Robber Barons, Main Street, and the Sales Tax Ruling

In a long-awaited and, now, roundly lamented ruling, the Supreme Court has decided that states do, after all, have the power to force online stores at the other end of the country to collect and remit taxes on sales made to their longsuffering residents.

On the one hand, this seems fair.  A store in your town has to extract sales taxes from customers; why shouldn't a store elsewhere, that ships you goods by mail?

On the other hand, there's a deeply unfair aspect.  Your hometown store is consuming public services from police protection to judicial enforcement; a store a thousand miles away doesn't use any local services except the roads, and those are paid for by taxes on UPS delivery vehicles.

The theory is that the tax is on the state resident - the purchaser - not the store, and so where the store is located is irrelevant.  If only this were true!  For the libertarian, the worst effect of this decision will be that it strips away tax competition between states.

For the past twenty years, greedy states and local governments have been effectively limited in their ability to impose confiscatory sales taxes on most goods because if the rates exceeded the effective shipping, their taxpayers would simply order goods online and have them sent in, avoiding the tax.  Now, an unhappy taxpayer must actually move their residence to a different jurisdiction, which is a much greater challenge.

Given that the Constitution grants to Congress the power to regulate interstate commerce, it's theoretically possible that Congress will pass a law forbidding states to require out-of-state companies to collect local sales taxes.  Given the number of tax-happy Democrats still in office, we won't hold our breath waiting for this to happen.

So, what will be the changes in the world we now live in?  Will it end the Internet as we know it?  Those who support this decision are celebrating that their beloved local brick-and-mortar store will no longer be suffering unfair competition from afar and that all will have to pay whatever sales taxes their local rulers choose to impose.  To hear them rejoice, one might expect a resurgence of the classic American small-town Main Street, filled with independent small businesses owned by local families who live in the apartment upstairs.

If that were actually going to happen, this decision would be welcome.  Alas, it won't, because the Supreme Court has no understanding of business in the modern Internet era.  Indeed, they don't even understand the history of business during the robber baron era a century ago.

Bigger Always Wins

If our modern ill-educated populace even thinks about the Gilded Age of the late 1800s, they probably envision a time of profound inequality and injustice, where greedy and rapacious capitalists stole from their longsuffering and un-organized workers.

As far as the inequality, they're right: the industrial era did indeed lead to the creation of vast fortunes, just as the Internet era has.  And, as with all eras, the vast majority of people don't become plutocrats no matter how gifted or industrious they might have been.

Justice in economic terms can't be determined by equality or the lack thereof. Yes, the robber barons became immensely wealthy.  But everybody else did too, compared to their own grandparents.

How was this possible?  Because, contrary to the teachings of Karl Marx, the capitalist managerial class do provide a service of great value.  They create business organizations with economies of scale allowing the prices of everything they touch to be lowered.

Consider the arch-monopolist, John D. Rockefeller and his Standard Oil Corp.  He was hated by his competitors because he was able to out-compete and eventually buy them out.

The ordinary purchaser of petroleum products didn't hate him nearly so much, and for a very good reason: As Standard Oil grew, the retail price of petroleum plummeted:

Its output and market share grew as its superior efficiency dramatically lowered its refining costs (by 1897, they were less than one-tenth of their level in 1869), and it passed on the efficiency savings in sharply reduced prices for refined oil (which fell from over 30 cents per gallon in 1869, to 10 cents in 1874, to 8 cents in 1885, and to 5.9 cents in 1897). It never achieved a monopoly.

Think about your personal experience with such massive corporations as Wal-Mart and Amazon: Were prices cheaper before they came to town?  Was service better?  Did you have a wider range of selection?

Of course not!  For the ordinary consumer, Wal-Mart and Amazon are nothing but blessings.  Amazon isn't always the cheapest source, but they sell darn near everything and their returns policy is without peer.  Wal-Mart doesn't stock nearly such a wide range, but if they do have what you want, they are virtually always the cheapest and you don't have to wait for delivery.

