What would happen if businesses only paid a gross revenue tax?
July 8, 2015 11:04 AM Subscribe
If every corporation/business had to pay a fixed percentage of its gross revenue as a tax, what effects would there be on prices and the economy at large?
Companies find all sorts of clever ways to write off expenses, move money around, have bases in different countries and do royalty deals, etc. But what if every company simply had to hand over, say, 10% of their gross revenue to the IRS/HMRC/similar? Would it work or would there be damaging effects? (For example, my first hunch is products with long chains of intermediaries would become very expensive?)
For the sake of simplicity, I want to avoid thinking about personal income taxes. Solely business income/corporation taxes.
Companies find all sorts of clever ways to write off expenses, move money around, have bases in different countries and do royalty deals, etc. But what if every company simply had to hand over, say, 10% of their gross revenue to the IRS/HMRC/similar? Would it work or would there be damaging effects? (For example, my first hunch is products with long chains of intermediaries would become very expensive?)
For the sake of simplicity, I want to avoid thinking about personal income taxes. Solely business income/corporation taxes.
This is an impossible question to answer. Some things you'd need to think about though:
-define "gross revenues"
-define "their"
-define "business income"
-what about partnerships, trusts, and other non-corporate business entities
-how is the tax revenue being used; could it potentially increase demand
posted by melissasaurus at 11:26 AM on July 8, 2015
-define "gross revenues"
-define "their"
-define "business income"
-what about partnerships, trusts, and other non-corporate business entities
-how is the tax revenue being used; could it potentially increase demand
posted by melissasaurus at 11:26 AM on July 8, 2015
You'd instantly penalize any industry that has low profit margins, and especially those that have low profit margins but very high costs. Semi-arbitrary example: If it costs $1000 to buy a laptop and I can sell it for $1100, I've made $100 in profit. If I instead buy a $2000 laptop and sell it for $2050, I've made $50 in profit. But in a gross-revenue tax regime, the latter would be taxed nearly twice as much, even though I made half as much money!
Real-life example: Supermarkets are extremely low-margin (1-2% for traditional ones, a couple percent more for Whole Foods and the like.) But they also have very high gross sales, because everybody needs to eat all the time. (think $500b+, never mind other grocery stores.) Even a 5% tax on gross sales would, for all intents and purposes, annihilate the entire industry overnight, because their profits would never exceed their tax burden.
Obviously in practice you might offset this by, ie, reducing other taxes. But the point is that you'd create a tax regime where businesses couldn't just focus on maximizing the profits they make, they'd also have to maximize their sales:profit ratio. Industries that serve the wealthy tend to be much more profitable per dollar than those that server the poor, because they sell fewer units but make more money on each unit. So you'd basically say "hey, I want a tax system that strongly encourages businesses to focus on serving the rich and makes serving poor people a really terrible idea."
Do you want that?
posted by Tomorrowful at 11:32 AM on July 8, 2015 [3 favorites]
Real-life example: Supermarkets are extremely low-margin (1-2% for traditional ones, a couple percent more for Whole Foods and the like.) But they also have very high gross sales, because everybody needs to eat all the time. (think $500b+, never mind other grocery stores.) Even a 5% tax on gross sales would, for all intents and purposes, annihilate the entire industry overnight, because their profits would never exceed their tax burden.
Obviously in practice you might offset this by, ie, reducing other taxes. But the point is that you'd create a tax regime where businesses couldn't just focus on maximizing the profits they make, they'd also have to maximize their sales:profit ratio. Industries that serve the wealthy tend to be much more profitable per dollar than those that server the poor, because they sell fewer units but make more money on each unit. So you'd basically say "hey, I want a tax system that strongly encourages businesses to focus on serving the rich and makes serving poor people a really terrible idea."
Do you want that?
posted by Tomorrowful at 11:32 AM on July 8, 2015 [3 favorites]
The other people are mostly wrong; prices would go up + the tax; part of that supposedly-small grocery margin includes the many other taxes already paid.
