At some point, I think governments are going to need to break down and start taxing revenue instead of profits.
A 3% tax on total revenue is the same as a 15% tax on the profits of a product with 20% profit margins.
A 3% tax on total revenue is the same as a 15% tax on the profits of a product with 20% profit margins.
One of the biggest policy problems with revenue taxes is that the effective tax rate is much higher on smaller companies than larger companies. A large vertically integrated company like Apple would pay a lower effective tax rate on an iPhone than any of their competitors, giving them a natural advantage. These are pretty dis-economic policy outcomes and the main reason no one seriously considers revenue taxes.
Revenue is recognized as the size of a sales transaction. The number of sales transactions required to build and sell a given product can vary enormously based on the structure of the business, usually as a product of optimizing for efficiency and specialization. When you tax revenue, businesses have a large incentive to restructure their business to optimize for minimizing the number of sales transactions in the course of building the product, because revenue taxes essentially compound as a function of the number of transactions which is then a cost of business. The compounding is why revenue taxes are so low, usually around 1%. Being tax efficient lowers your costs more than being business efficient, leading to bloated and non-competitive companies.
I've operated a business under one of the few revenue tax regimes. The perverse incentives to verticalize the business structure are very real. Revenue taxes add up quickly.
It also discourages long-term investments, and further rewards short-termism (which everyone seems to dislike).
I'm here all year, tip the waitress!