ThosLives's Journal: On Taxing Real and Virtual Goods

There's another article on taxation of virtual goods that caught my eye, this time from cnn.

I have been thinking about this for a while, and I think I finally have a more coherent view of my thoughts on the concept of transaction taxes.

In my mind, the fundamental purpose of a tax should be to provide some public service related to the thing which is taxed. For instance, a gasoline tax to support roads makes sense because gasoline is typically used to drive on a road.

Taking that concept, I would think that a sales (or transaction) tax should be used solely for the purpose of facilitating transactions, or perhaps dealing with instances when transactions have gone bad (for instance, shoplifting, or contract enforcement). That means that if there is no required enforcement, then there should be no need for a tax.

In real life, however, I don't honestly know the purpose of sales tax in my state - I know it accounts for a sizable portion of the state income, but it's not used for facilitation of sales. Incidentally, a sales tax is actually strange because it taxes the transaction only. Technically, if there were two people in my state and they kept selling the same pencil to each other, every sale would be taxed. This is effectively economic disincentive to conduct a transaction, which is actually probably not what people want when it comes to economics.

Now let's take virtual goods. I can somewhat understand taxing "cashing out" of a virtual system, but unless the taxing agency is going to provide some services related to transactions in the virtual marketplace, purely virtual transactions should be beyond the consideration of a taxing entity.

I think the solution here is to really be more active in our local and state governments - use the representation which we fought for to show that "hey, if you don't show us the benefit of having this tax, why should we have it?"

It seems that the point of most governments is "to increase government revenue" rather than improve the standard of living of constituents. While having more social programs may accomplish this, I think it's addressing the wrong issue. Take, for instance, health care costs. Rather than addressing the issues that cause costs to escalate, governments typically just set up a mandatory insurance program where the population at large funds the increasing costs. The best solution would be to address the laws which allow for things like excessive barriers to competition and lawsuits. (Indeed, if the health care market were truly a free market, costs could not be so high because the number of competitors would rise dramatically).

Anyway, that was a bit of a diversion, but I think that involvement in local and state policy will go a long way toward improving things and reducing the unnecessary tax burdens we face. (I say unnecessary because, personally, I don't mind funding basic infrastructure and education through taxes.)