But what would happen is total vertical integration favoring large companies over small ones. You can kinda see that already in that large companies pay lots of lawyers to move money around so they don't pay tax on it, while small companies suffer.
posted by flimflam at 11:39 AM on July 8, 2015 [2 favorites]
But what would happen is total vertical integration favoring large companies over small ones. You can kinda see that already in that large companies pay lots of lawyers to move money around so they don't pay tax on it, while small companies suffer.
posted by flimflam at 11:39 AM on July 8, 2015 [2 favorites]
The other people are mostly wrong; prices would go up + the tax; part of that supposedly-small grocery margin includes the many other taxes already paid.
This.
It would act essentially as a sales tax or a VAT (VATs eliminate your "long chain of intermediaries" problem).
posted by mr_roboto at 11:55 AM on July 8, 2015 [6 favorites]
This.
It would act essentially as a sales tax or a VAT (VATs eliminate your "long chain of intermediaries" problem).
posted by mr_roboto at 11:55 AM on July 8, 2015 [6 favorites]
Yeah; applied broadly, it would basically be a VAT. If a grocery store sells an apple for a dollar and makes only a penny in profit, adding in a 5% tax to their gross income would require them to send a nickel to the government for each transaction - but that wouldn't bankrupt them; they'd just charge $1.05 for the apple. If only one grocery store was taxed this way, some people would shop at competitors, and if only the grocery stores in one area were taxed this way, some people would go across the border to shop, but the broader the tax is applied, the less it would have an effect.
posted by Homeboy Trouble at 12:40 PM on July 8, 2015
posted by Homeboy Trouble at 12:40 PM on July 8, 2015
This scheme would put most restaurants right out of business. 10% profit margin is a dream for many.
posted by feckless fecal fear mongering at 12:51 PM on July 8, 2015 [1 favorite]
posted by feckless fecal fear mongering at 12:51 PM on July 8, 2015 [1 favorite]
If this was a VAT tax, would it be charged on the retail sale to the final user? If not, the components in the supply chain would each be taxed and then taxed again as the components were assembled and installed in each step. A house purchase would involve the 10% tax on the overall sale, plus the tax paid on the lumber and fixtures, plus the tax on the sale of the lumber and fixtures to the wholesaler, plus the tax paid on the lumber and fixtures components, etc.
It would snowball. Want to exempt some of those intermediate taxes? Now it gets complicated and unfair.
posted by Midnight Skulker at 12:52 PM on July 8, 2015
It would snowball. Want to exempt some of those intermediate taxes? Now it gets complicated and unfair.
posted by Midnight Skulker at 12:52 PM on July 8, 2015
This scheme would put most restaurants right out of business. 10% profit margin is a dream for many.
If this is the case, why are there any restaurants operating in the city of Los Angeles, where there's a sales tax (i.e. a tax on gross receipts) of 9%?
If this was a VAT tax, would it be charged on the retail sale to the final user? If not, the components in the supply chain would each be taxed and then taxed again as the components were assembled and installed in each step... etc. etc.
This isn't how a VAT works. A VAT is a tax on the "value added" at each step of production. The tax is levied on the difference between the cost of the starting materials received and the selling price of the product at each step of production. In the example of the house, you would pay only a tax on the difference in value between the finished house and the starting materials.
posted by mr_roboto at 1:04 PM on July 8, 2015 [1 favorite]
If this is the case, why are there any restaurants operating in the city of Los Angeles, where there's a sales tax (i.e. a tax on gross receipts) of 9%?
If this was a VAT tax, would it be charged on the retail sale to the final user? If not, the components in the supply chain would each be taxed and then taxed again as the components were assembled and installed in each step... etc. etc.
This isn't how a VAT works. A VAT is a tax on the "value added" at each step of production. The tax is levied on the difference between the cost of the starting materials received and the selling price of the product at each step of production. In the example of the house, you would pay only a tax on the difference in value between the finished house and the starting materials.
posted by mr_roboto at 1:04 PM on July 8, 2015 [1 favorite]
Because sales taxes are passed right through to the consumer.
posted by feckless fecal fear mongering at 1:16 PM on July 8, 2015
posted by feckless fecal fear mongering at 1:16 PM on July 8, 2015
Because sales taxes are passed right through to the consumer.
