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Ralf
Seiffe advises business start-ups and product launches from Chicago and
is a political analyst and columnist for the Illinois Leader and
Illinois Review.
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SEIFFE: Economic
Self-Destruction
Tuesday, March 6, 2007
By Ralf Seiffe
Governor Blagojevich,
Illinois’ economic hit man, is about to whack our State’s businesses
with a “Gross Receipts Tax.” If reports are correct, the Governor will
announce his plan to place a 1% levy on the sales of Illinois businesses to
pay for his ill-conceived health insurance scheme. I’ll leave the
insurance analysis to others but this financing ploy is a gigantic tax
increase, cravenly structured to raise much more than the advertised,
statutory rate. No doubt, the Illinois business community will respond
to this new impediment to state competitiveness with projections, studies
and knitted eyebrows but these won’t stop the Governor’s plan. To
really derail this tax plan--and turn Illinois consumers into tax
skeptics--business leaders should simply call their accounting departments.
A Gross
Receipts Tax is an abomination designed to hide tax increases from the real
tax-payers. As any economist or CEO will tell you, corporations do not
pay taxes, they just collect them. Businesses pass their costs on to
customers in every case and taxes are treated no differently than raw
material costs or the employer’s “contribution” portion of Social
Security taxes. The price they charge includes all these costs.
Promoting this plan under the premise that businesses will shoulder these
taxes so that Illinois residents can enjoy low-cost health insurance is a
fantasy that borders on fraud. The notion that there is such a
“free” benefit is so economically obnoxious that even a shallow thinker
like our Governor should be able to grasp it. But, even if he was
right and businesses did not pass on the Gross Receipts Tax to their
customers, the Governor is coercing one group for the benefit of another.
That would be immoral, to use the Governor’s terminology.
Not only is this tax being promoted as a “something for nothing” benefit
so misleading that the State would prohibit businesses from using such a
technique, it’s also a much bigger gouge than the Governor would have you
believe. Consider the scenario: An Illinois consumer buys a hammer at
his local hardware store. In this scenario, the product was made by a
manufacturer who purchased the product’s parts from an Illinois
sub-contractor. The manufacturer then sells the product to a
distributor and sends the product to a rack jobber who actually delivers the
hammer to the store. Let’s say the parts cost $2. The
manufacturer assembles the parts and sells it to the distributor for $4.
The distributor sells it to the rack jobber for $4.50 who then sells it to
the hardware store for $5. The hardware store marks it up to $7.
Let’s see what that “1%” tax really costs. The parts
sub-contractor sends 2 cents to Springfield to cover his portion of the
Gross Receipts Tax. The manufacturer does his part and sends another 4
cents to the Governor. The distributor and the rack jobber sent
Springfield 4.5 cents and a nickel, respectively. The hardware store,
which hasn’t paid any income tax in three years because big box home
improvement stores have gutted his business, is still obligated to send in 7
cents on his gross receipts. All these gouges add up to 22.5 cents
and, when these costs are added to the price of the hammer, the sale will
generate another 2 cents in sales taxes. That’s not 1% of the newly
burdened final $7.25 sales price, it’s 3.4%. From the State’s
point of view, this is like raising the sales tax by about half.
Even better for the tax eaters, there’s no exemption for raw
materials like there is in the sales tax system because this is a tax based
on revenues.
Of course, if the manufacturer moved across the river to Missouri, he could
avoid all these taxes. And, even if the manufacturer did not want to
move, it would be easy to simply buy from out-of-state suppliers.
Not only that, the plan, as reported, would also expand the universe of tax
payers to service enterprises. Since Illinois has become one of the
premier providers of intellectual services to the world, one wonders how we
beat our competitors in India and China by increasing our prices with this
new burden.
It appears that the Governor’s financing plan depends on hoodwinking the
public into thinking there is such a thing as a free lunch. By
coercing the business community to collect this and other taxes, the
government achieves a public relations triumph. Governor Blagojevich
highlights the benefits with splashy press conferences but oblige businesses
to do the dirty work. This reduces the apparent cost of these
benefits, effectively raising demand for more government services.
It’s the closest thing to perpetual motion ever demonstrated.
Fighting this--and other tax gambits--requires business to recognize the
government’s permanent interest is in coercing them into acting as tax
collectors. Making business act as the State’s surrogate embezzles
management’s control and must create some economic inefficiency.
Business should resist this sort of encroachment by denying government the
secrecy this underhanded taxing technique is designed to create.
The best antidote is exposure. If business simply disclosed all taxes
they pay as a surcharge to their posted price, the cloaking effect the
government seeks would cease. In the hammer example, a price ticket
would inform buyers that the hardware store’s price was $7 but the
government’s price was another quarter. This principle could be
applied to all taxes businesses pay including such obligations as real
estate taxes, trust fund payments, 941 Unemployment tax, excess compensation
tax, etc. Given the real size of government, the price of the hammer
would drop to less than $4.50 while the government’s price for the hammer
would rise to $2.91. This would
open the public’s eyes and make it painful at every check-out counter.
Just imagine the anger if every check-out clerk circled the tax portion on
every sales receipt just like The Jewel does when you flash an affinity
card.
For this
suggestion to work, it would only take Wal-Mart and the car companies to
explicitly identify. As soon as Wal-Mart began using a dual price ticket
(i.e. one that shows the untaxed price and also shows what government costs)
a huge swath of Americans would learn that they are taxpayers suffering
rates similar to those millionaires pay. When car companies begin to
put the price of taxes--and maybe regulations--on the window sticker, it
will very tangibly tell others “Enjoy that Chevy but if taxes were less,
you could have had a Caddy.”
Experience shows that business leaders spend a lot of money and effort to
fight the continuing plots politicians hatch. Perhaps the most
effective way to combat these trespasses is to simply call accounting and
have them print the price of government.
©
2007 Ralf Seiffe
Ralf Seiffe
advises business start-ups and product launches from Chicago, Illinois and
is a political analyst and columnist for the Illinois Leader and Illinois
Review.
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