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MPE781-Implications Of An On-Line Shopping Tax

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  • Course Code: MPE 781
  • University: Deakin Unversity
  • Country: Australia


1. In your own words, summarise the article. What is the main message of this article? [8 marks]
2. The article states that “The Australian Taxpayers’ Alliance said the Turnbull governments online shopping tax punishes Aussie consumers and denies shoppers the same choice available to billions of shoppers worldwide.” Do you agree with the above statement ? Make sure that you justify your answer with the relevant economic theories.
3. Explain the rationale behind the creation of an on-line shopping platform. Does the on-line shopping platform make a market more efficient? 
4. Do you agree that such an on-line shopping tax make Australian retailers more efficient? How does this on-line shopping tax affect the total surplus of an economy? 
5. “If multinationals aren’t forced to pay their fair share of tax, they will have a competitive advantage over retailers here in Australia, on 2 our own main streets and in our shopping centres.” What will be the short-run and long-run consequences of such a tax policy on Australian domestic retailer.


Answer 1

The main message of the article is related to an action of the government that is reportedly influencing the other agents of the economies such as the customers. According to the report, the government of Australia, headed by MR. Turnbull has decided to implement an online GST for any transaction below $1000. The treasurer, defending the move of the government said that the tax was important for many reasons. First and the foremost is that the government needs some tax money in order to provide essential services and secondly, the tax is also necessary in order to protect the indigenous retailers of Australia.

The management at Amazon has also responded to the imposition of taxes by limiting the products that are available on the website. In addition to that, the prices of the products have also increased. The government criticised the company for passing most of the burden to the customers of the country despite being a huge multinational company. Cosgrove and Olitsky (2015) stated that that can be the start of the trend and hence many other multinational online companies may leave the market of Australia due to the imposition of the new tax system.  It is important to note that, price on the website of Amazon increased so much that the customers found ways to import the products buying it directly from the website of the USA. The article reports that the prices of the products imported from the USA are cheaper than the prices quoted in the Amazon website of Australia even after all the shipping fees and the customs GST are paid. On the other hand, the Australian Taxpayers Alliance (ATA) stated that the tax on online purchase will not achieve the objectives of the government rather the customers will become a victim. ATA also says that the imposition of taxes will reduce the choices of the Australian customers and they will not be able to buy many things that other global customers can buy. It has also been stated that this move by the government is to benefit a small number of retailers’ prices whose is high anyway.  

Nevertheless, the management at Amazon has decided to redirect its customers to the website of the US where they can buy the products at a cheaper cost. However, they also have stated that they can only deliver the products in the US only.

Answer 2

Yes, I agree with the Australian Taxpayers alliance's statement that, the imposition of the taxes from the side of the government punishes the customers as it reduces the choices available to the Australian customers. Boon et al. (2015) stated that one of the biggest advantages of the perfectly competitive market structure is that it provides a lot of choices to the customers of the market. However, the imposition of the online GST taxes shrinks the choices available to the Australian customers defying the principles of the perfectly competitive market structure.

The claim of the Australian Taxpayers Alliance can also be explained and justified through the use of the economic theory. There are two economic theories that are related to the event of online GST. First and the most important theory that is related to the event are the supply and the demand theory of economics. According to the principles of demand and supply theory, the prices of the products and the quantity that is sold in the market are decided not by the seller themselves. Rather, the forces of supply and the demand for that particular product set the price and the quantity that is sold in the market.  If the demand for that particular product is high, given the supply level fixed the price for that product will increase. Again if the supply for a product goes down due to the increase in the operational cost of the sellers in the market, given a fixed demand, the prices of that product reduces.


Figure 1: The changes in the supply and the demand for the product

(Source: Weber, 2017)

In this case of Australia, the imposition of the taxes on the online transaction has decerased the demand for the goods and the services sold online. Therefore, the customers have reacted buying lesser amount of products at each of the price level.According to the theory of supply and the demand, the demand curve has shifted to the left side. Figure 2 shows the leftward shift of the demand curve in the market that also depicts the fact that for each price level the customer is demanding less quantity of goods and the service in the Australian market Soska and Christin, 2015). This imposition of the taxes and the corresponding reduction in the demand has not only increased the prices of the products in the Australian market. It has also reduced the equilibrium quantity that is sold in the market of Australia. Therefore the same choice is not available to the Australian customer which is available to other billions of customers around the world.


Figure 2: The leftward shift in the supply curve

(Source: Rahayu and Day 2015 )

Another important thing here to note is that the consumer surplus is also reduced with the imposition of the online GST. According to Fang, Qureshi et al. (2014), the consumer surplus is the area above the price and the demand curve. The consumer surplus means the extra amount that the customers are left with after paying for the goods and the services. The imposition of the taxes is increasing the prices of the goods and the services and hence the surplus of the consumers is also getting decreased. This also proves and supports the statement of the Australian Taxpayers Alliance that the imposition of the online GST actually punishes the customers of Australia. While on one hand, it reduces the choice available to the customers it also reduces the surplus of the customers as well.

