Darryl L. DePriest is the seventh presidentially appointed and Senate-confirmed Chief Counsel for the Office of Advocacy.
Prior to joining the Small Business Administration Office of...
United States Small Business Administration
Office of Advocacy
Cross Firm Size Variation
in Subnational Taxation
Under Federal Consumption-Based Taxation:
Impact and Implications
by Dr. James A. Papke
1996. 44p. Dr. James A. Papke, West Lafayette, IN 47906
(Under contract no. SBAHQ-94-C-8138, an addendum to: The Differential Impact of State-Local Tax Incentives on Small Versus Large Firms, Dr. James A. Papke, contract no. SBA-8138-0A-94)
The aim of this research is to use the empirical model developed in The Differential Impact of State-Local Tax Incentives in Small Versus Large Firms to examine the comparative impact of a federal consumption-based tax on the distribution of state and local business taxes across firm size. SBA's Region V is the geographical area covered in the analysis, but the region is a reasonable proxy for the differential impacts for the entire nation.
Scope and Methodology
The comparative tax impact is measured by the effective marginal tax rate (EMTR) on an incremental investment in the corporate sector. The EMTR is the percentage by which a tax or tax system reduces the rate of return on capital investment. The EMTR calculations contained in this paper correspond to two distinct business tax systems: the current federal, state, and local system and the federal, state, and local system containing a replacement federal consumption-based tax.
Taxes, it should be remembered, have two primary effects: they transfer resources from the private to the public sector and they alter the relative prices of goods and services and factors of production.
Under the several federal proposals for replacing the current set of federal income taxes with consumption-based taxation, state and local business taxes are not allowable
deductions from the federal tax base and all capital investment expenditures are treated as current outlays. The consequences of these provisions on comparative interjurisdictional tax burdens and on the distribution of these burdens by firm size and industry type are what is being investigated.
If capital income is freed from taxation, some other source or use of income must be exploited to maintain revenue neutrality.
Fundamental federal tax restructuring cannot take place in a vacuum; the starting point is the existing federal, state, and local tax system and the economic, political, and fiscal interrelationships and institutions that have developed over time. Subnational governments' reactions must be taken into account in any realistic assessment of the current reform proposals.
Long-term commitments are made on the assumption that the present tax system will continue. Any change in tax rules will impose windfall gains and losses on different segments of the economy. It is the responsibility of policymakers to balance these gains and losses at the margin based on the best information available.
The addendum is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 4874639 (TDD)
Order Number: PB96-131321
Cost: A09; A02 Microf.
Also available from NTIS: The Differential Impact of State-Local Tax Incentives on Small Versus Large Firms, Dr. James A. Papke, 167 p., contract no. SBA-8138-0A-94. Refer to Order No. PB96-131321.
*Last Modified 6-11-01