THE GROSS RECEIPTS TAX: A GREAT TAX FOR A GLOBAL ECONOMY

Pick a tax, and you pick who pays directly, and also who pays
indirectly when the cost of the tax is passed along to others in
the current of buying and selling. Pick a program on which to
spend tax revenues, and it’s the same: you pick who benefits
directly, and also who benefits indirectly when earnings or
savings are passed along to others in that same current.
So, what is Governor Blagojevich proposing to do, trying
to fund universal health insurance in Illinois with a Gross
Receipts Tax? Universal state-funded health insurance? The
son of a right-wing Serbian military officer who long ago
found it best to leave Tito’s Yugoslavia–has he suddenly
turned socialist? And what about Senator Emil Jones, who
appears to come in equal parts from Commonwealth Edison
and Chicago’s south side? What is a Gross Receipts Tax? All
this is high drama, but nobody seems to realize it quite.
I’ll leave it to others to discuss the health insurance side
of the story, exciting as it is, and focus here on the Gross
Receipts Tax, the GRT.
WHAT IS A GROSS RECEIPTS TAX?
It is a straight percentage levy on everything that comes into
the cash register. The Governor’s office came up with several
different proposed versions, but the proportion typically
varies between one and two percent of receipts, depending
on the type and size of the business taxed. However, small
businesses are completely exempted. Depending on which
proposed version you look at, small is defined in terms of
receipts, as less than either $2 million or $5 million.
Unlike a sales tax, which in legal terms is paid by consumers
and accordingly added on top of the sales price, a
GRT is paid by sellers and therefore included in the sales
price. This difference is not likely to be important. If people
are aware of the taxing techniques, only market conditions
will determine how the burden of the new tax would
be shared between seller and customer.
More important is that a sales tax is levied only on consumers
and exempts business customers, while a GRT is
levied on all sales regardless of the type of customer. This
is the feature of the GRT that has drawn the most criticism,
because of the potential effects of “pyramiding.”
Suppose for example (1) coal is sold to an aluminum
smelting plant and then (2) the aluminum to an aircraft
parts firm and then (3) the aluminum parts to an aircraft
manufacturer and then (4) the finished airplane to an airline
company and (5) airline tickets to passengers. In that
case, if all five sellers are big businesses, and if all sales
take place in Illinois, then the GRT will be collected five
times before the passenger takes off from O’Hare. That
seems like quite a pile of tax. But how bad is it really? I
hope to show you that it is not bad at all. In fact, just this
much-maligned feature, combined with the exemption
for small businesses, makes the GRT such a good tax both
economically and politically.
THE ECONOMICS OF THE GROSS RECEIPTS TAX
If Illinois were an island unto itself, a “closed economy”, then
the burden of the GRT would be divided somehow between
Illinois corporate shareholders receiving lower dividends and
Illinois consumers paying higher prices. Due to the “pyramiding”
just described, if the GRT rate were high enough, say
maybe 20 percent instead of just one or two percent, there
would be enough pressure to reduce the number of sales
turnovers to encourage “vertical integration.” For example,
the aluminum company might buy up the coal, aircraft parts
and airline businesses so the only remaining sale would be to
the passenger, and the tax would be imposed just once
instead of five times. But this is all fantasy. A tax rate as low as
one or two percent, even accumulated five times, will come to
as much as 10 percent of the final product price only if inputs
purchased from big businesses amount to 100 percent of
each company’s costs, with no labor, no overhead, and no
purchases from small businesses. It is reasonable to expect
instead, even in this weird example, a final accumulated tax
rate well below that now collected in sales taxes, not enough
to spur any kind of change in business organization
In reality, Illinois is not an island unto itself, not a closed
economy. Most big businesses selling in Illinois are nationwide
or even global operations, and their sales in Illinois
are a small fraction of their total business worldwide. The
tax imposed by the Illinois state government on sales taking
place in Illinois will make only a small impact on their
total costs. And who will bear the burden? Not just Illinois
shareholders, but shareholders worldwide will reap
reduced dividends; not just Illinois consumers, but consumers
worldwide will pay higher prices. But the effect,
when spread over the world, will be very, very small.
For the same reason, in a global economy, pyramiding
won’t be much of a problem. Only the occasional transaction
between big businesses will take place in Illinois;
most will take place elsewhere. The chance of five pyramiding
transactions all taking place (1) between taxably
big businesses (2) within Illinois leading (3) to a final sale
to an Illinois consumer, is vanishingly small.
The truth is the burden of the Illinois GRT would be
spread across the world market in the same way pollution
from Illinois spreads throughout earth’s atmosphere.
To suppose otherwise is to expect global corporations
to adopt state-by-state, country-by-country pricing strategies
ignoring general market conditions and focusing only
on appropriately rewarding or punishing tax policy. That
doesn’t seem at all likely.
