Various news sources are blaming Japan’s recent dip into a recession on its Internet sales tax increase imposed in April. As the Financial Times recently reported: “Japan’s latest contraction followed a jump in sales taxes in April, which hit consumer spending. It will make it more likely that Mr. Abe will delay a second tax increase, which was scheduled to take effect next October, until April 2017.”
Japan’s sales tax policies have translated into an economic hardship that likely didn’t have to happen if they were properly designed in the first place. A cautionary lesson here is that a poorly planned sales tax regime can have a devastating effect on the economy.
Here in America we must learn from this mishap. While Speaker Boehner has signaled the Marketplace Fairness Act/Internet sales tax policy will not be pursued in the House lame duck, any future measure that passes bearing similarities to the Senate backed MFA could yield a mirror image experience to Japan.
The MFA – in it’s current form – is burdensome, and its adverse impact will be felt most by small and medium-sized businesses that must remit taxes for over 9,600 tax jurisdictions and by consumers who will be confronting multiple tax rates, exemptions, tax holidays, etc. on their gift purchases – because of a destination-based tax system.
There are several more reasonable proposals in the works. For example, one alternative would allow small Internet retailers to collect a single sales tax rate – based on where they are located – and remit those taxes back to the states where their customers did the purchasing. It’s an amendable solution that would not require special compliance software or overhauling accounting systems.
Congress should be wary of enacting a massive new national tax scheme that will affect retailers and consumers alike and may slow down an economic recovery that is already limping along. Japan’s struggles are a worrisome indicator that a hastily planned tax regime can devastate the economy. Rightly so, America should take this as a warning.