INTRODUCTION

• Tremendous Internet Growth

- Few Online Consumers Pay Sales Tax

• Major Debate Over the Issue

- Supporting Enforcement

Revenue Losses, Competition with Retail

- Opposing Enforcement

Nurture the Internet, Compliance Costs

OVERVIEW AND OUTLINE

• Little Factual Basis For Evaluation

• What are the Trade-offs?

– Existing Literature

• Discussing the Evidence

– What Would Enforcement of Taxes Do?

– What are Revenue Losses from Internet?

– What is Known About the Other Issues?

1: WHAT WOULD TAXES DO?

TO ENFORCE CURRENT SALES

TAX:

Buyers: - 24 %

Sales: - 30 %

• Why do people buy?

• Tax factor varies by City

• Compare buying pattern

• Control for other factors

- Impact of sales tax

- High sensitivity

2: REVENUE LOSS FORECASTS

• Forecasts Claim Losses of $20b by 2002

- Further Forecasts out to 2010

- All are Seriously Flawed

• Major Problems

- Business vs. Consumer Sales

- Do not Account for Types of Goods

- Extrapolate Existing Growth Rates

2a: BUSINESS VS. CONSUMER

• In 1997, Forrester forecasts

• $327B in commerce by 2002

• 6% rate gives about $20B in lost Rev.

• In 1998, Forrester ups forecast to $843B

• But, These are the WRONG Transactions

• Forecasts of RETAIL sales by 2002

• Forrester: $76 Billion

• Jupiter Communications: $41 Billion

• Maximum losses of $5B?

2b: SALES BY TYPE OF GOOD (1998)Travel 3,073

Computers 1,090

Software 665

Books 630

Apparel 530

Music & Video 338

Food & Drink 235

Health & Beauty 213

Flowers 212

Recreation 187

Event Tickets 115

Household 100

Electronics 84

Specialty Gifts 63

Greetings 36

Miscellaneous 255

1998 CONSUMER SALES: $ 7,826 M

2b: SALES BY TYPE OF GOOD (1998)Travel 3,073

Computers 1,090

Software 665

Books 630

Apparel 530

Music & Video 338

Food & Drink 235

Health & Beauty 213

Flowers 212

Recreation 187

Event Tickets 115

Household 100

Electronics 84

Specialty Gifts 63

Greetings 36

Miscellaneous 255

1998 CONSUMER SALES: $ 7,826 M

2b: SALES BY TYPE OF GOOD (1998)Travel 3,073

Computers 1,090

Software 665

Books 630

Apparel 530

Music & Video 338

Food & Drink 235

Health & Beauty 213

Flowers 212

Recreation 187

Event Tickets 115

Household 100

Electronics 84

Specialty Gifts 63

Greetings 36

Miscellaneous 255

1998 CONSUMER SALES: $ 7,826 M

2b: SALES BY TYPE OF GOOD (1998)

Computers 545

Software 332

Books 630

Apparel 530

Music & Video 338

Health & Beauty 213

Recreation 187

Household 100

Electronics 84

Specialty Gifts 63

Miscellaneous 255

1998 REVENUE LOSING SALES: $ 3,278M

REVENUE LOSS 1998

1. 1998 Revenue Loss from Internet: $210m

- Smaller than mail-order 10-20 years ago

- Mail-Order between $50B and $100B

- This Revenue Loss is $3,200m to $6,400m

- Total Sales Tax Revenue is $160,000m

2. Internet Revenue Losses Assume

- Trade Creation Versus Diversion

PROJECTED REVENUE LOSS: ‘98-’03

REVENUE SHARE OF

LOSS SALES TAX REV.

1998 $ 210m 0.1%

1999 $ 470m 0.2%

2000 $ 880m 0.4%

2001 $1,400m 0.6%

2002 $2,300m 1.0%

2003 $3,500m 1.4%

Source: Goolsbee and Zittrain (1999)

2c: PROBLEMS OF EXTRAPOLATION

• Only way it matters:– Years of large growth

rates (not numbers)

• Speculation• Consider Mail-Order

– 82-87 rates

– Project to 1997

• 50% too large

• Consider Amazon• Growth levels vs. rates

– 1996 1,500%– 1997 825%– 1998 315%– 1999Q1 237%

3: EVIDENCE ON OTHER FACTORS

• Externalities– Network Benefits

– Learning

– Minimum scale

• Information– Credit Card

Security

– Repeat purchases

• Retail Competition– Little Effect on

shopping patterns

– Small share of current markets

• Compliance Costs– Costs shrinking

– Automate, Simplify

SUMMARY OF THE EVIDENCE

• What Would Taxes Do?

- Significant impact on current commerce

• What Are the Revenue Losses?

- Very Modest for Several Years

• What is Known About the Other Issues?

- Now, minimal competition with retail

- Some network & information benefits

- Falling Compliance Costs

COPIES OF THE STUDIES

CAN BE FOUND AT

http://gsbadg.uchicago.edu