Wednesday, April 4, 2007

A Gross Receipts Tax is Progressive

The support of the Gross Receipts tax have argued that is most fair and progressive way to fund expanded State Government spending. Ignoring for the moment whether or not Illinois needs more government spending lets look at this claim. A tax is progressive when a person or business that has higher income either pays a higher percentage of their income under the tax or at least pays more money in raw terms. Under the income tax even with a flat rate people with higher incomes pay more in raw terms, if the rate is 3 percent some one that makes 20,000 dollars would pay 600 dollars in tax, some one that makes 50,000 dollar , 1,500 dollars in tax and some that makes $100,000 would have a tax bill of $3,000 for example. The Gross Receipt Tax is based off a companies revenues regardless of how much of profit they earn, in the business world profit is corporate income, so companies that have the same revenue stream but wildly different profit margins because of the industries they operate in would pay the same in taxes. The company with the lower profit margin would see a higher percentage of their income going to Government to pay taxes. For example the maximum rate for service industries is about 2 percent, so let say you have two companies, one a restaurant and the other business consultancy, both have revenues of 10 million dollars, but the restaurant makes a profit of 1.5 million dollars and the business consultancy makes one of 3.25 million dollars, both of these companies would pay 200,000 dollars, so the restaurant would be paying 13.34 percent of their income to the Government in the form of the tax, while the business consultancy would be paying only 6.15 of their income to the Government, so the effective tax rate as percentage of income would be much lower for the company with the higher profit margin. This is not progressive.

In reality a lot if not all of this tax will be passed on to the consumer in the form of higher prices for every good and service sold in the state. This will have a large impact on lower income consumers that spend all of their income on goods and service and have lesser effect on middle and upper-income consumers that save a percentage of their income. If the Gross Receipts tax raises the price of all goods and service in the state by one percent, which could well be an underestimate, so a low income consumer will see one percent more of their income going to the state in the form of an indirect tax, for example some one that earns $20,000 dollars a year would be paying 200 dollars more in indirect taxes to the state and their effective income would be decline by 1 percent. While on the other hand some one that earns 50,000 dollars a year but saves $10,000 a year would be paying additional 400 dollars because of the Gross Receipts tax a year, but would see their income reduced by only .8 percent because they saved a portion of their income. Some one that earn 200,000 dollars a year and saves 50,000 dollars would be paying 1500 dollars year, but would see their effective income reduced be only .75 percent a year. Since the richer people are the higher percentage of their income they save, the higher income groups will see their income reduced by less than lower income groups. This is regressive and exacts same as the sales tax, the only difference is the sale tax is visible to everyone when they buy something and the Gross Receipt tax will be hidden.

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