amazon associates

Amazon kicked me out of their "Associates" program because I am a resident of Connecticut. That state, as have a few others, recently passed legislation subjecting sales through state-based affiliates to the sales tax. Amazon is protesting such bills nationwide by terminating affiliate contracts like the one I absent-mindedly signed up for a week ago. They claim the taxes are unconsitutional, as online traffic is protected by the commerce clause.


I think this is bullcrap.


Internet and catalog sales are already subject to the use tax, the ubiquitous but rarely obeyed companion to all (I think all) state sales taxes. The states are attempting to enforce, where they see legal nexus, i.e. with affiliates, the established use taxes. Given the situation with state budgets, to enforce existing, widely flouted tax laws seems like a reasonable idea.


The moritorium on taxing online sales was established in the 1990s as a way of encouraging an exciting new growth-industry. It seems to have worked. Well, whether or not the moritorium had any role in the explosion of e-commerce, online sales without a doubt have thrived. In fact it's the old-fashioned way of shopping that seems vulnerable today. Blockbuster and Borders are pretty much gone, driven out of business by online rivals, mainly Netflix and Amazon.


It would be a shame if the existence of online shopping continues to diminish oour access to stores. Stores are places to gather. They also offer an effortless way to see what the world offers. Videos are in three dimensions organized by genre, alphabet, and nation of origin. A bookstore table might be heaped with a hundred new novels the staff recommneds. At the moment, Americans are strolling through stores and shopping online. They get the benefit of both. But one business model is profitable and thriving while the other is weak and looking for ideas.


Equalizing the sales taxes we pay in the two ways we shop would be a good place to start. I don't see how that's not fair. Why should someone who buys via internet or catalog pay less taxes than someone patronizing a local store? Given the communal and eductional benefits of stores, you might argue they should pay less taxes than an online merchant, who extracts business from your state's resident without delivering your state a three-dimensional amenity.

But now Amazon, another corporation enjoying the benefit of existing law, has found someone to bully, and twist their arms into helping to preserve their sop. In this case, the victims, of all people, are their affiliates! These are small business people who steer business to internet retailers and earn a small percentage in return. The contrast in the personas of the players involved is almost comical. The thriving internet retailer who is putting bookstores out of business is fighting to withhold pennies from strapped state governments by terminating the tiny business operations of local resellers, the lowest-cost route to entrepreneur status for people with spare time and a desire to work from home.


I say tax Amazon sales and damn their whining!

Regulate Pill Prices

My friend Sudip came up with a public policy idea so simple and logical, I am surprised I haven't heard it before. It's a powerful idea that could make an enormous difference for the American economy and the federal government deficit.

First, observe the anti-dumping laws in our trade regulations, which prevent non-US manufacturers from selling products at a loss in the states. Dumping is considered a predatory practice, an investment foreign companies make with the goal of hurting their American competitors, while they make their profits elsewhere. The US government protects American manufacturers by regulating multi-national pricing practices.

Now take the pharmaceutical industry. It is well established that the multinational pharmaceuticals earn their profits in the United States. In the developing world, people can't afford to pay anything close to US prices. In the developed world, away from the states, governments negotiate with manufacturers and set prices, generally far below US prices. Here in the states, the market determines how much the drug companies can charge. Certainly, health insurers can negotiate more effectively than individuals can, but they don't get help from regulators. In fact, legislators know how important US profits are to the pharmaceuticals, so they protect this industry from regulators who might want to side with consumers. So life-improving or life-saving pills are available here, and often invented here, but we pay fifty times what our friends in India pay.

While the practice of regulating prices and the relative profitability of selling in different countries is well established, it is employed only to protect US business. American consumers are asked to provide big pharma with almost all its profits, while sales abroad clearly prove that pills could be made and sold profitably for much less.

