Ebay, Tax Cuts, and Capitalism
Posted 8/25/06 (By Travis)
EBay online stores closing by the hundreds
8/24/06 Marketwatch
Hundreds of eBay Inc. merchandisers say they have closed their online storefronts, and some took their listings elsewhere, in the wake of a controversial [6%] fee increase eBay began charging earlier in the week.
This is of interest because the same phenomena occurs when government raises taxes. Substitute 'government' for eBay and 'businesses' for 'online storefronts' and it becomes more apparent how economic disaster occurs. What types of businesses are most hurt when government raises taxes?
A list of more than 700 eBay stores that have closed so far can be found on a Web site created by Melinda Burnett, an eBay seller living in Atlanta. The majority of eBay stores closing appear to be the smaller ones, just as eBay had hoped.
"A lot seem to be small, mom-and-pop type places." said David Yaskulka, the president of Harris Michael Inc. of Valley Stream, N.Y., and chairman of a committee of the Professional EBay Sellers Alliance, the main association of eBay sellers. "These are the less successful ones that see that eBay as no longer profitable because of the rate hikes."
Diligent readers will recall that in 'Settling the Small Business Hype', I described how vital small businesses are to job growth; they employ 41% of all US workers and are typically the fastest growing, hardest working, employers. Raising taxes hurts the poorest of these, the businesses just getting started, the ones in the most precarious situations, the risk takers, the poorer small business owners.
But wait a second, I thought the reason Liberals advocate tax increases was to help, not hurt the little guy? Generally, Liberals don't deny raising taxes hurts the bottom line of business, they just believe business will somehow magically 'absorb' and 'afford' the cost. But, as extrapolation of this ebay simulation indirectly illustrates, they do not 'absorb' and 'afford', they go under, file for bankruptcy, and lay off their workers, the result being that there are even more 'poor' and 'downtrodden' to take care of. Instead of aiding the poor, or making us more 'equal' by distributing wealth, liberals have instead created more poverty, by tearing down productive wealth creating members of society, creating incentives for folks to fall into poverty, and discouraging the impoverished from trying to improve their lot.
However, there is hope:
A number of former eBay merchandisers say they're shifting their listings to Amazon.com Inc. and its Google Base free classifieds listings, plus a host of other eBay competitors.
When states or cities raise taxes, there is always the opportunity to relocate, to 'vote with your feet', which is why cities like San Francisco and states like California and New York, Massachusetts, and New Jersey have been hemorrhaging businesses and hence population. When the Federal Government raises taxes or undertakes foolish schemes like a Nationalized, excuse me, Socialized, Healthcare system, there is nowhere to run, unless, of course, you can somehow find a freer country overseas. Good luck with that....
One last point, if such damage can be created on ebay with a 'mere' 6% hike in 'taxes', imagine what is was like when Herbert Hoover:
passed the Revenue Act of 1932 which increased the top income tax rate from 25% to 63% with the aim being to restore business confidence by reducing the deficit.
Yet, we are taught in public school that it was 'excessive capitalism' and erroneous 'laissez-faire economics', which were to blame for the Great Depression.
Posted 8/27/06 (By Travis)
This is an update to the post above, 'Ebay, Tax Cuts, and Capitalism'. I received some good feedback on this post from Dr. Russell Roberts, Professor of economics at George Mason University and co-owner of Cafe Hayek (an excellent site btw). The Club For Growth has also linked to this post.
I should clarify that this analysis is not meant to be critical of Ebay. Ebay is a private company and can raise fees on whomever they want as high as they want. In fact, it's entirely possible Ebay's decision was the best for the company, as their auction business is most profitable and the large number of 'mom and pop stores' were apparently a drag on their costs.
However, no one believes 'mom and pop small businesses' are a drag on the economy, in fact they are the engine of growth. And the interesting part, and key point of the previous post, was how Ebay choose to rid itself of these smaller outlets, by raising fees by 6%. Although the analogy is imperfect, the same effect is likely to occur when taxes are raised, with the smallest businesses going under first because they are most vulnerable to shifting market conditions, if one considers a tax hike a 'market condition'.
