Pizza is less palatable with an 18.5 percent sales tax

As the 2012 campaign cycle approaches full swing, we are noting an increasing amount of discussion regarding how to tackle the U.S. deficit. The Republican debates have yielded a broad range of positions, from dramatic spending cuts to wholesale changes in the tax code. The expense-reduction camp is best exemplified by Ron Paul, who recently published a plan for balancing the budget in three years through a dramatic reduction in spending and benefits. The tax camp is best personified by pizza magnate and candidate Herman Cains often discussed 9-9-9 plan.

While we recognize the above largely amounts to campaign rhetoric, it is quite telling that the political party that has thus far held the line on tax increases is very much talking about tax reform. Much of the tax discussion has focused on the individual and what these varying tax schematics mean to household returns. We think the debate needs to focus on how the proposed changes affect small business, as the employer of over 50 percent of private sector workers.

In King County, where the combined state and local retail sales tax is 9.5 percent, Cains 9-9-9 plan would seem likely to give everyone pause before closing a retail transaction, whether it involves a pack of gum or something much larger. This program would have the greatest impact on small businesses that deal heavily in discretionary items, such as convenience stores. We think this would constrain commerce and ultimately have negative consequences on employment.

An alternative we think would be much more palatable is a sales tax on retail transactions conducted on the internet. Forrester Research estimated U.S. ecommerce sales will reach $197 billion in 2011. Applying a 9 percent tax to those transactions yields $17.7 billion, nearly twice the budget of the TSA, an entity Ron Paul proposes to abolish. More importantly, this would level the playing field across sales channels, likely bolstering commerce for small retail businesses, which again employ the largest percentage of the population. Thats prudent tax policy, in our opinion.

Bryan Jaffe and Christian Schiller are managing directors at Cascadia Capital, a Seattle-based boutique investment bank serving companies in diverse industries, including information technology, sustainability and middle market.