The Corner

The Get Off My Lawn Party vs. the Future

I keep an eye on Apple news, in part because I’m an investor and in part because my new book is organized around the question: Why does your smart phone get better and cheaper every year while your public schools get more expensive and less effective, and why isn’t health care, a basic necessity, as cheap and accessible as mobile-phone service, which until the day before yesterday was a millionaire’s luxury?

Apple has been getting beat up a little bit by investors, but there were a few points in its Q2 report that are worth taking a second to appreciate: The first is that its online app store is now doing about 800 transactions per second. The second is that the app store has now generated more than $9 billion in revenue for the third-party app developers selling their products there, at a current pace of more than $1 billion per quarter.

Put another way, that means that the third-party app business being transacted through Apple’s online store is by itself approaching the size of a small Fortune 500 company, and if current trends continue, that business soon will be by itself larger than Harley-Davidson or Owens Corning. That’s just the cut Apple pays to outside developers. If Apple itself were a country, its economy would be about half the size of Ireland’s. Ecuador, Oman, and Angola are big oil producers, but none has an economy as large as Apple’s.

The current debate over the Internet sales tax — the woefully misnamed Marketplace Fairness Act — is not about companies like Apple, but about the next Apple. A giant such as Apple has the resources to calculate, collect, and remit taxes on behalf of each of the country’s 9,600 or so sales-tax authorities, and in fact it does so. But the compliance costs imposes by the Marketplace Fairness Act would place smaller upstarts at a distinct disadvantage, which is, I suspect, one reason that market incumbents such as Amazon support the tax. The real cost of taxes is not the revenue out the door to the taxman; it’s the revenue out to the door to the taxman plus all of the costs involved in complying with the tax code. That’s a hassle for businesses that have to comply with a single taxing authority; Senator Enzi’s wrongheaded bill would require businesses to comply with every taxing authority from sea to shining sea. No big deal for Apple or Amazon, but a significant burden for the firms hoping to one day compete with them. Entrepreneurs know that, and so do the investors who have the power to put capital into their projects or withhold it.

The Republican party, as our editorial notes this morning, is not doing especially well among younger voters. There are many reasons for that, and being insufficiently hostile to taxes probably is not one of them. But if the GOP hopes to make inroads into that generation, its best hope of doing so is probably in appealing to such traditionally Republican-friendly groups as entrepreneurs, investors, small-business operators, and, perhaps most important, those young people who aspire to those groups. The digital economy is where those people are found. The future probably looks a good deal more like the Apple app store than J. C. Penney.

The question at hand is not one of fairness. California has the power to impose its ridiculous taxes on California-based businesses, whether they are online or brick-and-mortar operations. What it does not have is the power to impose its ridiculous taxes on businesses based in Texas, Virginia, New York, or Maine. The Marketplace Fairness Act gives it that; the bill would move us away from jurisdictional tax competition and toward a multistate tax cartel. That this is happening with Republican support is vexing. They may as well pass a federal sales tax — we’ll end up with roughly the same thing.

The Republican party has always been pulled in opposite directions: between being the party of big business and the party of free enterprise — and they are not the same thing. If the GOP is not the party of free enterprise, then what is it? The political home of the Chamber of Commerce, the National Retail Federation, and guys with standing tee times at the Deer Island Country Club? If the GOP wants to be something other than the “Get Off My Lawn!” party, then growth, opportunity, and innovation — i.e., the future — has to be at the center of its message. Walmart can carry its own water. And our entrepreneurs have better things to do than act as deputy tax collectors for every feckless and rapacious revenue agency in the country.


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