Optimal commodity taxation of traditional and electronic commerce

This paper examines theoretical arguments supporting preferential sales tax treatment of electronic commerce, using a version of the standard optimal commodity tax model that includes distributional concerns, tax-exempt goods, a subset of individuals with highly elastic demand for Internet goods (which are close but imperfect substitutes for similar goods sold by traditional retailers), and relatively high administrative costs of taxing electronic commerce. The analysis concludes that tax exemption of electronic commerce is unlikely to be even close to optimal, with the optimal tax differentials calculated suggesting that the traditional prescription Of uniform taxation of traditional and electronic commerce should not be overridden by optimal taxation concerns.