And a gross revenue tax wouldn't be? I think it probably would.
posted by mr_roboto at 1:22 PM on July 8, 2015
And a gross revenue tax wouldn't be? I think it probably would.
posted by mr_roboto at 1:22 PM on July 8, 2015
I mean, it's trivial to pass to the customer. You just tack on an additional x% to your prices across the board.
posted by mr_roboto at 1:23 PM on July 8, 2015
posted by mr_roboto at 1:23 PM on July 8, 2015
Taxes are only as effective as they are collectible. Sales taxes are very easy to collect. Customers are used to paying them. Everyone expects them. It's easy to audit a restaurant's income if they are suspected of cheating on taxes – check inventory, POS system records, etc. If the restaurant was responsible for collecting what amounts to a 9% sales tax all year long and paying it in one lump sum at the end of the year, I would expect the collection rate to be smaller, since the gross revenue tax would be placing a larger responsibility on the restaurant to be good citizens and report their revenue properly. You might think that, well, that's the job of some regulatory body to enforce the tax laws, let them handle it. But those regulators are expensive, and that's another expense that the state has to pay if we make it harder to collect tax money. Income and sales taxes are popular for this reason. They're easy and inexpensive to collect. Hence the state gets more revenue than they would otherwise.
posted by deathpanels at 1:24 PM on July 8, 2015
posted by deathpanels at 1:24 PM on July 8, 2015
A gross revenue tax could work very similarly to a sales tax or VAT. The big difference, as mr_roboto says, is that VAT and sales tax are only applied on the sales to the end user or t he value added, while a simple tax on revenue would happen at every stage of the pipeline: every time one corporation bought something from a different one, the tax would be incurred on the full value of the product.
This would create BIG incentives for people to game the tax via corporate structure. For instance, maybe before, to make a book, you'd have a logging company sell trees to a paper mill which would sell paper to a publishing house which would sell books to a bookstore which would sell them to you. But under a revenue-tax regime, the lawyers would make very sure that the only time any revenue was booked was when you bought the book.
You could imagine this creating big incentives for vertical integration: the different stages of the process would all be conducted by the same company. Say goodbye to your local bookstore, because the only tax-efficient owner of a bookstore would be a forestry company.
posted by goingonit at 1:27 PM on July 8, 2015 [3 favorites]
This would create BIG incentives for people to game the tax via corporate structure. For instance, maybe before, to make a book, you'd have a logging company sell trees to a paper mill which would sell paper to a publishing house which would sell books to a bookstore which would sell them to you. But under a revenue-tax regime, the lawyers would make very sure that the only time any revenue was booked was when you bought the book.
You could imagine this creating big incentives for vertical integration: the different stages of the process would all be conducted by the same company. Say goodbye to your local bookstore, because the only tax-efficient owner of a bookstore would be a forestry company.
posted by goingonit at 1:27 PM on July 8, 2015 [3 favorites]
Yeah, what goingonit just said might be a major unintended consequence.
Sales taxes (and I would assume VAT taxes in countries that have them) are either waived or greatly reduced for products that will become part of another product for resale. Coca-Cola doesn't pay tax on corn syrup because it's going to go into their product, and THAT product gets taxed. My state has a "machine tax" rate on equipment and supplies purchased for a production line, which probably sounds like (and maybe is) corporate lobbying at work, but when the machinery gets used (and supplies expended) to make a saleable product, there's a common-sense case to waive the tax.
Under this scheme, I guess you could have a similar waiver, but then the corn syrup people don't pay much tax, because very little corn syrup gets bought by a direct consumer.
I'm a business owner, and at the risk of sounding like I'm circling the wagons, many of these "unfair loopholes" are designed to mitigate and reduce the kinds of double-taxation situations like you're describing. For example, if you own a business that mainly employs yourself and maybe immediate family members -- if you tax the business on a top-line revenue basis, should you then tax the owner again on his or her personal income they take out of the business to live on? As it currently stands, many small businesses are "pass-through" entities - the profits of the business flow to the owner's personal 1040 form, and are taxed whether the owner spends all that money or keeps it in the business. I consider this equitable enough, since it only gets taxed once regardless.
At the risk of sounding totally negative to the idea, what you're describing with some modification (and just call it a VAT, because that's what it ends up being) would have my support, provided:
- it does away with income tax
- there are exemptions for NECESSITIES - staple foods, clothing, medicine, housing, etc.
as I despise having my privacy invaded by having to submit a detailed report of my revenues and expenses to the government annually.
