Taxing Goods and Services in a Digital Era

53 Pages Posted: 24 Nov 2020

See all articles by David R. Agrawal

David R. Agrawal

University of Kentucky - James W. Martin School of Public Policy and Administration; University of Kentucky - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

William F. Fox

University of Tennessee, Knoxville - College of Business Administration

Date Written: 2020

Abstract

Taxing consumption in the digital economy poses unique challenges for fiscal authorities. Recent institutional reforms, such as states changing remittance rules for the sales and use tax following the Supreme Court decision in South Dakota v. Wayfair, were enacted in order to increase tax revenue collections and create a more neutral tax system. Although these reforms induced more remote vendors to remit taxes on a destination basis, the revenue gains were modest, consistent with most large online vendors remitting taxes prior to the reforms. Instead, following the recent large shock to online shopping from the Covid-19 pandemic, the shift to destination-based taxation has redistributed revenues between large and small local jurisdictions. Increased online shopping raises revenue growth in small jurisdictions while contracting revenues in large jurisdictions. But, Wayfair is not the end of the story: technological changes that induce new consumption patterns, promise new challenges for fiscal authorities. Critical challenges for the next decades include limiting administrative and compliance costs of enforcing taxes in a digital world, determining filing thresholds, dealing with online marketplaces and facilitators, and taxing the consumption of digital services from two-sided platforms. With respect to digital services, we discuss whether consumption taxes should be imposed on both monetized platforms and non-monetized platforms such as social media, and the mechanisms for doing so.

JEL Classification: H200, H700, K300, L800, R500

Suggested Citation

Agrawal, David R. and Fox, William F., Taxing Goods and Services in a Digital Era (2020). CESifo Working Paper No. 8708, Available at SSRN: https://ssrn.com/abstract=3736490

David R. Agrawal (Contact Author)

University of Kentucky - James W. Martin School of Public Policy and Administration ( email )

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HOME PAGE: http://www.uky.edu/~drag222/

University of Kentucky - Department of Economics ( email )

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United States

HOME PAGE: http://www.uky.edu/~drag222/

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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HOME PAGE: http://www.uky.edu/~drag222/

William F. Fox

University of Tennessee, Knoxville - College of Business Administration ( email )

453 Haslam Business Building
Knoxville, TN 37996
United States
865-974-5441 (Phone)
423-974-3100 (Fax)

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