Pyramiding, Productive Efficiency, and Revenue under a Gross Receipts Tax Andre J. Barbe Department of Economics Rice University FTA Revenue Estimation & Tax Research Conference October 24, 2012 Barbe (Rice University) Gross Receipts Taxes FTA 2012 1 / 29
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Pyramiding, Productive Efficiency, and Revenue under a ...€¦ · A gross receipts tax (GRT) is a tax on the gross receipts (total revenue) of firms Also known as a turnover tax
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Pyramiding, Productive Efficiency, and Revenueunder a Gross Receipts Tax
Andre J. Barbe
Department of EconomicsRice University
FTA Revenue Estimation & Tax Research ConferenceOctober 24, 2012
Gross receipts taxA gross receipts tax (GRT) is a tax on the gross receipts (totalrevenue) of firmsAlso known as a turnover taxEquivalent to a tax on sales to other firms (intermediate goods) orconsumers (final goods)
Retail sales tax (RST), in principle, only taxes sales to consumers(final goods)
Tax pyramiding is the taxation of a good multiple times as it movesthough the supply chain before finally reaching consumersAlso known as tax cascading
Caused by taxation of intermediate goods
Gross receipts tax: if no deduction for intermediate goodpurchasesSales tax: if taxes sales of intermediate goods
Literature is very negative towards GRT because of problems causedby tax pyramiding
Arbitrary RatesAs seen in exampleHigher effective rates for goods with high value added early inproduction and many firms in supply chainRates are not based on economic criteria such as firms’ ability topay
Productive InefficiencyDiamond and Mirrlees (1971)Taxes on intermediate goods are inefficientThe tax on intermediate goods is still reflected in the price of finalgoodsFirms substitute away from more heavily taxed intermediate goodsto more lightly taxed goodsThis substitution minimized the post-tax cost of inputs, not thepre-tax cost of inputs
TransparencyConsumers do not know how much tax will pyramid and thus howmuch prices will be increased
Create general equilibrium model of representative US state economy
Production:21 industries, one for each 2-digit NAICS sectorAll industries perfectly competitiveEach industry has a cost function for producing output usingcapital, labor, and the outputs of the 21 industries as inputsLabor supply is fixed but capital is mobileImports and exports held constant
Consumers:Expenditure function for one representative consumerConsumers receive income from labor and capital
Calculate the effect of replacing an existing sales tax with a grossreceipts tax
Use a 1% GRT and a revenue neutral sales taxSales tax applies to all final good sales to consumersGross receipts tax applies to all revenue of all firms
N is the total number of inputs, t is the year, and pj is the price of inputj to industry xShare spent on input i depends on price of all inputs, substitutability ofthose inputs and i , the year, and a constant term
N is the total number of inputs, t is the year, pi is the price of input i ,and variables i and j index inputsThen add taxes to get final price of outputFor GRT: px = 1.01cx
Data Sources:US national accounts from 1960-2005 from Jorgenson (2007)1997 Economic Census Bridge between NAICS and SICBEA Tables of the Use of Commodities by Industries 1997-2010BEA Gross Output Price Index 1987-2010
Regressions run using iterated 3-stage least squares