But it will never happen because we love our social engineering in the good old US, with incentives for buying this and penalties for buying (or not buying) that...
posted by randomkeystrike at 1:51 PM on July 8, 2015
Sales taxes (and I would assume VAT taxes in countries that have them) are either waived or greatly reduced for products that will become part of another product for resale. Coca-Cola doesn't pay tax on corn syrup because it's going to go into their product, and THAT product gets taxed. My state has a "machine tax" rate on equipment and supplies purchased for a production line, which probably sounds like (and maybe is) corporate lobbying at work, but when the machinery gets used (and supplies expended) to make a saleable product, there's a common-sense case to waive the tax.
Under this scheme, I guess you could have a similar waiver, but then the corn syrup people don't pay much tax, because very little corn syrup gets bought by a direct consumer.
I'm a business owner, and at the risk of sounding like I'm circling the wagons, many of these "unfair loopholes" are designed to mitigate and reduce the kinds of double-taxation situations like you're describing. For example, if you own a business that mainly employs yourself and maybe immediate family members -- if you tax the business on a top-line revenue basis, should you then tax the owner again on his or her personal income they take out of the business to live on? As it currently stands, many small businesses are "pass-through" entities - the profits of the business flow to the owner's personal 1040 form, and are taxed whether the owner spends all that money or keeps it in the business. I consider this equitable enough, since it only gets taxed once regardless.
At the risk of sounding totally negative to the idea, what you're describing with some modification (and just call it a VAT, because that's what it ends up being) would have my support, provided:
- it does away with income tax
- there are exemptions for NECESSITIES - staple foods, clothing, medicine, housing, etc.
as I despise having my privacy invaded by having to submit a detailed report of my revenues and expenses to the government annually.
But it will never happen because we love our social engineering in the good old US, with incentives for buying this and penalties for buying (or not buying) that...
posted by randomkeystrike at 1:51 PM on July 8, 2015
it's trivial to pass to the customer. You just tack on an additional x% to your prices across the board.
Yeah, of course it would in many cases. Demand for groceries isn't going to evaporate with a 5% increase in prices. But for low profit-margin businesses in sectors with elastic demand, that's not going to be the case. Grocery stores are just the most obvious and easy to think about example of a low-margin business, but they're not a great example of the problem with a gross receipts tax.
And what the OP is proposing has some similarities with VAT, but taxing gross receipts for all businesses is definitely not a VAT. VAT is a reasonable system with pros and cons; a blanket gross receipts tax would be nuts. Moving to gross receipts for certain sectors might be a good idea, I know some states have that for things like utilities which basically have a guaranteed profitability because there's no competition or realistic possibility of demand evaporating.
posted by skewed at 1:53 PM on July 8, 2015
Yeah, of course it would in many cases. Demand for groceries isn't going to evaporate with a 5% increase in prices. But for low profit-margin businesses in sectors with elastic demand, that's not going to be the case. Grocery stores are just the most obvious and easy to think about example of a low-margin business, but they're not a great example of the problem with a gross receipts tax.
And what the OP is proposing has some similarities with VAT, but taxing gross receipts for all businesses is definitely not a VAT. VAT is a reasonable system with pros and cons; a blanket gross receipts tax would be nuts. Moving to gross receipts for certain sectors might be a good idea, I know some states have that for things like utilities which basically have a guaranteed profitability because there's no competition or realistic possibility of demand evaporating.
posted by skewed at 1:53 PM on July 8, 2015
Companies with larger operating margins would kill it. More banks, less manufacturers and retailers.
posted by jpe at 4:12 PM on July 8, 2015
posted by jpe at 4:12 PM on July 8, 2015
For me, it makes most sense to look at this in terms of the "1 percent". If we know that the top 1% own more than half of the total wealth, shouldn't we be looking at them first and foremost if we want to talk about personal taxes? I think we need to look at corporate taxes the same way... here are some 2014 numbers for comparison.
First let's look at the large US companies, using Google and Apple as an example. Google's revenue for 2014 was in the $60 billion range and what they paid in taxes was around 3%. Apple's revenue for 2014 was in the $180 billion range and what they paid in taxes was around 4%. (The exact tax rates are difficult to pinpoint because the rates on offshore revenues differ from the rates on domestic revenues but given that the whole point of "offshoring" your revenues is tax avoidance, it's safe to say that those single percentage rates are fairly close).
