A gross receipts tax is a levy on all business sales, regardless of whether the item is sold for consumption or intermediate use. There are no deductions for the cost of producing the item, for previous taxes on the item, or for other costs (as provided for in a value-added or income tax). As a result the base is simple to measure and the tax is easy to administer.
However, the tax is highly inefficient. The gross receipts tax results in “ pyramidingThe imposition of a tax on a tax that occurs when both intermediate components and the final product are taxed. ” (aka “cascading” or “double taxation”)—multiple layers of tax as a product goes through production and distribution. The extent of the pyramidingThe imposition of a tax on a tax that occurs when both intermediate components and the final product are taxed. depends on how many times intermediate components are sold before being incorporated in the final product and on the extent to which the tax is passed on to the buyer at each stage. As a result the total burden of a gross receipts tax varies capriciously, in ways that policymakers generally do not intend. The tax is non-neutral and likely to distort the behavior of consumers and businesses. In addition the tax is not transparent to the consumer. Thus in most cases consumption taxes represent a superior option to gross receipts taxes.
Gross Receipts Taxes: Policy
Gross receipts taxes
Gross receipts taxes should not be used. Other, more efficient taxes should be used to raise revenue.