United States Small Business Administration
Office of Advocacy
RS 170
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Purpose
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.
Highlights
Policy Implications
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.
Ordering Information
The addendum is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 4874650
(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