Types of business taxes

A tax  is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state. Among the many taxes charged by the government on business is the value added tax (VAT), also known as ‘Goods and Services Tax’ (G.S.T), Sales Tax, Single Business Tax (SBT), or Turnover Tax. The goal of this tax is to apply the equivalent of a sales tax to every operation that creates value.

The Michigan Single Business Tax. In 1975, the Michigan legislature approved Public Act 228, radically changing the state’s business tax environment. Titled the Single Business Tax (SBT) Act, Public Act 228 replaced profit-based taxation with value-added taxation [1]. More specifically, the SBT replaced seven taxes: the state corporate income tax (the largest revenue generator, then levied at 7.8 percent); the financial institutions income tax; the corporate franchise fee; the savings and loan association fee; the domestic insurance company privilege fee; the local government property tax on inventories; and the intangibles tax on business [2]. The fact that one tax replaced so many others gave impetus to the name Single Business Tax. The Michigan SBT is unique because it is the only currently levied VAT in the United States. New Hampshire imposes both a corporate income tax (Business Profits Tax) and a Business Enterprise Tax, which is a 0.75 percent tax on compensation, interest, and dividends paid whose impact is similar to a SBT but they are not SBT s.

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Unique features of Michigan’s SBT. Compared to taxes levied on profits, SBT is a completely different approach to raising tax revenue because it uses the value firms add to products as the tax base. The value a firm adds to a product is the sales price less the cost of materials used in production. This value added should act as a proxy for a firm’s activity within a specified jurisdiction, such as a state. In turn, business activity provides a good measure of the government services a firm consumes over the tax year. For this reason, the SBT as with other types of VATs are said to be levied on a “services consumed” or “benefits received” principle rather than an “ability to pay” (profits) principle [3]. If sheet steel is imported by a machine manufacturer, that manufacturer will pay the SBT on the purchase price, remitting that amount to the government. The manufacturer will then transform the steel into a machine, selling the machine for a higher price to a wholesale distributor. The manufacturer will collect the SBT on the higher price, but will remit to the government only the excess related to the “value added” (the price over the cost of the sheet steel). The wholesale distributor will then continue the process, charging the retail distributor the SBT on the entire price to the retailer, but remitting only the amount related to the distribution markup to the government. The last SBT amount is paid by the eventual retail customer who cannot recover any of the previously paid SBT. Since sales tax is often cheated, collecting the tax at each production level, and requiring the previous production level to collect the next level tax in order to recover the SBT previously paid by that production level, forces the entire economy to participate in tax collection enforcement.

How does Michigan’s SBT meet Smith’s tax principles? Michigan’s SBT appears to meet all 4 of Smith’s criteria. Since SBT is collected in the state where the product is manufactured, its collection support’s that State’s enterprise. The amount of VAT is also directly related to the profit margin on that product thus in theory is “in proportion” to what the subject ought to be able to pay. However in each case there are other costs that go into the manufacture that the company must cover. If they raise the product’s price to cover them, then the value added to the product is higher and their tax is higher. Thus measuring the value added solely by the cost of the raw material on which initial tax is paid versus the sales cost of the product means that the price of the product must be slightly higher to balance the “apparent” value added [4]. A bad product has production and value added costs that exceed the profit margin.

The SBT tax is certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, are all clear and plain to the contributor, but not to every other person in the supply chain. Final consumers have no idea on how many levels SBT is charged, and are amazed at the price they must pay for the product. If they did know about all the taxes, they would probably be reluctant to pay the final sales tax as well since more that have the cost of the product might be traceable to SBT.

The conveniency of the SBT is clear, since it is collected at all intermediate stages when any kind of exchange of material or work is done. Thus SBT does fulfill Smith’s 3rd criteria.  Unfortunately is does conform to his 4th principle which is not take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.” Because the SBT taxes are shifted up the chain all the way to the consumer who will never have a chance to recoup these taxes, it in fact takes more from the consumer than it does from the manufacturer. On top of that since the State is using the intermediate SBT monies all the way through, it has an opportunity to earn money with SBT money, and increase the amount it has. As a political entrepreneur I would abolish the sales tax since it is in fact a 2nd SBT, because the price of the product is increased to reimburse the company for their VAT portions, plus a profit margin, and the consumer pays a SBT based on the product price plus all the intermediate SBT s so the percentage they pay is based on a value much higher than the product is really worth. Alternatively the sales tax ought to be based on a smaller percentage of the final sales price. Currently the U.S. does not have a SBT tax, and if one is instituted, then for fairness, sale tax rules must be changed to make the consistent with Smith’s principles.