In the field of game theory, where we study strategic behavior, the
prisoners' dilemma is a classic problem. It goes like this: Imagine
you and a friend committed a crime together. You are both caught, put
in separate rooms, and given the chance to confess and testify against
each other. If niether of you confesses, you will both get one year in
prison for a minor charge. If one of you confesses, he will go free and
the other one will go to prison for seven years. However, if both of
you confess, you will both go to prison for five years.
To understand the dilemma, it helps to take a moment and think about
what you would do in this situation. To help you make your decision,
here is a table that shows what your sentence will be depending on what
decision you and your friend make:
| |
Friend confesses |
Friend stays quiet |
| You confess |
5 years |
Go free |
| You stay quiet |
7 years |
1 year |
If your friend confesses, is it better for you to confess or stay quiet?
What if your friend stays quiet, is it better for you to confess or
stay quiet?
What makes the prisoners' dilemma problem so interesting is that no
matter what the other person does, your sentence will be slightly better
if you confess than if you don't. If both people give succumb and
confess, however, they are both much worse off (five years in prison)
than if they had stayed quiet (one year in prison). In other words,
even though both people refusing to confess seems like an ideal outcome,
refusing to confess is a very risky strategy because you will be much
worse off if your friend chooses to betray you. It seems like quite a
paradox, but it's true, and it can lead to some tricky situations in
real-life, too.
Internet Sales Tax
In the United States, sales tax has never been charged on the sale of
physical goods if they are shipped across state lines. In recent times,
however, some states have decided to change this and charge sales tax on
inter-state sales.
Some people think that the states are just grasping for any revenue they
can find in order to make ends meet. Others think that not taxing
internet sales is a true loophole, an unfair advantage that rewards
internet companies and punishes brick-and-mortar stores. If there are
reasons to encourage interstate commerce by not charging sales tax, then
Amazon certainly seems to be pushing them to the limit. They
are actually setting up fulfillment centers around the country so many
of their shipments don't actually cross any state lines, but they're
still claiming that they don't have to pay sales tax in those states as
an out-of-state company. If they can get away with that, it definitely
seems like an unlevel playing field, the type of advantage for
mega-corporations over small businesses which doesn't sit right with me.
Ultimately, it seems that taxing sales within a state but not taxing
anything that crosses state lines doesn't make much sense. If the
government deserves to take 6-10% of every dollar we spend to create
quality roads, safe cities, and a functioning economy to make commerce
possible, then why exempt some things just because they travel longer
distances? Why discourage people from buying locally and encourage them
to use distant companies that will waste energy driving things across an
imaginary line solely to avoid taxation?
States that are trying to start charging sales tax on internet
purchases, however, are having trouble because they're in a prisoners'
dilemma...
The states' dilemma
States would like to charge sales tax to recover the revenue they're
losing as people purchase more and more goods online. The problem is
that Amazon can punish any state that enacts an internet sales tax
by canceling all Amazon affiliate accounts and ceasing construction
spending in that state. In effect, they're playing the states against
each other, making sure it's in each state's best interest to not charge
internet sales tax, even though the states would all be better off if
they all charged internet sales tax. If every state charged internet
sales tax, it would be better for all of them. Amazon wouldn't cancel
its affiliate program anywhere, as it's certainly more profitable to
have an affiliate program than not to. Similarly, having a network of
geographically distributed warehouses would still likely be a smart
business move, so Amazon would maintain their expansion and construction
around the country and would be similarly unable to use that as a
bargaining piece to pit the states against each other.
In part 2, I explain a way we can solve the internet sales tax
problem in a way that's fair to all the states and also to internet
retailers, and how it relates to the prisoners' dilemma problem in
general.