A profitable pharmaceutical industry is a critical player in American health care and we are fortunate to have them as a part of our compelling economic arsenal. And clearly profits drive them to perform research which can lead to newer better drugs with luck and a lot of money. But health care costs in the US are famously unsustainable. Governments, corporations, and individuals who pick up the tab for our health care cannot make their future budgets balance, because health care inflation has been steadily above inflation in other goods. Why should the American consumer, the sick consumer in particular, be asked to shoulder the whole subsidy, while the rest of the world free rides on the latest science?

Pharmaceuical companies that sell drugs in different countries should not be allowed to vary the price as they see fit. Why not say the US price can't be more than, say, 25% greater than the average price in the next five highest-price countries? That's far from "most favored nation," and would still leave a lot of profitability and incentive to do research. The US consumer would benefit, insurance carriers would benefit. US non-pharma business and government would benefit. Other rich countries might see a price increase for their pills. But the pricing would be much more fair.

Taxation of Dividends

Making dividends exempt from income taxation is anathema to liberals and perhaps a majority of the US population, because its direct beneficiaries are the wealthier half of the population and the amount of the benefit would be directly proportional to how rich you are. A sizeable minority of the population, those owning no stocks, would not benefit at all. One could argue, however, that a number of social problems would be alleviated by having corporations increase their dividends. If we can identify steps that would lead to larger dividends, such as through the tax code, they should be considered. For example, I suggest that in exchange for a slightly higher corporate income tax rate, any dividend paid out of retained earnings be tax free to the investor. The benefits of greater dividends include the following.

1. There would be less reliance on net income accounting in determining profitability of a corporation. Dividends now are a small fraction of earnings, and earnings are the prime focus of investors in evaluating stocks. With the focus on earnings, there is a strong temptation to inflate non-cash income in reported earnings, undermining investor confidence and creating volatility in asset prices. An increased focus on dividends would also reduce fraud along with more benign forms of bias in reported earnings.
2. Resources would be invested more efficiently because there would no longer be a tax rationale for hoarding cash.
3. Retirees would draw more income from the dividends on their stocks and there would be less pressure on Americans to save massively for retirement. If dividends are 2% to 3% as they are now, Americans need to save about $2 million to receive $50,000 per year in dividend income. They could obtain additional funds by selling appreciated shares, but buying and selling shares is a fundamentally speculative activity, not an appropriate foundation for retirement planning for a broad segment of society. Doubling the dividend rate cuts the target in half.

employment taxes

It seems odd that in this era of the jobless recovery and declining real median income that we are still taxing employment. The 7.5% social security, unemployment insurance, workers comp, though they're all unimpeachable uses of funds, all make it more expensive for businesses to hire people. Health insurance also famously adds to the cost of hiring. In this high-productivity and low-employment growth era, it's high time we found another economic transaction to piggyback on. I'd love to see a federal sales or excise tax, and if it were coupled with a lower tax on employment-based social security who would complain? Another possibility would be catalog and internet shopping. People owe use tax to their home state on those transactions already, but states probably need federal help to enforce those liabilities.

The jobs bill is fine, but we should recognize that the jobs problem isn't temporary. Jobs are disappearing. Since the 1980s, companies have been avoiding hiring and finding alternative ways of responding to growth. I have no doubt that most people will make do perfectly well in their new entrepreneurial / consulting / temp / home office careers. But stable jobs are a good option for most people and for the economy and we should adjust our tax system to promote them.

Wall Street

All this Wall Street pay business is red herring. Changing the salaries of a handful of people at the top of a hadful of firms is a superficial move, pure politics. It's not unfair though. If we're bailing them out, we can tell them what to do with tax payer money.

Here are a few tougher changes that would be good but that don't seem to be in the works, because our political leadership is surprisingly timid, given what we've just been through:

Resurrect Glass Steagall. (Resurrectionism! See the NYTimes piece on Paul Volcker
NYTimes.comwww.nytimes.com/2009/10/21/business/21volcker.html) Split up the super global financial instiutions and force the businesses that get the benefit of the discount window and FDIC insurance to perform the banking services that we actually need, such as lending to small business.

