>A tax on revenues would kill a lot of high growth businesses
And also low-margin businesses. If you tax a business on its total sales rather than profits, a low-margin and high-volume operation cannot survive as easily.
Example. A supermarket chain makes many sales, collecting average 5% margins on a sale. A seller of high-end automobiles moves fewer units, but can take a 15% margin. Assume both businesses make the same $1m sales in a year.
If you're taxing profits at 20% the supermarket pays $10k on $50k profit while the car dealer pays $30k on $150k profit, for a total tax take of $40k.
If you're instead taxing total sales at 2%, each will pay $20k on their $1m sales. The same total taxes were raised, but the tax burden (at least in terms of retained earnings that are now available for reinvestment) has fallen differently. The supermarket is paying 40% of their profits in taxes, the car dealer is paying 13.3% of their profits in taxes.
And if a business makes only 1% average margin on their sales, they are underwater by this scheme. ($1m sales, $10k profit, $20k tax).
A VAT isn’t a sales tax though. I think you can subtract the cost of goods since they were already taxed? Compared with income tax, there are fewer expenses you can subtract from revenue, but there still are some.
But since prices will adjust, the question is really one of tax incidence. Who gets to raise prices to cover their taxes? And that’s complicated.
I think you can subtract R&D costs somewhere else. At least I remember the accounting department being really picky about having accurate details on R&D hours.
Not out of VAT though. They are deductible from your income, which is how you come up with how much profit you made (which is taxed).
With VAT, you can deduct from it all the other VAT that you paid. E.g. you bill someone 100 + 10% VAT for a total bill of 110. You receive 110. You are now supposed to pay that 10 VAT to the government. But before you pay it, you can subtract the VAT that you paid in the last month, so if you bought, say, scissors, that had a VAT of 2, and a pencil, with a VAT of 1, you have to pay a total VAT of 7 back to the government.
That’s assuming there is competition from companies that can avoid the tax, otherwise their margins stay the same and the industry ends up with higher prices. In effect it’s roughly equivalent to sales tax, though one that also applies to suppliers and therefore promotes vertical integration.
Which is the real reason countries tax profits, it can’t be passed on to consumers. Aka a company that maximized profits at some price point can’t raise prices without lowering profits.
There are definitely expenses you can incur that result in either a taxable income reduction or a tax deduction - there aren't many of them (most individual expenditures aren't considered expenses in the way that profits are measured) - but there are some.
As an example in Canada one newly recognized tax exemption for 2020 was a 400$ flat tax deduction for remote working.
You can argue that more tax burden should be shifted initially to corporations but I think that expenses and taxes have aligned in a way that makes a predominantly revenue based individual tax fair - corporations could also easily carry revenue based taxes, some low margin business would become infeasible but every economic policy shifts that line in some manner.
In the US they’re getting fewer and fewer. Property tax + mortgage interest combined is now capped at $10k. This was no doubt to punish blue state residents where property values are higher
Mortgage interest relief was abolished in the U.K. decade a ago. Do you get relief on renting too, or just mortgage?
Either way seems a long way from business which gets to remove 100% of the cost of rent, maintenence, and pretty much anything else. If I employ a gardener to mow a lawn because my time is more valuable spent inventing a cure for cancer, I can’t deduct that. It makes far more sense from a personal perspective to work less and do a given job myself (lowering GDP and productivity, a lose/lose situation). Won’t say 35% marginal tax, I’d have to do $1000 overtime to pay $650 to put in a new shower, and the builder would only keep $422. It might take him 2 hours and me 6 hours, but if it takes me 10 hours to earn that $1000 extra it’s worth doing it myself and denying the world the cure for cancer I could have developed in that time.
A business on the other hand will just take the extra $1k revenue and offset the cost of the plumber against the revenue before paying tax.
As others mention, if you’re a 1099 contractor (even part time), you have more options to mitigate this (tradeoff being you pay the employer’s portion of social security contribution, and must manage your own finances to withhold enough to pay the next tax bill).
But you’re not wrong to be upset about this. It really doesn’t seem fair. And I’m not sure the government could get away with it so easily if they weren’t able to deputize employers to withhold taxes from your paycheck.
Btw, IMO this is also part of the reason for targeting 1099 status of the gig economy – collection rates are much lower for contractors (who must pay their own taxes, and may not have the funds available to do so) than for employees (who have their taxes withheld from their paycheck so they don’t need to pay tax on their salary).
I’m of the firm belief that the first $100k in individual income should be taxed exactly $0. Taxing unsophisticated, frequently barely profitable contractors – and penalizing them for failure to maintain savings or meet filing deadlines - is counterproductive to a successful economy.
The IRS collects 80% (or more) of its revenue from Americans with more than $100k income. On the other hand, Americans with 1099 status and under $100k income almost certainly feel a greater relative psychological and financial burden of tax compliance than anyone making over $100k.
Many of them need to choose between paying bills or paying the IRS – whereas for higher income earners, tax compliance is much less stressful as there is never any doubt whether they’ll have enough money to both pay their taxes (on time) and survive.
In this sense, the tax system feels disproportionately unfair to a large segment of the population that contributes to a comparatively small percentage of tax revenue.
The one reason to have continually growing "tax function" is to avoid a particular number be more beneficial than a larger number.
Eg. someone making $100k is better off than someone else making $100001, but also maybe $120k (depending on the tax rates). Basically, at $100k, there is no incentive to earn more because your net, take-home figure will be lower if you do, until you jump significantly over the hoop.
