Monday, March 12, 2007

why the gross receipts tax is bad for the consumer

The Gross receipts tax is now official part of the Governor proposed new budget, as anyone that reads either of my blogs already knows this tax is bad for the economic climate of Illinois and will hurt the state’s economy growth, encourage companies to leave the state, make it hard to retain companies that are based here and hurt job growth. This tax will also directly hurt the consumer. First when Governor Blagojevich says this is about making business pay their fair share, it’s a lie, business in Illinois already pay 50.8% of all taxes and fees paid to state and local governments in Illinois, compared to the nation wide average of 42.6%. So business in the state are already paying there share of taxes.

Secondly it’s the people that are going to end up baring the burden of most of the tax are you and me and every other consumer in the state, rich, poor or middle class. The reason for this is that most of the cost of the tax will be passed on to the consumer in the form of higher prices. The reason for this is that since a Gross Receipts tax is based on the amount of revenues that a company brings in not its profit margin, which is revenue minus cost; this tax will increase of the cost of doing business in this state for every company in Illinois in two ways. First this will raise their total cost, for those of you that have economics 101 it will raise all of there cost curves, and companies to keep there profits at near the same levels as before the tax will have to raise their prices. Some of the Governor’s followers and hangers on have argued that competition and the market will keep companies from passing on to much of the tax increase to the consumers, but they are misunderstanding how the free market works. What the free market does is prevent companies for charging unfair prices for a good and/or service, because if they people will see the higher than excepted profit for that market and new companies will enter the market and force the price back down. Since the Gross Receipt Tax will affect most if not all businesses in the state, they all will face the newer higher cost curve and will not be able to lower the price of their goods and/or services with out cutting into there profit margin, which would make no-sense for a company to do.

This is the first way that the Gross Receipts Tax will raise prices for consumers, the second way that it will raise prices is that goods and service sold between business will be indirectly taxed at there full value not the value added by a company, so if company A sells a good to company B for 6 dollars, it will be taxed on that whole 6 dollars, then if company B uses the good it bought from company A to make a product that it sells to the consumer for 10 dollars it will be taxed on the whole 10 dollars so the six dollars worth of value in that product will taxed twice in this case. You could very easily have cases were the value of product could be taxed 3 or 4 times before it is sold to the consumer. While this may be a little confusing, the end results if pretty simple and clear, because the goods and service will be taxed this way the cost of raw materials and business service for companies in Illinois will go up, which means that their total cost will increase yet again and prices will rise more to make up for the increase in cost.

This tax will raise prices in two ways, one throe increasing the cost of doing business in Illinois by raising the taxes that a company has to pay and secondly by increase in the cost of raw material and business services in the state. In the end large portions of the tax will ended up being paid for the consumer and ask yourself why Governor Blagojevich isn’t beings honest with the public about the effects of the Gross Receipts Tax? I am guessing because he realize that if he told the public that it would raise the price of almost every good and service in the state, he realize that very few people would support it. So instated he is playing the populist card and trying to pass this off as greedy businesses not wanting to pay their fair share of taxes.

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