Art Laffer Releases Marketplace Fairness Act Study Based on Fantasy

Art Laffer recently released a study  paid for by a Walmart funded Pro-Internet-Tax group in which he claims the Marketplace Fairness Act could - if accompanied by significant state income tax cuts - add jobs to the economy. Years ago Mr. Laffer made a great contribution toward the popularizing of tax economics in the United States.  More recently, has had some problems with his economic models, including his 2006-2007 prediction where he assured the American public that there was no housing bubble, that there would be no housing crash, and that the U.S. economy had no risk of recession.  If you listened to him then, you likely lost your shirt (and probably your home).  We believe that if you listen to him now, you'll lose your shirt again, this time to higher taxes and jobs that don't come.

First, let's talk about what Laffer gets right.  He says something commonsensical;  at a certain point taxes alter behavior.  If you tax an activity at increasingly higher rates, at some point you get less of that activity.  He thinks income and other taxes are bad and that those rates are too high and should be replaced by sales taxes.  He sees the Marketplace Fairness Act as a way to broaden the sales tax base so that income taxes could be lowered, thereby stimulating more income producing behavior (i.e. jobs/employment).

So where does he go wrong?

1. Correlation is not causation.  He appears to have omitted that we have experienced (as the president likes to say) "the greatest financial crisis since the great depression".  Sure, Laffer didn't see it coming, but that's no excuse now to pretend it never happened.  He can't now blame the slowdown in GDP per adult on the composition of the tax base; we still haven't recovered from a decade of boom and bust and that's the cause of the reductions in GDP per adult.

2. He overestimates the amount of uncollected tax by online sales.  He is relying on numbers from studies that have already been discredited.  In places where internet sales have been taxed collections have been 85% lower than his studies predict.  The true uncollected revenue is actually in the $2.5-6B range according to more recent studies and the actual data.  Remember, online sales make up 5% of all sales, and according to the former chairman of the Congressional Advisory Committee on Electronic Commerce 83% of online sales are made by big retailers and already taxed, leaving less than 1% of all retail taxes uncollected (because the states choose to not collect them).

3. He ignores the *cost* of the MFA to other sectors of the economy.  The AAA-CPA has said that the cost of compliance to the companies burdened by the MFA wipes out the revenue captured from it.  That is, it's a destructive tax.  It *destroys* small business jobs and crushes entrepreneurship.

4. MOST IMPORTANTLY: Laffer's program only "works" (by his own admission) if states actually make it revenue neutral by cutting other taxes!  But they aren't doing that, they're budgeting for *increases* in spending if the MFA passes.  NOTHING  in the bill requires states to lower their income tax or other taxes.  Nothing!  And to believe they will is to be deaf - because they are *saying* they are going to spend more.

In short, Laffer's entire study comes down to an unrealistic fantasy that if the MFA passes then states will make the bill revenue neutral by cutting their income taxes.

Small local sellers that have been duped into supporting the MFA and really believe it will somehow solve their problems need to get with the century and start selling online and stop being shills for Walmart  -  again, the company behind Laffer's study.  Amazingly, while it is the big box chains that moved down the street that most hurts small local businesses, these mom and pops are being encouraged by those same big boxes to blame online sellers.  Even more ironically, the biggest online sellers are, in fact, the online stores of the big boxes.  Small businesses that support the MFA are supporting the company (and companies) that has killed more small mom and pops than any other business in the history of the world.

If you want the TRUTH about the unfair MFA and what a job killer and small business killer it is, see:



We think you can trust CPAs who are on the front lines of this issue more than Laffer. Read the AAA-CPAs open letter about the devastating impact of MFA. They assert that "If you add up all the costs for complying with the new legislation, then the administrative burden placed on smaller remote sellers will exceed the use tax revenues remitted to the various states."