The gross-receipts tax, as proposed by Nevada Governor Brian Sandoval (R), is much like an ordinary sales tax, taxing firms’ sales by taking a certain percent of sales in taxes. Since the tax will be a somewhat a percent of sales, or purchases, it is sure to be as regressive as any sales tax. However, a gross-receipts tax is much worse than an ordinary sales tax for five reasons.
First, since the tax is on a percent of sales, no matter where those sales take place in the supply chain and is cumulative along that supply chain, the shorter the chain, the lower the effective tax rate becomes, leading to a more costly supply chain. Such a tax scheme only serves to induce businesses to reduce the links in that chain as much as possible, through vertical mergers and by pushing as much of the vertical chain outside of the state as possible. This reduction in “the middle man” in the supply chain, instead of cutting costs to consumers only serves to raise costs, as business activity becomes less efficient–the only reason middlemen are used in supply chains is they reduce costs. Europeans who now use the value-added tax once used gross-receipts taxes. They transitioned to the value-added tax which is a tax on the net revenues (net of cost of goods sold), so that a 10% sales tax and a 10% value-added tax raise prices to consumers by the same amount and collect the same amount of money. The gross-receipts tax was just too inefficient.
Second, with an ordinary sales tax, certain goods can be shown favor by exempting them from taxation, such as exempting food, medicine and/or electricity from sales tax, exemptions which reduce or eliminate the regressivity of sales taxes. A gross-receipts tax, just as with the European value-added tax, cannot eliminate or cut the rate on certain types of consumer goods from taxation to cut the tax’s regressivity, but can only cut or eliminate the tax on particular industries.
Third, taxing industries instead of taxing types of goods leads to more intense lobbying, since producer groups are more concentrated and have more reason to get together than consumers. Nevada Governor Sandoval proposes to have different tax rates for 30 different identified industries. Such industry-level taxation only serves to encourage industries to lobby the Nevada state government more intensively seeking favors in the form of more favorable tax treatment for their industry. This only encourages more back-room deal making for special treatment for particular industries. Such favoritism in taxation not only wastes resources by encouraging lobbying, the unfair tax treatment with different businesses taxed at different rates also decreases efficiency in the economy by directing resources by government taxes instead of market prices—people are encouraged to use their resources for government-approved purposes rather than market-approved purposes, and the government-approved purposes are the ones with the most lobbyist money behind them.
Fourth, when something seems to be free, we want more of it, but nothing is free, there are not free lunches, leading to more government than we would want if we knew the real cost. In the nineteenth century in the American West, saloons would often advertise free lunches (free with the purchase of a drink). Customers found out that their drinks would be more expensive and those free lunches would be very salty, making them crave more drinks—they realized those lunches were anything but free. A major problem with the gross-receipts tax is one that the Nobel Laureate James Buchanan labelled “fiscal illusion.” With a sales tax, buyers see that they are paying the tax. So voters, as tax-paying buyers see how much their state government costs them with every loaf of bread or can of beans they buy. But with both the value-added tax and the gross-receipts tax, the taxes paid on the item are hidden in the final sales price. The cost of new spending plans by legislators and governors, instead of being clearly seen at the cash register become completely hidden from view. Many people were shocked to find how the level of deceit it took to pass the “Affordable Care Act.” A gross-receipts tax sets up a deceitful system that hides the costs of programs from voters to get government programs passes.
Finally, government expansion financed by such “free money” is often difficult to reverse. I am told that in our National Parks, feeding the animals is discouraged because it gets the animals dependent on the handouts. “Free lunches” or the free stuff given out by government creates program dependency and are difficult to repeal from government. Such free stuff seems freer still when financed by taxes that seem to be paid for by someone else, but that someone else, Senator Russell Long’s “fellow behind the tree,” just turns out to be us crouching down under the load of hidden taxes.