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The Official Blog of National Taxpayers Union

Bastiat on Friday

Posted by Doug El Sanadi - August 22, 2008

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

That comment, from the essay “What Is Seen and What Is Not Seen” by French political economist Frederic Bastiat, provides a framework for analyzing New York’s internet sales tax (aka the “Amazon tax”). According to this article, based on information from New York City’s Independent Budget Office, New York State and NYC combined lost a total of approximately $50 million in sales taxes between July 1, 2006 and June 30, 2007. Why? Because New Yorkers purchased goods online.

Although NY law already requires residents to report online purchases and then pay the appropriate sales taxes, few do so. To solve this, on June 1st the state implemented a new tax statute that requires the companies selling online to NY residents to collect sales tax from those residents.

Currently, Amazon.com and Overstock.com are challenging the constitutionality of the online sales tax. If this challenge fails to overturn the law, one can make educated guesses about what will follow. In the short run, New York may gain higher sales tax revenues from this policy. But…

An Amazon tax makes it more expensive for online vendors to do business with New Yorkers. Some sellers may attempt to “swallow” that cost and leave prices the same; in that case their profit margins decrease. On the other hand, if a seller passes the cost onto consumers by raising prices, then less will be purchased. Either way, profits decline. And, in the second scenario where prices increase, consumers lose out by paying more.

Finally, the state itself will be hurt in the long term. Already ranked at 49 out of 50 in the “Rich States, Poor States” Economic Outlook Ranking, New York is sending a clear message to current and potential residents: “it is more expensive to live here than elsewhere.”

Bastiat would frown on this policy, and, if the tax is upheld, it seems likely that New York officials will get more than they bargained for.

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