Your humble correspondent distinctly remembers the execrable service at our local Zayre's before Wal-Mart came to town and put them out of their misery.  Our local mom-and-pop stationery store had lovely service and sweet people, but pens cost $6.  All Americans are better off thanks to the vast purchasing power and efficiency of these giants.

Modern business academia likes to talk about how "network effects" make it inevitable that the biggest company in any Internet-related field will tend to squeeze out all others, but that phenomenon has been observed for a century at least.  The plain facts of history show that companies will inevitably grow as large as they can, stopped only when they become so large that they can no longer be run effectively.  Then they start to stumble and fall to smaller, more nimble competitors that, in their turn, overgrow and become sclerotic.

Thus Sears was replaced by Wal-Mart, Amazon, Lowe's, and a host of others.  Today's mom-and-pop has to compete with Amazon; yesterday's sweated over competition from the Sears catalog.

Indeed, by definition a mom-and-pop can't successfully compete with the giants: If they could, they wouldn't be a mom-and-pop anymore, they'd be on their way to being a giant themselves.

Unless It's Actively Prevented

So, given that businesses have been around for a long, long time, how is it that there are any small businesses in existence?  Shouldn't they all have been eaten up or driven out long ago?

Sad to say, many small businesses exist purely because of government intervention.  Taxicab medallions, for example, have long been granted preferentially to individuals rather than the large citywide cab companies that once prevailed.  Car dealerships are locally owned because, a century ago, most states made it illegal for car manufacturers to also own car dealers - a restriction which Tesla is attempting to fight, with scattered success.

Standard Oil, even at its peak, was not a monopoly, but the federal government used its antitrust powers to break them up into several different oil companies, many of which still survive and compete today.  Thomas Watson famously pointed out that IBM controlled only a small percentage of the "computing equipment" industry if you included pencils and paper, but the antitrusters knocked IBM down to size and nearly put "Big Blue" out of business.

Today's business world is commanded by corporations larger and more powerful than they've ever been, largely because, for once, our government has been far too inactive.  The major banks, the major airlines, the giant Internet corporations - all are too big to fail and too big to be controlled, so they ought to be forced to break up.

This would increase competition and help create room for small businesses on the margins where the giants would have lost a bit of their grip.

Even in an era of giants, though, there are small businesses which survive due to specialization in a unique niche.  Amazon may be happy to sell you a new watch, for example, but they will never be able to provide expert repair and cleaning of your great-grandfather's heirloom antique pocketwatch or grandfather clock.  There will always be room for niche experts to make their own way.

It doesn't seem like giant corporations are able to drive local restaurants out of business either, at least not if they're any good.  Our streets may be filled with McDonald's, Olive Garden, and Outback Steakhouses, but you needn't go far to find a owner-operated restaurant.

Is there still a place, though, for a small locally-owned store that sells the exact same commodity stuff made in China as everyone else?  Perhaps there is, perhaps there isn't.  And if there is no such place, why should the government attempt to force there to be?

The Road Not Taken

If it is your dream to own and operate a general bookshop - well, I'm sorry to have to be the one to break it to you, but you need a new dream.  Those days are done - just as are the days of starting a car manufacturing business in your barn or a computer business in your garage.

Instead, look for something that isn't already being done by people who have tens of billions of dollars more than you do.  Nobody can be an expert at everything, but if you work hard enough, most everyone could be the world's leading expert at some carefully defined niche.  True, 99.99% of everyone else in the world may not care two cents for your particular niche, but the .01% of those who do will diligently seek out out.  And the Internet makes that possible in a way that never has been seen before.

That's why this ruling is so potentially devastating.  Not because it will help the local pen shop compete against Amazon - they can't, sales tax or no.  And not even because it will allow governments to raise taxes even higher than they already can, free from tax competition - they already have other ways, and other taxes, to achieve those larcenous ends.

No, the true tragedy is that your small local niche expert now cannot realistically offer his wares nationwide - because even if there are 100 people who care about what he does, and which combined would provide a livelihood, the logistical overhead of filing and remitting taxes in the 100 different local tax jurisdiction those 100 customers live in, would make business entirely impractical.

We won't be seeing more mom-and-pop stores either land-based or online.  We'll be seeing fewer, and we'll all be the poorer for it.