Logic is Not a Prerequisite

I was listening this past week to objections being raised against the gross receipts tax. Two jumped out, mostly because they came from the same person and followed one right after the other.

The first: the gross receipts tax is not related to profitability and will hurt businesses with small profit margins.

The second: we know that it is going to get passed on, just like all other taxes, to consumers and is going to hurt low income families.

I wanted to interrupt, “Choose one … but you can’t have both.”

If profit margins are cut, consumers won’t be affected.

If the tax is passed on to consumers, profit margins won’t be affected.

But logic has never been a necessary ingredient in political discourse.

What do economists know about what happens to taxes on business? Very little really. As William Oakland of Tulane University, and William Testa, vice president of the Federal Reserve Bank in Chicago, wrote in the May, 2000, issue of Economic Development Quarterly, “The actual incidence of business taxes remains unknown …”

There have been lots of studies, but the results depend largely on the assumptions made at the beginning as to how businesses respond to various taxes. It may be that it is this underlying uncertainty that makes the contradictory assertions about the gross receipts tax both believable.

The broad base, the low rate, and the simplicity are the strengths of the gross receipts tax. Because it applies to all economic sectors, the rate can be low. The lower the rate, the more easily it can be incorporated into the cost of doing business. Because the tax affects all economic activity and not just the production of tangible goods, if it is passed on, it is passed on to a much broader range of consumers than those now affected by the sales tax.

The gross receipts tax is better than alternatives that have been suggested to raise the same revenue. Doubling the individual and corporate income taxes would do little to spread the burden of taxes to those who now don’t pay and would simply make those who are paying now, just pay more. Broadening the sales tax to include consumer services would be far more regressive than a gross receipts tax.