Force interest rate swaps and other derivatives to be traded in an exchange, rather than over the counter. Having these instruments rely on the credit of the counter-parties puts a very difficult to determine amount of risk on thousands of company and government balance sheets, unnecessarily. Standardize agreements, and pool credit.

Bring back the uptick rule on short-selling. Eliminate naked short-selling. The short-sellers effected a self-fulfilling prophecy by causing a run on Bear and Lehman in 2008. The banks were overleveraged, but a soft wind-down would have been more pleasant for all of us. Hey, I'm no defender of bubbles. But making a killing by wiping out a vulnerable big company is unwholesome.

Let shareholders vote on senior executive pay packages.

If a trader's annual profits are contingent on iffy "mark to markets" of illiquid assets, leave some compensation for the future, when the real results are known. You could easily have a situation otherwise, where bankers are gaming their employers because they know how they'll get compensated, and are sticking shareholders with risks they wouldn't want to own themselves.

stimulative taxes?

The US has a tough economic problem here in late 2009. Growth is extremely sluggish and expected to stay that way for at least a year. And the budget deficit and debt situation strikes many people - including currency markets, who are driving the dollar down - as so serious that significant fiscal stimulus, in the form of new spending or tax cuts may not be possilble.

What's the answer?

Stimulative taxes. We have to identify fiscal initiatives that will lower the deficit while not further depressing the economy, and if such a thing is possible, find taxes that can actually stimulate investment.

One way to do this would be to pass laws today that have taxes rise gradually over time. This helps with long-term fiscal imbalance while not dragging dollars out of a bad economy. Also, businesses will have a chance to respond to the coming tax hikes, potentially in stimulative ways. If we're going to impose a gas tax that will gradually rise to $2.00 a gallon, we need to start designing more efficient cars. If electricity from coal is going to go up with excise taxes, we need more windmills and solar panels.

health care reform

I agree that we should reform the US health care "system."

Here are some of the reasons:

1. Fee for service insurance plans drive up costs of services and of premiums.
2. 48 million cannot afford insurance and don't get healthcare they need.
3. Preventative care should be encouraged.
4. Competitive businesses that must compete with other countries - i.e. manufacturing - compete at a disadvantage if they provide high-cost American healthcare.
5. High cost pushes down quality. We can't buy as much when something is more expensive.
6. Attaching health insurance to employment increases the cost of hiring people and therefore reduces employment.

Here's a simple plan that addresses all of these issues:

The federal government should define a set of services that it wants provided. It should comprise a fairly comprehensive offering, but more importantly be a very well defined list. Once the package is articulated a cost can be estimated. I would take a less ambitious package at this point, because a successful program can be expanded. And a basic program would help the situation immensely.

To deliver the package in the most cost-effective way, it should then hold a bidding process in each of the 438 Congressional districts. The winning bidder would be the enity that can credibly provide the specified service for the lowest price. The price would include a regular payment from the government, based on population covered, plus small co-payments from the users, designed to produce appropriate levels of use.

The cost of the program would be paid for by new taxes. These taxes should be designed to not discourage employment. OK things to tax would be personal income, corporate profits, excise taxes on goods we want people to use less, such as oil.

The entities that I envision bidding would be amalgams of existing hospitals, medical offices, drugstores, etc, depending on the services articulated, but organized under a single managerial umbrella for the purposes of delivering those services.

Each of the resulting regional health providers would be a multi-billion dollar business, but the job wouldn't be so enormous that it necessarily creates an oppressive bloated bureacracy. Think of an entity about the size of a state police force or a county school system. Having multiple providers would lead to a variety of innovations, which would then be copied around the country. The service would be offered to all comers, but would not rope in the entire health industry, so people who wanted to spend more for what they think are better services would be free to do so. But the public package would be subject to renewal every, say, five years, so that the provider would have to perform or one of the other providers would likely win the next time around.