Again with the principles of perfect competition as well the state of the Australian taxpayers’ alliance can be validated. In the perfectly competitive market structure, there are a huge number of buyers and the sellers in the market (Mankiw, 2014). That means no single buyer or seller of the market has any control over the prices and the quantity of the market. If one of the sellers tries to increase the price in order to increase their revenue, the customers will move to other sellers. However, the market structure of the Australian market does not follow a perfectly competitive market structure. According to the reports, Amazon clearly has a bit more advantage over the other sellers in the market. few of the customers of the online portal is loyal to such an extent that they are ready to use VPN services in order to get the product delivered from the USA (Leong et al. 2016). Given this scenario, the imposition of the taxes has punished the online customers. The prices of the products for that particular company have increased and the supply of goods and the services has increased leading to a high increase in the prices.

Answer 3

The communication technology has improved rapidly in the last decade that has also helped in reducing the cost of communication. In addition to that, the uses of smart devices have also increased over the last few years that have paved the way for a new kind of business platform. These kinds of business generally do not have physical retails, rather they use the internet to establish a connection between a huge pool of buyers and sellers in the market. There are many of the advantages of not having a physical retail shop that compels many of the businesses to go online these days (Larson, 2018). The rationale behind the creation of the online shopping platform has been present below in details. 


First and the foremost rationale behind setting up an online retail is that fact that it provides a larger view of the management of the company. For example, a local retailer can only consider the local buyers as the potential buyers of the company. The management of the local retail can only observe the buying behaviors and the pattern of the customers who are in the proximity of the retail. On the other hand, an online market shop provides a whole overview of the market that includes customers of all geographical location. Klassen et al. (2014) stated that the online marketplace allows the seller to have an initial large customer base that directly helps in boosting the operation of the company.

Apart from that, the cost of operation is one of the decision-making points for the sellers of the market. A seller can always reduce the cost of operation using low quality of raw material that would eventually reduce the quality of the end product. An online market portal allows the seller to avoid investing in the overheads in order to establish a physical retail. Basu (2016) noted that the overhead cost of the seller accounts for a percentage of the overall cost of production. Thus, using the online shopping platform reduces the operational cost of the sellers which eventually reflect in the prices of the products and the services. Therefore, in terms of the efficiency, the online market platform is a better option for the businesses. The reduction in the prices not only benefits the sellers but it also benefits the sellers of the market as well. Chaffey (2015) stated that a reduced price level also helps to attract new customers as well.

Another rationale of setting up an online platform is that it provides perfect information both the sellers and the customers of the market. Boon, Pitt, and Salehi-Sangari (2015) stated that the online marketplace has the potential to supplement a market towards becoming more perfect in nature. According to the principles of market structure, a perfect commotion is where the information is free to any seller and buyers of the market. However, in reality, it is impossible for the buyers and the sellers to have perfect information about the market and hence this is one of the biggest reasons why there is no perfectly competitive market in reality. The online shopping portal, while on one hand allows the seller to study its potential buyers, on the other hand, allow the customers to understand product description of different sellers of the market (Kassaei and Patel,2014). As a result, none of the sellers of the market can use any particular production process to gain an advantage over the other sellers in the market.

In addition to that, the online market portal also allows the sellers to use the economies of scale in order to expand the business. Basu, (2016) noted that most of the multinational online retailers have the advantage to sell any product at a lower price than the seller who has a physical retail in the city.  The economies of scale state that, as the output of the firm increases, the average cost of production reduces. This is due to the U shaped property of the Long-run average cost curve. The seller using the online market portal gets to produce for a larger customer base and hence this low average cost curve allows the seller to enjoy better margin over the cost of production. Kakarot-Handtke (2014) highlighted that this advantage of the online market portal also benefit the customers as they get products and the services at lower prices. Therefore, using the online platform as a stage to carry out business becomes efficient for both the customers and the sellers of the market.


Figure 3: The decreasing average cost with the increase in production

(Source: Houde et al. 2017)

Lastly, the online market portal also allows the seller to collect digital information and segment the customers as per their differentiated needs. According to Goodwin et al. (2015), marketing and advertisement contribute to a significant portion of the overall cost of operation of a firm. Therefore, any company that can lower this cost can keep the prices of the products low. The digital data collection feature of the online market platform helps in the big data analysis of the firm that eventually influences the strategic decisions and hence saves a lot of costs. Thus, to sum up, the online marketing platform has a number of benefits which one hand eases the processes of the businesses for the sellers and on the other hand, it reduces the cost of production (Fang et al. 2014). The competitive nature of the market enhances and hence online market platforms contribute to the efficiency.