Now let's look at the small businesses in the US. There are around 5 million small businesses in the US (I am counting only companies with at least 1 employee so as to exclude millions of independent contractors) and their average revenue is $3 million, for a total of around $15 billion in revenues.
So that's $240B in revenue for just (!) Apple and Google vs. $15B in revenue for all (!) of the small businesses. (Obviously my numbers are very back-of-the-envelope and US-centric but I think they do paint a representative picture).
This is why it seems very short-sighted to me to speculate about the survival of the smaller businesses and the higher consumer prices. If the top 1% just paid SOME goddamn taxes, like the 10% you proposed, we'd be rolling in so much dough that we'd be happy to spend a little more at the supermarket! To be fair, the economies of Ireland, Switzerland, Hong Kong, Lebanon, Liberia, Panama, and Singapore would tank - but for everyone else, it would be a big win.
posted by rada at 4:40 PM on July 8, 2015
First let's look at the large US companies, using Google and Apple as an example. Google's revenue for 2014 was in the $60 billion range and what they paid in taxes was around 3%. Apple's revenue for 2014 was in the $180 billion range and what they paid in taxes was around 4%. (The exact tax rates are difficult to pinpoint because the rates on offshore revenues differ from the rates on domestic revenues but given that the whole point of "offshoring" your revenues is tax avoidance, it's safe to say that those single percentage rates are fairly close).
Now let's look at the small businesses in the US. There are around 5 million small businesses in the US (I am counting only companies with at least 1 employee so as to exclude millions of independent contractors) and their average revenue is $3 million, for a total of around $15 billion in revenues.
So that's $240B in revenue for just (!) Apple and Google vs. $15B in revenue for all (!) of the small businesses. (Obviously my numbers are very back-of-the-envelope and US-centric but I think they do paint a representative picture).
This is why it seems very short-sighted to me to speculate about the survival of the smaller businesses and the higher consumer prices. If the top 1% just paid SOME goddamn taxes, like the 10% you proposed, we'd be rolling in so much dough that we'd be happy to spend a little more at the supermarket! To be fair, the economies of Ireland, Switzerland, Hong Kong, Lebanon, Liberia, Panama, and Singapore would tank - but for everyone else, it would be a big win.
posted by rada at 4:40 PM on July 8, 2015
rada: one of the main hard parts of taxation, especially corporate taxation, is that companies respond to incentives. In particular, unlike people, companies have a much easier time splitting themselves up, combining themselves, or in other respects changing what they look like in order to pay as little tax as possible. So one of the main goals of building a corporate tax system is making it so companies should pay a similar amount of tax regardless of how they organize themselves. This turns out to be quite hard! And if you do it wrong, all the money that you thought would go to the government ends up going to lawyers.
Another hard thing -- in fact, economists say, an impossible thing -- is determining the incidence of taxes: who actually ends up paying. Microeconomists say, famously, that it doesn't depend who you tax, it only depends on the price elasticities of supply and demand. If the buyers of a good are more price-sensitive, the sellers will pay more, but if the sellers are price-sensitive, the buyers will pay more. This obviously isn't 100% true in the real world but it's an important insight: you might try to tax entities but what you are really taxing is particular forms of economic activity.
So when evaluating a particular tax, the important question to ask isn't who forks the money over to the government directly. It's how will the people and businesses in the economy respond to the new state of affairs, and where do we end up.
posted by goingonit at 5:30 PM on July 8, 2015
Another hard thing -- in fact, economists say, an impossible thing -- is determining the incidence of taxes: who actually ends up paying. Microeconomists say, famously, that it doesn't depend who you tax, it only depends on the price elasticities of supply and demand. If the buyers of a good are more price-sensitive, the sellers will pay more, but if the sellers are price-sensitive, the buyers will pay more. This obviously isn't 100% true in the real world but it's an important insight: you might try to tax entities but what you are really taxing is particular forms of economic activity.
So when evaluating a particular tax, the important question to ask isn't who forks the money over to the government directly. It's how will the people and businesses in the economy respond to the new state of affairs, and where do we end up.
posted by goingonit at 5:30 PM on July 8, 2015
This is why it seems very short-sighted to me to speculate about the survival of the smaller businesses and the higher consumer prices. If the top 1% just paid SOME goddamn taxes, like the 10% you proposed, we'd be rolling in so much dough that we'd be happy to spend a little more at the supermarket!
