To Tax or Not To Tax? The Case of Electronic Commerce by

ABSTRACT: Despite the intensifying debate over the taxation of internet commerce, the relevant issues have not been given a systematic treatment in the context of the literature on optimal taxation. We present such an analysis, and investigate separately the taxation of business purchases of intermediate goods, the taxation of consumer purchases of final goods and services, and the various issues of administration and compliance costs as they apply to the development of e-commerce. We conclude that, generally, the optimal tax literature can not be used in support of a blanket tax exemption for internet purchases. Certain conditions could lead to the optimality of an exemption, but those conditions are not likely to be met in practice