Trinidad and Tobago should lead on international tax neutrality
TRINIDAD & TOBAGO, November 27, 2016 – Fiscal policy is complex. All too often Trinidad and Tobago policy makers’ misguided attempts at solving economic problems have detrimental effects on the nation’s economic stability. The global online sales world should take note.
Colm Imbert, Deputy Prime Minister for Trinidad and Tobago, claims that the nation’s current 7 percent online sales tax is economically necessary. The National Tax Journal, however, states emphatically that, “traditional bricks and mortar firms still dominate any measure of retail business activity.” (National Tax Journal, September 2015,68 (3S), 735-766.)
On the other hand, online retailers use less government resources than physical retailers justifies their exemption from the sales tax.
In its ongoing effort to acquire developed country status, Trinidad should consider international tax neutrality and abandon its online sales tax scheme. Studies show that employment rises in areas with greater commercial activity and lower sales tax rates.
The online tax would be levied on non-domestic corporations. At the same time, however, there would be no stopping other governments from instituting an online sales tax of their own, effectively pricing local consumers out of the market and slowing overall global economic growth.
Reviewing the history of sales tax—disregarding its revenue collection aspect—sales tax in one respect is merely a measure of economic activity, a means of government accounting for commercial transactions within a given national economy. Provided one understands that Trinidad can finance any measure of capital improvement, the sales tax is arguably justified as socially necessary:
“Within the Holy Roman Empire, towns were the first entities to establish tax-based economies. Logically, the most important source of local revenue for these towns would be of central interest for illuminating the larger questions raised by Schumpeter, a leading world economist, about shifting fiscal policy.” (Full Cups, Full Coffers: Tax Strategies and Consumer Culture in the Early Modern German Cities B. Ann Tlusty)
Levying an online sales tax in today’s new era of internet sales is an outmoded notion. The internet has changed commercial activity in significant ways. As one result, governments must revise the policies governing these transactions. They cannot be looked at the same as traditional, local transactions. Rather than simply focusing on revenue collection, policy makers need to start from scratch to determine what the future of e-commerce holds for Trinidad and the global economy.
Like today’s internet, the colonial era in both North and South America offered a seemingly endless bounty of resources. But European colonial powers lost sight of that economic bounty by over-taxation at the source. The far-reaching result of that policy was the American revolution.
The same today could be true for the internet. For the internet to sustain the economic advantage necessary to foster the innovations and service offerings future generations will need, the online world of commerce must be free of the baggage associated with brick and mortar establishments, irrespective of the policies of any particular government.
How sales tax works in the physical world does not translate to the virtual world, nor should it. In the brick and mortar paradigm, a consumer goes to a location, makes a purchase and leaves. No one in government can ascertain what economic changes transpired and how to appropriate resources to account for that event.
Enter the sales tax, a unique measure of every transaction occurring by location. This gives administrators some rationale for policy decisions based on the economic events reported by each predetermined location. From it, an economist can infer where most people shop, what they are interested in buying and at what price.
Areas offering the best products and customer service report the most sales and therefore receive the most infrastructure enhancement, such as better streets, more lighting and security for shoppers. One key element: nowhere in the equation is the customer identified. There is no record of how old or how tall customers might be, where they live, what income level they have achieved, or any other characteristics for that matter, especially when cash transactions are involved.
Internet transactions are quite different. Online businesses customize and streamline transactions down to the minute details of a customer’s preferences by tracking every purchase, every site visit, and even by logging in, when possible, factors unrelated to the purchase such as household size, health factors, race, language and ethnic background. The costs of acquiring this data are borne solely by the corporation fulfilling each sale. Sales tax becomes irrelevant at this point because security, infrastructure and access become a corporate responsibility.
Brick and mortar establishments still need their streets fixed to assure customer access, not to mention police protection, utility infrastructure and so forth, all of which justifies sales tax charges geared toward coordinating public improvements undertaken by government to support such establishments.
Internet commerce, on the other hand, brings faster service and (hopefully) better products to your fingertips, whether you are dining in the comfort of your home, hopelessly unfulfilled at work and in need of a break, or actively on the go pursuing life’s pleasures or meeting family demands.
In most economically developed countries, which Trinidad and Tobago plan to become, transaction-based taxes generate approximately 20 – 30 percent of jurisdictional government (state or local subdivision) revenue and roughly 8 percent of national revenues. The U.S., on the other hand, is currently the only developed nation without a national consumption tax.
As e-commerce makes transactions more hassle free, the institution of an online sales tax makes the business world inversely more convoluted, as compliance costs will become significantly prohibitive.
In short, a litany of implementation problems face policy makers weighing such a tax, and many are of the view that,
“’Retail Sales Tax RST’ is now an aberration in the world perspective. Its future seems dim. Its problems result from difficulties of enforcement at higher rates, problems from inclusion of business purchases in the base, and issues in making border adjustments in international trade.” (Misconceptions about Value-Added and Retail Sales Taxes: Are They Barriers to Sensible Tax Policy?)