CAREER: Taxes and the Internet Economy

University Of Chicago, Chicago IL

Investigators

Abstract

Although it has existed for only a few years, the Internet has grown at almost unbelievable rates and is likely to continue to do so. This project outlines an empirically based research and teaching agenda that analyzes the Internet economy and the implications that it has for tax policy. Policy makers domestically and abroad are searching for ways to understand and analyze the role of public policy in the 'new' economy. By using the tools of public finance and industrial organization on new data sources about the Internet, the proposed research seeks to make empirical contributions to the study of this burgeoning field. In conjunction with this research the project also develops a new course about economics and strategy in the Internet economy that will emphasize the importance of economic analysis for understanding this new medium. The project described has three major research components. The first is a study of the impact of sales taxes on Internet commerce. In the United States, most transactions over the Internet do not pay sales taxes. Using data on the demographics and the online purchase patterns of almost 25,000 Internet users, this project examines how taxes affect online purchase patterns across locations. The data suggest that taxes have a noticeable effect on Internet commerce with people in high tax places being significantly more likely to buy online. The data are sufficiently detailed to allow for a number of tests for spurious correlation between tax rates and unobserved technological sophistication across cities. The second component of the project is an analysis of the demand for high-speed Internet access. Using data on consumer valuation of this new service, the project estimates the potential welfare gains from broadband access and examine the potential efficiency costs associated with taxing Internet access. The project emphasizes that in rapidly growing markets with fixed costs such as high-speed Internet access, there are important dynamic efficiency losses from taxation that are neglected in a conventional tax analysis. The preliminary evidence suggests that these dynamic factors may be quite important and that the welfare gains to high-speed Internet infrastructure may be fairly large. The final component of the project is an analysis of the degree of competition between online and retail sellers of computers. Using hedonic regressions on individual computer purchase data, this project creates retail price indices for computers in 50 major metropolitan areas and use those to estimate own- and cross-price elasticities for computers bought through different channels. The results is important for calculating optimal Internet tax policy.