That is not how marginal tax rates work. I’m not suggesting we abandon marginal tax brackets. In the case of your example, the person who earned $101k would pay tax on the $1k above $100k, i.e. they would pay $200 of taxes.
The proposal to start taxing only amounts above $100k is not fundamentally different from the standard deduction or personal allowance that already exists (YMMV by jurisdiction). My proposal is simply to increase this floor by 10-20x.
There aren’t many tax schemes in the world where earning $1 more incurs > $1 in tax. Ironically it’s more likely to happen if you’re poor, and a gain in income causes you to lose social support or other benefits.
It's never that simple. Serbia still to this day has a scheme where you get a fixed amount taxation as self-employed "enterpreneur" up to 6M RSD (50k EUR/60k USD) of revenue, but are subjected to other taxation rules once you cross it (as a company or as an employee). It was heavily (ab)used by the IT crowd locally (until rule changes in 2019 about who can use this), and it was beneficial to stay under the 6M limit or you'd need to approach 10M (100k USD) to get the same net income.
That’s because there are no “low-margin” wage workers, who make large figures in gross salary, but also have extremely high “costs of earning wage”. I can’t think of any wage worker who would fit this bill. At best, this could apply to some self-employed people, but they can just incorporate. Maybe it would also apply to very low-wage workers, if you consider food and housing as cost of revenue, but then again low wage workers already pay basically no income tax.
That's not really true. There are and have been many states, provinces and cities where my line of work is rewarded with high pre-tax pay, but the cost of living in those places (especially housing) makes it uneconomic.
Most[0] countries would still make you pay income tax for whatever you earn for your personal services and not class it as part of the business' revenue. I believe in the UK this was addressed with IR35[0] and in Australia it is called as PSI[1]
[0] This loophole started being closed in the late 90s/early 00s and continues to be closed in the remaining countries that haven't yet addressed it.
I’m not sure what this has to do with taxing revenues vs profits. Regardless of whether you provide your services through a limited company and regardless of the IR35 status of any particular contract you can always deduct business expenses from revenues before getting taxed.
The purpose of IR35 is to stop people from avoiding national insurance contributions.
Say I create a business that receives $2000/m in contracting revenue instead of personal 1099 income. What if this business then acquires a property with a $2000/m mortgage and in turn rents that property to me for $1/mo. As all revenue is consumed by expenses would the business not be taxed? It seems like there has to be a reason why this strategy can not be used to avoid tax on all personal expenses?
Well, you're in luck! The IRS has prepared a 56-page document on just this topic [1]. The summary on page 3 is:
> To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
Your particular example with free or below-market rent would almost certainly be considered tax evasion -- in fact, I believe this is one of the things that Allen Weisselberg is charged with [2].
People don't really have "profits". You could argue that some amount of money people make is used to pay for food, shelter etc and then treat the rest as "profit". In that case a progressive income tax system does tax individuals on "profit" because the first dollars you earn are either not taxed or taxed at a very low rate.
People aboslutely have profits, and that fact that it is not looked upon in this way is a problem
I sell my labor on the market for as much money as I can get for that labor. I do this for the same reason a business is formed to provide for myself, my family, and to enjoy my life
This is the entire purpose of the "Standard Deduction" as that is viewed by the IRS as the "cost of living", and in their view it would be to complicated and allow for too much tax evasion if they allowed you to itemize every cost of living you had. Personally I think that is excused just to over tax people.
One should be able to deduct on an itemized schedule every grocery bill, every utility, even housing from their income taxes. Paying only taxes on that income they earned above and beyond the "Needs" of a person.
... because the other money (expenses) was paid to someone else throughout the system. So it either ended up as another corporate revenue or as someone's income, which is taxed.
> Governments want to tax profits rather than revenues
Yes, but Hollywood Accounting[1] transforms taxable profits into untaxable expenses. (Search this discussion for 'Hollywood Accounting' for a longer post I made.) A revenue tax is more difficult to game with creative accounting methods.
I mean, VAT is not a tax on revenue, it's a tax on added value. In essence it's a form of profit taxing already.
If you buy $10 of flower (including VAT) and turn it into $15 of bread (including VAT), you effectively only pay value added tax on $5. If you're generating no real margins and just have a lot of volume, you're effectively also paying no real VAT.
> A tax on revenues would kill a lot of high growth businesses.
A tax on revenues would also kill a great many low profit businesses
Oil and gas extraction: -7.6%
Support activities for mining: 0.6%
Beverage manufacturing: 0.8%
Grocery and related product merchant wholesalers: 1.9%
Lawn and garden equipment and supplies stores: 2.0%
Miscellaneous durable goods merchant wholesalers: 2.3%
Petroleum and petroleum products merchant wholesalers: 2.4%
Grocery stores: 2.5%
Automobile dealers: 3.2%
Building material and supplies dealers: 3.2%
Continuing care retirement communities and assisted living facilities for the elderly: 3.3%
Other motor vehicle dealers: 3.3%
Home furnishings stores: 3.3%
Furniture stores: 3.4%
Beer, wine, and liquor stores: 3.4%
I followed your link just because I couldn't understand what the percentages were ('profit as a percentage of revenue?') but it doesn't explain either, unless it's the same as earlier one - 'growth in sales' (and we assume year on year? Doesn't say) - but that has nothing to do with profit...