In effect, then, the GRT is an ingenious device for raising
money from out of state. A modern tax adapted to the
modern global economy, it is designed to collect revenue
at least cost to actual residents of our great state. It is similar
to the royalties the state of Alaska and the various oil
producing countries collect from oil mining revenues, the
cost of which we all bear.
THE POLITICS OF THE GROSS RECEIPTS TAX
If the burden of the Illinois GRT is so small when spread
all across the globe, why the fuss? From our new global
perspective, it’s obvious. What if every state and every
country, what if every taxing authority decided to do as
Illinois might? It would be a conservative’s nightmare.
Right now, people moan about the “race to the bottom”.
Every state and every country competes with every other
one to cut taxes and social services and offer subsidies to
businesses to get them to invest there. The public sector
shrinks, the private sector grows.
With the GRT, however, there is little point to a company
moving a production facility into or out of state because it still
would pay taxes, as before, on its sales to Illinois customers.
To avoid the tax, the company would have to move its
customers out of state.
This of course can be done to some extent, as will be
illustrated in an example below, which is why the tax rate
cannot be raised too far over rates nearby. But it is not at all
simple to avoid this tax.
With the GRT, in other words, the “race to the bottom”
can be reversed. Instead of cutting taxes, states and countries
gain by raising them. Whoever raises more tax draws
in more funds from the rest of the world. It could rapidly
turn into a “race to the top”.
It is fun to speculate about this kind of future, might be
fun even to speculate on it. Maybe the specter of such a “race
to the top” would force the Federal Government to step in
with a new national tax policy to take over the funding of
health insurance and education and so on, so as to stop the
states from upping the ante on each other. Maybe this story
could even repeat itself somehow on the world stage.
But here I will end this line of thought and take us back
to Illinois.
WHAT ABOUT HIGH-VOLUME, LOW MARGIN
BUSINESSES?
These are businesses, typically distributors and retailers,
where profit, whether large or small, is an unusually small
proportion of the transacted volume. Typical would be an
auto dealership, where the items dealt in are expensive and
margins proportionately small. Sell a $20,000 car and profit
$1,000 on it, and that’s a great deal for a few hours work:
wonderful business. But the GRT tax is on the $20,000
received from the customer, not on the $1,000 actually
remaining as profit after costs have been paid. So a GRT of
2 percent would be $400 and the after tax profit would
then be $600. That’s quite a chunk out of the pocket of the
dealership owners, and they have a right to complain. But
do we have to listen?
It is one thing to be driven out of business; another to
have to live more modestly off it, knowing it is still a better
deal than closing it down and selling the assets for cash.
And this is how we can tell if the tax is really too high.
Suppose there are 20 auto dealerships before the tax is
imposed. If after the tax one closes and the other 19
remain in business, it is polite to say that that one closed
because of the tax. Really it must have been on the edge for
other reasons, however; why did the other 19 not close?
Conclusion: no problem with the tax. But now suppose 15
dealerships close in Illinois, and five reopen in Indiana
and send brochures and ads back to Illinois declaring that
it is worth the trip for the customer to come out to Indiana
to buy cars where prices are lower. Uh-oh—that would
indeed be a sign that the tax is too high.
WHY TAX CORPORATIONS?
Though persons legally, corporations are not persons. So
why tax them? If shareholder dividends are taxed, why tax
the corporation also? This is the question of “double taxation”.
There are the three good answers.
1. Retained earnings. These are profits not distributed as
dividends among shareholders. They may be used for productive
investment, for advertising and lobbying, or else to prepare
for a takeover. In any case, retained earnings are a source
of corporate power; and a tax could restrain that power.
2. Money leaving the state. This was discussed above.
Many shareholders live outside Illinois, and pay their
taxes elsewhere. One chance to get at their money is to
tax operations in Illinois: to wit, the corporations themselves. 3. Following the money. If transparency
were total, this would be irrelevant;
but in fact it is hard for tax authorities to
accurately track the flow of funds to figure
out who gets what and who owes
what. Every real tax collection scheme
has a lot to do with practicality. The Gross
Receipts Tax in particular is relatively
easy to enforce and collect—and that
consideration can beat down a lot of high
principle. Other corporate taxes may be
levied for the same reason—easy to
enforce and easy to collect.
These three points also make clear why
it is a real problem that many large corporations
pay few or no taxes in Illinois. Leaving
morals aside, they are an underutilized
resource for the state.
What about the opposition storm of
criticism?
The howls of outrage from the business
community are a good hint the tax would hit
its target. Raising taxes is hard for an elected
government; redistributive taxation even
harder, where those taxed know they won’t
get the benefits, and those to benefit remain
either voiceless or cynical. In the meantime,
we need to challenge hysteria, the usual voice
of the right-wing. Hey, it’s just a little tax.