and local governments for the exact same goods that are
being sold tax-free over the Internet,” says the
Coalition, composed of businesses and
associations such as Wal-Mart and the
National Association of Retailers. “Our nation’s tax
policies should promote equal treatment for all commercial transactions
regardless of whether the sales are made in a store, from a catalog, or
via the Internet.”
But Net tax opponents point to the Supreme Court’s ruling that said
state and local sales taxes imposed on Internet or catalog sales are
unconstitutional if the retailers do not have a physical presence in a
consumer’s state — a violation of the interstate commerce clause.
Additionally, Net tax critics point out that taxes are politically
much more difficult to scale back than they are to create. And in a
time when state and local government coffers across the United States
are overflowing with tax revenue, claims that e-commerce popularity is
eroding tax bases fall flat.
California, the state with one of the top-ten economies in the world,
is just one example of states that are awash in revenue. The home of the
Silicon Valley, birthplace of the Internet, has had a budget surplus of
$4 billion or more for five consecutive years, including the 2000-01
The trend-setting state has increased its spending every year during
the revenue windfall, increasing its budget from $59.8 billion in the
1995-96 fiscal year to $81 billion in 1999-00. That 35 percent increase
in just five years is a testament to just how much money is being
funneled into state government — funds, which proponents of an Internet
sales tax say, would be depleted should untaxed e-commerce continue to
“What they’re doing is extortion. It’s evidence of the insatiable
appetite of government to tax everything that moves,” Ron Nehring,
spokesman for Americans for Tax Reform told
And once a tax is in place, the likelihood of its being reduced or
repealed is slim, not to mention the regulatory advantage gained by
government through taxation. Llewelyn Rockwell, economist and president
of the Ludwig von Mises Institute, a research
and educational center of classical liberalism, believes e-commerce
taxation could be just the tip of the iceberg.
“It will start out small like they did with the income tax,” he said,
which began earlier this century at just a fraction of a percent and now
can top 50 percent. “It’s like giving the burglar one piece of your
silverware. They’ll never be satisfied,” continued Rockwell.
Recent events lend credence to Rockwell’s assertion.
Summers indicated President Clinton was ready for a veto fight with
Congress over various tax relief bills that the administration believes
would cut too deeply into future budget surpluses.
“Excessive tax cuts outside of an overall fiscal framework that
assures we are paying down debt and able to meet future obligations
would be economically imprudent and could possibly put the economic
expansion at risk,” Summers said.
Republicans succeeded in getting House approval of a 10-year,
$182-billion tax cut that would provide relief for 25 million couples
dinged by the marriage penalty, which requires them to pay more taxes
than if they were single.
Senate Republican Leader Trent Lott of Mississippi said Tuesday the Senate would soon take up
its own version of the measure as congressional Republicans push forward
other popular tax relief measures.
Elimination of the marriage penalty and other punitive taxes such as
the death tax were included in a massive $792 billion tax cut Clinton
vetoed last year.
Summers said the administration still believes the better approach is
for Congress to adopt the more modest, targeted tax breaks included in
President Clinton’s 2001 budget. Clinton’s budget included $351 billion
in tax cuts for low and middle-income taxpayers, partially offset by
$181 million in tax increases, including a 25-cent per pack boost in the
Summers also said the GOP tax cuts would spur consumer spending at a
time when the economy is already running full tilt and the Federal
Reserve has embarked on a series of interest rate increases to slow
growth and keep inflation under control.
“This is not time when it is appropriate to stimulate consumption on
a substantial scale,” Summers said, warning the Fed could be forced to
boost interest rates even higher, offsetting the benefits of the tax
cuts for consumers, and threatening to push the economy into a
The Congressional Advisory Commission on Electronic Commerce, headed by Republican Gov. James
Gilmore of Virginia, is studying the
Internet tax issue and is due to release its recommendations in April.
The commission’s next meeting is March 20-21 in Dallas.
A federal law placing a temporary moratorium on taxes aimed
specifically at the Internet will expire in October 2001, though bills
have been introduced to extend the moratorium both temporarily and
Summers said plans should be studied to harmonize and simplify sales
taxes among states whose sales tax schemes can vary drastically with a
long-term goal of imposing sales taxes on consumers nationwide.
Such a plan already exists and was proposed to the E-commerce
Commission by the National Governors Association. The plan calls for “trusted third parties” to be
hired by governments to collect taxes from e-consumers. NGA’s proposal
has come closer to becoming a reality with the creation of Taxware’s
transaction tax server
which the company hopes to promote to local governments in the fall.
Summers said he had tried his hand at cyber-shopping, but conceded he
was “not terribly competent on the Internet.”
See Joseph Farah’s columns:
New Internet taxes and old hoaxes