Sunday, February 10

Tax Sensitivity in Electronic Commerce

I have talked previously about taxation on the internet. But there is quite a lot of underlying sensitivities and economics around what is the optimal level of taxation so that you do not kill the golden goose by over taxing the transactions. Here's an example of a paper which delves deeper into this issue.

Generally speaking, if you have high sales tax locally, then people will shop online more (solely based upon the situation in the USA, other countries levy online sales tax). It is a big issue, I quote:

Bruce and Fox (2001), using the concepts from these studies, estimate the annual revenue loss from business to consumer (B2C) commerce alone to be between $1.7 billion and $2.6 billion. Furthermore, each study predicts continued growth in state revenue losses in the future as the number of Internet users increases.

The author finds that actually, the tax sensitivity is not that high as previously thought. I quote further results:

Further analysis based on a splined tax rate indicates that only those facing the highest tax rates are still sensitive to rate changes. I also find that users who have been online for many years are significantly more sensitive to changes in the tax rate than are new adopters. Finally, including broadband and security variables in the model does not improve the significance

this is interesting. As it so happens, the only people who seems to be sensitive to local tax changes are those who are well experienced with the internet and/or are higher tax payers. Unfortunately, this is fairly typical in western societies, the people who really need to care about their financial situations (generally the people at the lower end of the scale) dont. So perhaps the fact that the government is stepping in to remove taxation is helping the consumers on their behalf. But that doesn't remove the problem of the slowly reducing tax income of the states. They have to think about a better way to handle this kind of issue of income shortfall. Perhaps a form of value added tax?

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