Network Externalities and Indirect Tax Preferences for Electronic Commerce

Author: Zodrow G.R.

Source: International Tax and Public Finance, Volume 10, Number 1, January 2003 , pp. 79-97(19)

Publisher: Springer

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Abstract:

Although most arguments supporting preferential tax treatment of electronic commerce are suspect, the existence of network externalities provides one potentially defensible rationale. This paper considers (1) direct network externalities, which arise in communications networks like the Internet, (2) indirect network externalities, which arise in computer hardware/software systems in imperfectly competitive markets, and (3) learning network externalities, which arise when existing network participants assist new users. It concludes the case for preferential treatment is weak, and that proposed blanket sales tax exemptions of remote (or all) e-commerce are especially inappropriate. Finally, the paper comments briefly on US sales tax reform efforts.

Keywords: network externalities; taxation of electronic commerce; Internet taxation; sales tax reform

Language: English

Document Type: Research article

Affiliations: 1: Economics Department, Baker Institute for Public Policy, Rice University, 6100 Main Street, Houston, TX 77005, USA zodrow@rice.edu

Publication date: 2003-01-01