This really has nothing to do with the question about taxing gross rather than net income though. You are suggesting that the rich should pay more money in taxes, but if you want to soak the rich, we could just raise taxes on net income. Eliminating some exclusions and exemptions would go much further toward solving this problem without creating all the problems that strict gross revenue taxes would..
posted by skewed at 6:34 PM on July 8, 2015
This really has nothing to do with the question about taxing gross rather than net income though. You are suggesting that the rich should pay more money in taxes, but if you want to soak the rich, we could just raise taxes on net income. Eliminating some exclusions and exemptions would go much further toward solving this problem without creating all the problems that strict gross revenue taxes would..
posted by skewed at 6:34 PM on July 8, 2015
You don't have to speculate how it would work because there are states that already have a gross revenue tax. Nevada just put one in place. The state of Washington has had a gross revenue tax for decades.
The advantage of a gross revenue tax is that it is very simple to administer and difficult to scam with phony deductions. You simply count every dollar that the business brings in the door as gross revenue. There are no complicated expense deductions. You don't have to compute value added as for a VAT. You just take your gross revenue, multiply it by the tax rate, and you are done.
For example in Washington State, the general rate is approximately 0.5% for most retail, wholesale and manufacturing businesses. The rate is 1.5% for services like doctors, lawyers, barbers and consultants.
posted by JackFlash at 10:37 PM on July 8, 2015
The advantage of a gross revenue tax is that it is very simple to administer and difficult to scam with phony deductions. You simply count every dollar that the business brings in the door as gross revenue. There are no complicated expense deductions. You don't have to compute value added as for a VAT. You just take your gross revenue, multiply it by the tax rate, and you are done.
For example in Washington State, the general rate is approximately 0.5% for most retail, wholesale and manufacturing businesses. The rate is 1.5% for services like doctors, lawyers, barbers and consultants.
posted by JackFlash at 10:37 PM on July 8, 2015
Because I was curious, here's Washington's page explaining their gross reciepts tax.
As you might imagine, there are many exceptions carved out that appear to benefit the largest firms in the state, or rural voters. Sometimes both, in the case of locating your tech support call center in a rural area.
As you can imagine, this is all very complex to legislate. Careful attention is also paid to tax industries differently, presumably mostly because it's not always simple to pass on taxes.
Like people have said, taxing gross receipts naturally favors shorter supply chains ('vertical integration'). Wikipedia even mentions this on their page about gross receipts taxes. I suspect that Washington's B&O tax rate is low enough that it's rare to buy your suppliers just to save on taxes -- sales and property tax make up the bulk of state revenue.
AFAIK, VAT is designed to be a similar system without accidentally creating winner and loser industries when you get the tax regime off slightly, or penalizing specialized supply chains.
posted by pwnguin at 4:54 PM on July 11, 2015 [1 favorite]
As you might imagine, there are many exceptions carved out that appear to benefit the largest firms in the state, or rural voters. Sometimes both, in the case of locating your tech support call center in a rural area.
As you can imagine, this is all very complex to legislate. Careful attention is also paid to tax industries differently, presumably mostly because it's not always simple to pass on taxes.
Like people have said, taxing gross receipts naturally favors shorter supply chains ('vertical integration'). Wikipedia even mentions this on their page about gross receipts taxes. I suspect that Washington's B&O tax rate is low enough that it's rare to buy your suppliers just to save on taxes -- sales and property tax make up the bulk of state revenue.
AFAIK, VAT is designed to be a similar system without accidentally creating winner and loser industries when you get the tax regime off slightly, or penalizing specialized supply chains.
posted by pwnguin at 4:54 PM on July 11, 2015 [1 favorite]
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You'd end up treating high-profit margin, low-volume sellers much better than low-profit margin high-volume sellers. Much harder to sell lots of beer at 5% profit margin than just a bit of champagne at 50%.
You'd make it very hard for businesses to survive unless they were immediately profitable. No five-year path to profitability if you're being taxed on your revenue from day one. For that matter, any legitimately unprofitable period would be fatal to 99% of businesses if they had to pay tax on revenue regardless of profit.
posted by skewed at 11:21 AM on July 8, 2015 [13 favorites]