[CompelTechnic]

Let's say you operate a low margin business, such as a gas station. All numbers are before tax.

For the year, you spend $1,000,000 paying for fuel, convenience store supplies, electricity, wages, etc. You get $1,050,000 in revenue from your customers, for a fairly realistic margin of 5%.

Now let's say you run a software business. You pay $500,000 in electric bills, computers, wages, etc, and collect $1,000,000 in revenue for a margin of 50%.

Would you rather live in a society where the gas station pays MORE tax than the software business? This would be the case if you taxed revenue instead of profit. If the revenue-tax rate were 4%, the owner of the gas station would be left with $10,000 at the end of the year, and the owner of the software business would be left with $460,000. Bringing these numbers back into normal, profit-based terms, the gas station owner would be paying an effective tax rate of 80%, with the software business owner paying an effective tax rate of 8%.

If businesses were taxed on revenue instead of profit, low margin businesses and capital intensive businesses would be punished disproportionately. Businesses often face unplanned expenses or loss of revenue. This would have the effect of forcing businesses to raise prices to compensate for the increased risk, and would force lots out of business. This reduced economic activity would be bad for consumers, producers, the government, and society as a whole.

Individual people's income taxes cannot be treated this way, because the closest analogy to "business expenses" for a person's lifestyle is their cost of living. If cost of living were deductible it would be highly gameable and ripe for abuse by numerous parties.

[cure]

> Individual people's income taxes cannot be treated this way, because the closest analogy to "business expenses" for a person's lifestyle is their cost of living. If cost of living were deductible it would be highly gameable and ripe for abuse by numerous parties.

You are being a little bit funny here. This paragraph basically proves the OP's point.

Because companies would never abuse the taxation rules, of course. They would never cheat by shifting money around in opaque ways so as to lower the profits they have to report for taxation purposes. Clearly, that's why they can be trusted to be taxed on profits rather than revenue, but mere mortals cannot.

/sarcasm

I think in your gas station example, the net effect of a 4% tax on revenue would naturally be a 4% increase in the sales price of goods. Or, the gas station would go out of business...

I actually don't think a flat revenue tax would necessarily overall be better than the current system where taxes are based solely on profits, precisely because of examples like the one you give. It seems like some sort of combined model of a revenue tax and profit tax may be the way to go. Which is incidentally where the EU was going with this particular proposal.

[CompelTechnic]

Your argument advocating that the gas station increase its prices 4% does not fully consider the fact that businesses are risky, and it does not consider how unfair the situation remains for the owner. If this 4% increase did occur, the new revenue figure is $1,092,000. With $92,000 of profit before tax, the owner is now paying $43,680 of taxes, leaving $48,320 of profit after tax (much better than before). They are still paying 47% taxes on their profit before tax.

The degree to which businesses generate expenses is the majority of the degree to which they take on risk. It's pretty well understood that most economies are already too risk-averse. We should not further punish those willing to take risk.

The thrust of my argument is focused around the fact that low margin businesses would have an EXTREMELY high sensitivity to variable cash flows. I should have focused more on how unfair this is to small businesses, which already are a risky proposition. It is strange to me that multiple people have replied without having any acknowledgement of this.

The benefits of taxation must be balanced against the potential for abuse and the damage it does to the businesses that are taxed.

Taxing revenue would likely have less potential for abuse, but I would argue the damage it would do to the economy would be much larger than the benefit this may provide.

[rusk]

By this reasoning I should only be taxed on income once food, fuel and housing costs are taken into account, or am I missing something? I end up paying VAT on a lot of these things as well ...

I do get tax credits for some essentials but it's relatively speaking a miniscule amount.

There's an interesting formula for a progressive tax regime if anybody wants to take it up ...

[icebraining]

That's kind of the purpose of deductions; it's common for housing (particularly mortgage), education and health costs to be deductible on one's income tax, much like a business deducts its expenses to calculate profit.

Taxing only your disposable income would mean that a person living in a mansion would pay much less than someone living in a small home, which is weird; arguably, the extra niceness of the house is "profit", whereas the shareholders don't usually benefit from paying more for their inputs (some exceptions notwithstanding).

[pault]

> Taxing only your disposable income would mean that a person living in a mansion would pay much less than someone living in a small home, which is weird;

Just as weird as a corporation with billions in revenue paying a zero or negative tax rate? Or weirder?

[icebraining]

Not as weird :)

[smallbigfish]

>it's common for housing (particularly mortgage), education and health costs to be deductible on one's income tax

Oh! What's the name of this country?

In my country all taxes are applied before you get to see the actual money.

[rusk]

Tax credits == Deductions

[patd]

I think his argument was that, as you said, it would be highly gameable. But it's also the case for companies and they're (ab)using it to the point of paying little to no taxes in some countries.

[Skrillex]

>Individual people's income taxes cannot be treated this way, because the closest analogy to "business expenses" for a person's lifestyle is their cost of living. If cost of living were deductible it would be highly gameable and ripe for abuse by numerous parties.

That is the thing. Maybe a person could do that if the rules let them, but businesses are already doing it, at scale. I think that either businesses should not be able to do it, or normal people should be able to do it. As for the "low margin business" example, I see no reason for the government to support any particular kind of business over another under a capitalist system.