Gross Receipts Taxes: Theory and Recent Evidence
A gross receipts tax is levied against the receipts of a sale that results in a change of ownership. By including transactions at intermediate stages of production, these “turnover taxes” are not based on profits, measures of income, or any other indicator of consumption power that is targeted by most other tax instruments in modern developed economies. Furthermore, the tax gives a competitive advantage to bigger businesses that can make their own inputs rather than buy them. Finally, as taxes get added to the various stages of production they “pyramid” into the final price, so that the effective tax rate on goods exceeds the tax rates presented to voters and final consumers.
In the United States, most of the gross receipts tax adoptions were spurred by the fiscal pressures of the Great Depression of the 1930s.Even by World War II, however, many gross receipts taxes were found to be unconstitutional or were otherwise repealed. States that repealed the taxes generally substituted the revenues with greater dependence on business income and retail sales taxes.
This article highlights the logic of why such widespread and seemingly coordinated abandonment of the gross receipts taxes occurred. It also reviews the empirical evidence of this effort and concludes that history has favorably rewarded this abandonment. Finally, the essay reviews the arguments where cases supporting the gross receipts taxes would arise, which itself demonstrates that the gross receipts taxes should remain an instrument of the pre-WWII era for the United States.