The ironic ending to this saga is that when government raises taxes, it bankrupts companies and discourages new business startups with the probable result being that it raises less overall money than if it had kept taxes neutral, or even cut them!
Posted 8/28/06 (By Travis)
Another update to 'Ebay, Tax Cuts, and Capitalism'. A reader has commented, see 8/25 comment below, that the fee hikes were in most cases much higher than 6%, and in some cases reached 250% or 500%. I've looked into this a bit and found this to be true; Ebay has increased many different types of fees for items in stores, which can often add up to large increases, depending on the price of an item.
Wouldntyaknow, some large companies are also closing shop:
Last week Ebays largest media seller, Movie Marz, [with 1.2 million items] announced they will be pulling up their ebay stakes and moving on.
So, it's not just the little guys that get hurt by tax increases. We're all in this together.
Here's a new scenario; what happens if we tax eBay itself?
6/6/2003 BBC
According to the new European directive, all internet firms trading in western Europe must now charge VAT on services and products sold from their sites, if the sellers live in a European country.
The move means that seller fees will now include VAT, and eBay admitted the move to charge a sales tax could have an effect on its European business, until now one of the firm's fastest growing units.
EBay said it would increase its fees in Britain and Germany to compensate for any loss of revenue from the new laws.
This story is of interest because some of our friends on the left following these posts might believe raising taxes on small businesses, or even wealthy individuals, who often own small businesses, is not the best idea, but since corporations 'rip off' consumers and make 'excess profit', they can be taxed without overly negative consequences. However, as illustrated here, corporations just pass on the tax increases to consumers. The lesson learned is that a tax does not become less harmful when it is applied in a 'feel good' manner (such as on 'excessively' profitable energy companies). Besides, corporations can vote with their feet just as easy as eBay's former online-store owners:
Media giant AOL Time Warner has already taken steps to pre-empt the charges, setting up a new business unit in Luxembourg - a European country with a more favourable VAT rate - for its internet group AOL Europe.
These economic lessons from the internet are quite valuable, and provide an exclusive window into incentives and disincentives of human behavior and the root causes of prosperity, better said, the root causes of economic stagnation.
For example, The Pay Pal Wars is an excellent book, describing the rise of Pay Pal, which, incidentally, was founded by a libertarian, and the hyper competitive, hyper capitalistic nature of internet companies, which, luckily, are still relatively free from the heavy hand of big government. However, the back cover states:
While every Silicon Valley startup can count on fierce competition, this candid insider's account reveals that sometimes that's the least of an entrepreneur's worries! When PayPal launched its online payment service and set out to overhaul the world's currency markets, it survived the dot-com bust and weathered a competitive struggle with the auction giant eBay. But hordes of government regulators, trial lawyers, and organized crime rings soon targeted PayPal for destruction, turning its quest to make Internet history into a desperate struggle for survival.
Trial lawyers?
EBay fee hikes put traders out of e-business
8/28/06 The Australian
EBAY faces a possible class action from disgruntled Australian sellers pushed out of business after the online auctioneer jacked up its merchant and other fees by as much as 500 per cent.
An online forum lists at least 250 Australian-based internet stores that have closed since the US internet auction giant hiked its fees last Monday.
The loss-making eBay traders could sue for unconscionable conduct under the Trade Practices Act, said trade practices barrister Neville Rochow.
"People have invested a great deal of trust in eBay and its cost structure and may have been induced into using the site on that basis," he said.
But, when an online store is created, the seller signs a user agreement policy, which contains the following:
Joining eBay and bidding on listed items is free. We do charge fees for using other services, such as listing items. When you list an item or use a service that has a fee you have an opportunity to review and accept the fees that you will be charged based on our Fees schedule, which we may change from time to time. Changes to that Policy are effective after we provide you with at least fourteen days' notice by posting the changes on the Site.
It seems to me this is a classic case of government attempting to sidestep a contractual agreement signed between private parties. Ebay could raise its fees 10000% and, as long as they give 14 days notice, it should be entirely legal. Predatory lawsuits like the one being filed in Australia are anti-business, anti-jobs, anti-growth, and, most obviously, anti-common sense.
See also 'Settling the Small Business Hype' and 'The Great Depression'