RALEIGH – I know I’m probably supposed to be all up in arms about the prospect of the North Carolina legislature imposing a “ringtone tax.” But the idea, originated by Rep. Paul Luebke of Durham, doesn’t exactly raise my ire. It’s more deserving of a shrug.
Luebke’s argument is a familiar one. As long as North Carolina and other states levy a retail sales tax on products such as music recordings, why not be consistent? Should a consumer who buys a CD at the local big box pay sales tax while another consumer downloading the songs from the web makes his purchase tax-free?
Sounds rational and fair. But there is an argument for differential treatment. The act of shopping in a brick-and-mortar store involves the use of several services provided by state and local government, including road access and public safety. Fewer government expenditures can reasonably be associated with the act of downloading a song, so perhaps the sales-tax burden on the transaction should be less.
I shrug because I’m not persuaded that either argument really speaks to the reality of the modern economy. The retail sales tax is an archaic remnant of the consumer economy of the early 20th century. Because it applies only to physical goods and not to most services, it has gotten progressively out of alignment with consumer spending. Add in the role of catalog, direct mail, and online retailing, and you have a tax with a narrowing base, problematic enforcement, and economic distortion.
The proposed ringtone tax, really just the application of the sales tax rate to online purchases, may be intended to rectify the situation somewhat, but it’s probably not worth messing with. For one thing, vendors will be obligated to collect and remit the tax to the state only if they have a brick-and-mortar presence in North Carolina, which basically circles us back around to the original debate. Most consumers aren’t going to volunteer to pay a tax on download purchases, particularly given their type, frequency, and price. They won’t bother to keep the records.
Rather than going through the motions of trying to rationalize a sales tax that is hopelessly irrational in the modern world, I think that North Carolina should simply do away with the separate retail sales tax altogether.
From a tax-policy perspective, taxing consumer transactions one at a time is not the only way to levy a tax on consumption. In fact, it’s an inferior choice. If the goal is to tax all consumed income equally – and it should be – then the best course would be to tweak the existing income-tax code.
By definition, a household’s total income is disposed of every year in one of three ways: investment, donation, and consumption. I would argue that there should be no annual tax on money that people choose to invest, because that is nothing more than deferred consumption. Eventually, invested money and its earnings are donated or consumed, either by the original owners or their heirs. Tax it then, once and only once, or else you create a tax bias against saving and investing.
As for the share of money given away to others, there is room for debate about its proper tax treatment. I’ve come to believe that it is reasonable to allow households to deduct at least some of their charitable giving, for several reasons beyond the scope of today’s inquiry.
So that leaves consumption – which is, inevitably, the amount the household spends on all goods and services throughout the year, whether purchased from stores, catalogs, or web vendors. That’s the ideal base of a fair sales tax – but we’ll never get there through the sales tax itself. The barriers, political and practical, are too great.
Instead, have North Carolinians tally their net income, subtract charitable donations and net savings (how much they put into savings vehicles minus how much they take out that year), and then pay a flat marginal tax rate on the remaining income, which is household consumption. This is a modern, practical, sensible idea for fixing the tax system.
And thus doomed, I guess.
Hood is president of the John Locke Foundation