The merits and drawbacks of a potential “Amazon tax”

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In response to the struggles of the department store group House of Fraser (that culminated in a successful bid for the firm by Sports Direct billionaire Mike Ashley), the Chancellor of the Exchequer Phillip Hammond reported that he was considering a new set of taxes to tackle online businesses. Commonly referred to collectively as an “Amazon tax”, these taxes can be understood to be online sales taxes which would have the effect of reducing the after-tax revenue of e-commerce retailers such as Amazon, which typically enjoy relatively high per unit net margins compared to their high street counterparts. The idea of this system of taxation is to, in the Chancellor’s words, “support the high street” through the process of change characterised by a change in British consumer preferences from the high street to online shopping. This can be taken to mean slowing the pace of transition from high street firms to online retailers in the retail marketplace and thus cutting job losses due to high street bankruptcies. In principle the idea reduces the profitability of these online retailers through causing a reduction in demand for their products as consumers switch back to high street shopping. In turn, this raises the profitability of high street retailers and reduces the risk of redundancies. Not such a bad idea on the face of it!

However, there are a few qualms I have with this proposal. The first of these is that such an idea ignores the fact that this will result in increased prices for the consumer. Essentially, one of the reasons why online retailers prosper is because they have a lower average cost per product sold, thus enabling them to charge lower prices than high street firms in order to achieve the same profit per unit. Already, this gives an advantage to the online retailer in the form of lower prices, which in theory the sales tax should be able to solve. However, what about on the demand-side? UK real wages have remained almost stagnant and actually have fallen in some time periods, and policies which increase the cost of everyday shopping squeeze the consumer further. In an economy characterised by falling living standards, is a further reduction in the purchasing power of income really worth delaying some redundancies till later? This brings me on to my next point – is interfering with the free market a sensible decision in this case?

My answer would be no. The reason for this is that while implementing re-skilling programs and helping those made redundant to find alternative employment would indeed cost a great deal of money to the government, the high street (in my opinion) doesn’t exactly have a bright future either way. The convenience of shopping online as opposed to making a trip out represents another major plus that no system of taxation can take away from online retailers. This advantage, coupled with the fact that online retailers have almost no cost of selling more products (apart from actually storing these products), makes it relatively likely that either way the high street will see a significant reduction in its size. This presents us with a choice: redundancies now or redundancies later? The idea of the collapse of the high street being inevitable allows us to make a more rational decision, which is to not employ such a tax. Instead, the additional time can be used to employ workers with new, more relevant skills and/or help them find alternative labour – both strategies that serve to improve the future standard of living of British citizens. As opposed to delaying the inevitable, this seems like a far better option.

To conclude, analysing the merits and drawbacks of a proposed “Amazon tax” indicates that, in this case at least, interfering with the free market and delaying redundancies that are likely to anyways happen is not the best possible option. While it is true that the profitability of high street firms may rise in the short run due to such action, online retailers have numerous advantages (as listed above) over their high street competitors which enables them to sustain a competitive advantage in the industry. Hammond’s plan, while noble in principle, actually works against the utilitarian idea of raising living standards for the greatest number of people through raising prices for consumers already squeezed financially. For this reason, the proposed “Amazon tax” to me should not go ahead under any circumstances – the average Brit seems to have already had enough.

2 Comments Add yours

  1. William Lynne says:

    How about an even playing field where on and offline retailers both pay a median level of tax?

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    1. I think the key here is that both on and offline retailers pay the same level of tax – so yes, I agree that both should pay the same level of tax as opposed to the government unnecessarily taxing one higher than the other (assuming that there’s no significant difference in externalities of production between the two). So I think your suggestion has a lot of merit to it 🙂 Thanks for the comment again, Mr Lynne!

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