A Treasury Department report on taxing cyberspace may have killed off any chance that a broad-based consumption tax will replace the income tax any time soon. The November report stated the Treasury did not intend to explore special taxes on Internet commerce, which is still just a trickle. Even though only 10 percent of the 129 million Americans online have purchased something online, Microsoft, AOL, and even stodgy IBM are betting the best way to wring money from the Web is to turn it into a point- and-click QVC. As a result, observers project that electronic commerce in the United States will top $70 billion by 2000.
"We absolutely reject the idea that the Internet is some sort of golden goose whose feathers should be taxed," Deputy Treasury Secretary Lawrence Summers told The New York Times. What Summers and, more important, career Treasury officials want is tax neutrality. That means Internet business should be treated the same as other commerce. And that's where consumption taxes--a favorite policy proposal among some free market advocates--come in. Conforming the existing tax code to the Internet will be hard enough. Imposing a new federal sales tax to replace the income tax could be impossible. Imposing transaction taxes in cyberspace is tricky. Where on the Internet does a transaction take place? The Interactive Services Association wants the purchaser to always pay. But it is up to the seller to collect the sales taxes.
Some Internet sellers do it for all states, some for a few states, and some only for the state in which they file taxes. At current rates, all under 10 percent, there is some incentive to evade. Imagine the temptation presented by a federal tax of 20 percent or more. And when you consider the probability that e-money sales will be encrypted and anonymous, you have sure-fire tax evasion.
In contrast to retailing, income reporting is still more firmly rooted in paperwork, i.d. numbers, and scriveners--the people who collect the income have to live somewhere. So Treasury has little reason to abandon the income tax just yet. But the day is coming when even a paycheck could be e-money--none of which comes from a U.S. mint.