PRINCIPLES OF BUSINESS TAXATION

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PRINCIPLES OF BUSINESS TAXATION
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Business Taxation in the US

• National levelCorporation Income Tax

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Business Taxation in the US

• National levelCorporation Income Tax
• State levelCorporation Income Tax, Retail Sales
  Tax

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Business Taxation in the US

• National levelCorporation Income Tax
• State levelCorporation Income Tax, Retail Sales
  Tax
• Local levelReal and Personal Property Tax

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Business Taxation in the US

• National levelCorporation Income Tax
• State levelCorporation Income Tax, Retail Sales
  Tax
• Local levelReal and Personal Property Tax
• OthersBusiness License Fees, Payroll taxes

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Business Taxation in the US

• National levelCorporation Income Tax
• State levelCorporation Income Tax, Retail Sales
  Tax
• Local levelReal and Personal Property Tax
• OthersBusiness License Fees, Payroll taxes
• Importanceminor at national level, 38 of
  State-local revenue during 1995

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Business Taxation in the US

• National levelCorporation Income Tax
• State levelCorporation Income Tax, Retail Sales
  Tax
• Local levelReal and Personal Property Tax
• OthersBusiness License Fees, Payroll taxes
• Importanceminor at national level, 38 of
  State-local revenue
• Rationale national logic does not apply to
  regional business taxes.

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Analysis of Business Taxes

• At the risk of overstatement, most discussion of
  business taxation at the state-local level
  focuses upon location impacts and issues
  surrounding avoidance.

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Analysis of Business Taxes

• At the risk of overstatement, most discussion of
  business taxation at the state-local level
  focuses upon location impacts and issues
  surrounding avoidance.
• Little discussion surrounding the basis for such
  taxation.

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Definitional Issues

• Ambiguity arises because
• (1) tax shifting

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Definitional Issues

• Ambiguity arises because
• (1) tax shifting
• (2) individuals are ultimate repositories of
  tax burden

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Definitional Issues

• Ambiguity arises because
• (1) tax shifting
• (2) individuals are ultimate repositories of
  tax burden
• Any general levy upon
• business purchase of inputs
• a firms assets
• business earnings
• right to do business

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Definitional Issues

• Ambiguity arises because
• (1) tax shifting
• (2) individuals are ultimate repositories of
  tax burden
• Any general levy upon
• business purchase of inputs
• a firms assets
• business earnings
• right to do business
• Not includedgross receipts taxes, personal
  income taxes

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for public consumer goods
• a. Taxed inputs are immobile and perfectly
  inelastic in supply. No locational impacts.
  Taxed inputs absorb tax.
  

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for public consumer goods
• a. Taxed inputs are immobile and perfectly
  inelastic in supply.
• b. Some taxed inputs are mobile and outputs
  subject to national competition. Inputs absorb
  tax in inverse relation to their
  mobility. Perfectly mobile factors escape any
  burden

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for public consumer goods
• a. Taxed inputs are immobile and perfectly
  inelastic in supply.. b. Some taxed inputs
  mobile and outputs subject to national
  competition.
• c. Some taxed inputs mobile and some outputs
  not subject to national competition (eg. home
  goods).
• Consumers share burden with inputs, in inverse
  relation to their inelasticity of demand. Excess
  profits on home goods absorb some of tax burden
  
  

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for public consumer goods
• To sum up, the incidence of general taxes on
  business purchases of inputs depends upon the
  mobility of the taxed factors and, in some
  circumstances, the mobility of those consuming
  the products produced using the taxed factors.
  It also depends upon the existence of excess
  business profits

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for public consumer goods
• In the long-run, business profits can suffer
  only in the presence of excess profits.

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• Let these services take the form of rival
  private goods or congestible goods and their
  usage is neutral with respect to input
  proportions.
  

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• Without business taxes, windfalls would
  initially accrue to business community.
  

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• In the long-run however, they would be absorbed
  by inputs in inverse relation to immobility of
  the input and by consumers of non-traded
  services.

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• In the long-run however, they would be absorbed
  by inputs in inverse relation to immobility of
  the input and by consumers of non-traded
  services.
• They would remain with the bottom line only to
  the extent that excess business profits
  exist.

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• The benefits to mobile factors would attract
  entry into the regional economy, creating a wedge
  between their gross returns here and elsewhere.
• In short, the regional economy would be
  overcrowded from an efficiency standpoint.
  

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• The benefits to mobile factors would attract
  entry into the regional economy, creating a wedge
  between their gross returns here and elsewhere.
• These inefficiencies could be avoided by a
  suitable tax upon the purchase of business
  inputs.