Answer 4

The government of Australia headed by Mr. Turnbull imposed the tax in order to achieve to the objective of the government. First is to raise tax revenue for different national services of the country and to protect the local retailers form the threats of the multinational companies such as the Amazon. However, one of the problems here is that multinational companies such as the Amazon have better control over the prices than the local retailers of Australia (Eraker et al. 2015). The report shows that the customers of Australia, even after the imposition of the taxes are interested to buy the goods and the services from the USA website of the company rather than the local retailers. Therefore, the objective of the government which was to protect the domestic sellers from the multinational online companies failed. The imposition of the taxes disabled the local retailers to get the technological know-how from the multinational companies. Therefore the production process and the scale of production remained small leading to the rise in the price of the goods and the service. This also justifies the statement of the ATA, which says the imposition of the taxes punishes the Australian customers (Cosgrove and Olitsky, 2015). After the imposition of the taxes, the customers not only has a short of supply in the market they also have higher prices for the goods and the services, be it multinational companies or be it, local retailers.  


Figure 4: The deadweight loss and the social loss

(Source: Chaffey, 2015)

Another point that proves that the imposition of the taxes does not make the retailers efficient is the fact that, the imposition of the taxes reduces the social welfare. The principle of economics shows that the tax can reduce the likeliness of the customers to buy from the market. Given the fact that demand for the goods and the services are pretty much elastic, a part of the tax is also passed on to the sellers of the market. Brue et al. (2014) stated that the tax rate creates a difference between the price paid by the customers and the price received by the sellers. However, the ultimate result of the tax as shown by the figure 4 is the increase in the price and the decrease in the equilibrium quantity. The Pe in the figure shows the pre-tax equilibrium which lies between the Ps and Pc. The tax reduces both the consumer surplus and the producer’s surplus. Although it increases the tax revenue for the government, it results in a space that is not owned by anyone. This is known as the deadweight loss which is shown as a red triangle in the figure. This area is lost from the overall welfare of the society and hence clearly shows that the imposition of the taxes neither benefits the sellers nor the customers of the Australian market (Arinze et al. 2018).

Answer 5

The imposition of taxes on online sellers can increase the operational cost of the companies so much so that it can shift the AVC curve to the upside. According to the theory of economics and the long-term cost analysis, given a fixed MC curve, the upward shift in the AVC curve can increase the cost of operation (Boon et al. 2015). Again, if the price of the market goes below the minimum average cost of production, the seller may decide to wrap up the operation of the company.

P MC2+MC1+t MC1




Q2 Q1 Q

Figure 5: The long-run consequences of tax imposition

(Source: Alley and Emery, 2017)

The figure 5 shows that in the long run, the imposition of the taxes may reduce the overall production of the industry with an unchanged price for the goods and the services. Bjorklund (2017) noted that the corresponding reduction in the prices gets limited due to the incapability of the local retailers to use the technological know-how from the multinational companies of the market. In the short run, the local retailers may find it cost-effective to produce due to a sudden increase in the demand for their goods and the services. However, in the long run, the customers of Australia will find a way to import directly from the USA using the Website of Amazon and other VPN services (Barsade, 2014). In this case, the capacity enhancement by the local retailers may get nullified and hence can have no effect on the prices of the goods and the services of the market. The interest in the turning the business into an online marketplace may also set it in this case. This, in turn, will make the business come under the online GST that further will affect the operation of the business through increased cost of production. It also needs to be noted that the imposition of the taxes, in the long run, can increase the average cost of production for the domestic retailers in such a way that it can be more than the price of the market (Baek, 2015). Therefore, in the long run, few of the domestic retailers may find it problematic to operate in the market.

Therefore, the objective of the government which was to increase the tax revenue and to protects the domestic retailers from the pressure of the multinational companies fails with the imposition of the taxes. While on one hand, it deteriorates the competitiveness of the market it also makes the operation more destructive for the social welfare. Again, in the long run, it may also disturb the operation of the domestic retailers as well. In all the cases, the customers are the one who suffers from the policies of the government. 



Alley, C. and Emery, J., 2017. Taxation of Cross-Border E-Commerce: Avoidance of Permanent Establishment and Multilateral Modifications to Tax Treaties. Journal of International Taxation, 28(11), pp.38-49.

Arinze, U.C., Ebem, D.U., Eneh, A. and Ezugwu, O.A., 2018. E-Commerce and electronic taxation in Nigeria. Information Technologist (The), 15(1).

Baek, Y.M., 2015. Current status of the E-commerce market in China and implication. Journal of Digital Convergence, 13(1), pp.111-124.

Barsade, J., Exactor Inc, 2014. Integrated e-commerce sales and use tax exchange system and method. U.S. Patent 8,700,504.

Basu, S., 2016. Global perspectives on e-commerce taxation law. Routledge.

Bjorklund, E., 2017. Just One Click Away: The Politics of E?Commerce Sales Tax Policy. Sociological Inquiry, 87(1), pp.97-123.


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