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• The benefits to mobile factors would attract
  entry into the regional economy, creating a wedge
  between their gross returns here and elsewhere.
• These inefficiencies could be avoided by a
  suitable tax upon the purchase of business
  inputs.
• If there is no benefit bias with respect to
  input use, inputs should be taxed in proportion
  to their prices.

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Consequences of Taxation of Business Inputs

• Tax proceeds pay for services to the business
  community
• The benefits to mobile factors would attract
  entry into the regional economy, creating a wedge
  between their gross returns here and elsewhere.
• These inefficiencies could be avoided by a
  suitable tax upon the purchase of business
  inputs.
• If there is no benefit bias with respect to
  input use, inputs should be taxed in proportion
  to their prices.
• If benefits flow to the use of specific inputs,
  these input tax should be restricted to these
  inputs.

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting
• Ability to Pay (soak the rich)

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting
• Soak the rich
• Ease of raising revenue

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting
• Soak the rich
• Ease of raising revenue
• Share benefits of community amenities (rents)

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting
• Soak the rich
• Ease of raising revenue
• Share benefits of community amenities (rents)
• Correct for Externalities

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Other Rationale for the Taxation of Business

• Numerous other rationale might be advanced
• Tax exporting
• Soak the rich
• Ease of raising revenue
• Share benefits of community amenities (rents)
• Correct for externalities
• Share the rewards resulting from legal and
  economic framework

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The Benefit Principle

• Taxes which recoup the cost of business public
  services
• (1) reduce windfalls to the private sector

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The Benefit Principle

• Taxes which recoup the cost of business public
  services
• (1) reduce windfalls to the private sector
• (2) promote locational neutrality

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The Benefit Principle

• Taxes which recoup the cost of business public
  services
• (1) reduce windfalls to the private sector
• (2) promote locational neutrality
• (3) promote production efficiency

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The Benefit Principle

• Taxes which recoup the cost of business public
  services
• (1) reduce windfalls to the private sector
• (2) promote locational neutrality
• (3) promote production efficiency
• (4) promote better political decisions for
  public consumer and public business services

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The Benefit Principle

• Taxes which recoup the cost of business public
  services
• (1) reduce windfalls to the private sector
• (2) promote locational neutrality
• (3) promote production efficiency
• (4) promote better political decisions for
  public consumer and public business services
• These benefits can best be achieved by direct
  taxation of business rather than through the
  taxation of those inputs that ultimately enjoy
  the benefits of the public services.

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IMPLEMENTATION

• INDENTIFY BENEFITS

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IMPLEMENTATION

• INDENTIFY BENEFITS
• CHOOSE SUITABLE TAX STRUCTURE

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IDENTIFYING BENEFITS

• Services which do not directly benefit business
  community Safety net expenditure Educatio
  n expenditure

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IDENTIFYING BENEFITS

• Services which do not directly benefit business
  community Safety net expenditure Educatio
  n expenditure
• Services which benefit only business
  community unemployment insurance

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IDENTIFYING BENEFITS

• Services which do not directly benefit business
  community Safety net expenditure Educatio
  n expenditure
• Services which benefit only business
  community unemployment insurance
• Services which benefit both business and
  consumers public safety and criminal
  justice transportation general
  government

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IDENTIFYING BENEFITS

• 16 of tax financed state-local expenditure in
  1995.

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IDENTIFYING BENEFITS

• 16 of tax financed state-local expenditure in
  1995.
• 38 of state-local taxes derived from business in
  1995

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IDENTIFYING BENEFITS

• 16 of tax financed state-local expenditure in
  1995.
• 38 of state-local taxes derived from business in
  1995
• Existing business tax levels far beyond those
  which would be justified by the benefit
  principle. Suggests that voter-tax prices may be
  badly distorted.

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Suitable Tax Structures

• State level dominated by corporation income
  tax and sales tax replace with origin based VAT
• Local level dominated by property tax
  implement local earnings taxes to balance
  property tax. Separate business and residential
  property tax rates. Dont use business
  property taxes to pay for schools

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FEASIBLITY ISSUES

• Can business share of public expenditures be
  accurately identified? .

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FEASIBLITY ISSUES

• Can business share of public expenditures be
  accurately identified? Approximations based
  upon usage estimates are feasible and even if not
  completely accurate are better than assuming no
  benefits or benefits where they simply do not
  apply.

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FEASIBLITY ISSUES

• Is an origin based approach to business taxes
  politically feasible?

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FEASIBLITY ISSUES

• Is an origin based approach to business taxes
  politically feasible? If limited to business
  services the opposition would be far less.
  Distinction between origin and destination
  is exaggerated and may be based on money
  illusion..