<blockquote>
<p>If taxes were paid on revenue, wouldn't the money flow stabilize somewhere else? (prices would go up, and so would salaries in order for people to afford the new prices).</p>
</blockquote>
<p>This sentence is unclear. If you mean to ask whether market would eventually reach some stable equilibrium the answer would be yes.</p>
<p>However, this is a bit of a moot point. There actually already are taxes on revenue as pointed in comments. VAT and sales taxes are de facto taxes on company's revenue even if they might not be de jure taxes on company revenue. This is because company's revenue is defined as price times quantity sold <span class="math-container">$R=pq$</span> so any tax that is levied on price company charges is de facto a revenue tax.</p>
<p>I make a purposeful distinction between de facto and de jure tax because in most tax codes you will see written that firms collect VAT/sales tax from consumers on behalf of the government. So de jure these taxes are applied to consumers, however from economic perspective it does not matter if VAT or sales tax is de jure levied on consumers or producers as tax burden is always allocated by the market (see Mankiw Principles of Economics).</p>
<p>The intuition why they are equivalent can be seen in the pictures below I taken from the Mankiw's book. The intuition is that whether tax is levied on consumers or suppliers (firms) it will have the same effect on new market equilibrium price and quantity supplied.
<a href="https://i.sstatic.net/U5lOA.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/U5lOA.png" alt="enter image description here" /></a>
<a href="https://i.sstatic.net/paqdO.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/paqdO.png" alt="enter image description here" /></a></p>
<p>So de facto VAT and sales taxes are also revenue taxes. Also since tax burden is split by the market it does not really matter from distributional/welfare perspective if government puts this tax de jure on businesses, so there is no opportunity here to do any redistribution just by changing the de jure designated payer of a tax. This does not mean the burden of the tax is distributed equally or that even there might not be cases where only one side of the market bears the burden. The point is that the burden is determined by the market not government.</p>
<p>In practice the designation of who pays might have political significance. That is an economically equivalent tax on producers might be more palatable to voters to the same tax on consumers but that does not matter for economic analysis.</p>
<p>Furthermore, an important caveat is that sometimes it might be more practical to tax one party because they might have for example lower administrative burden. This is why VAT and sales tax are both collected by companies so in fact they pay the tax even though de jure these are taxes on consumers and de facto the tax burden is always split between consumers and producers depending on parameters of supply and demand regardless of designated payer stipulated in law.</p>

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2020-09-14T17:05:59.553Z
The difference between a revenue tax and VAT is that VAT is refunded on the materials that go into the product. So each dollar of the product's price is taxed once, not once per company.
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2020-09-14T17:22:28.143Z
@user253751 but precisely *you can only deduct the VAT from materials and other inputs in order to avoid double taxation*, but not cost of those inputs only VAT that you previously paid over those costs. This is why in the end sales tax and VAT are economically equivalent. But that tidbit aside yes it is a revenue tax because the tax is levied on revenue firm earns minus *tax* paid for COGS not just minus the COGS in which case it would be gross profit tax. Or to be more specific it is revenue tax from perspective of final goods and services.
1muflon1
CC BY-SA 4.0
2020-09-15T11:17:10.887Z
You pay the tax on (revenue minus COGS). Equivalently: You pay (tax on revenue) minus (tax on COGS). You do not pay: tax on (revenue minus (tax on COGS))
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2020-09-15T11:25:10.463Z
@user253751 but this is simply not correct generally speaking. VAT is applied to revenue not gross profit. You can look at any accounting book, see for example this accounting for dummies as example https://www.dummies.com/business/accounting/how-to-calculate-vat-2/
1muflon1
CC BY-SA 4.0
2020-09-15T11:34:23.123Z
For example, if there is 10 percent VAT firm buys materials for 10e +1e VAT and then sells the product for 100e the VAT on that 100e sale will be 10e not 9e sure company gets eventually 1e refund for the VAT payed in the first step but the VAT is applied to revenue not gross profit and then you deduct the VAT payed on materials. Company cannot deduct COGS that include also wages for assembly workers from VAT. Also if company produces everything in house there is not even that deduction there.
1muflon1
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2020-09-15T11:44:26.703Z
do you know what it's called when tax is paid on revenue and deducted on materials? that's called a tax on the revenue minus the materials. It's not called a tax on just the revenue. You don't "eventually" get a 1e refund, you don't pay it in the first place.
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2020-09-15T11:49:55.910Z
@user253751 1. Yes you do on paper even if the tax is settled in net once per month/quarter. 2. Gross profit is Revenue-COGS. Consider this example again company buys materials for 10e+1e VAT then company has 10e wage bill to produce product it sells for 100e+10e VAT. Here the VAT applied to total product is 10e, VAT refund 1e, net VAT paid 9e but the gross profit in this example is 80e so according to you VAT should be 8e but that’s not how things work. Now suppose company produces everything in house and has in-house wage cost 20e again sells for 100e+10e VAT. VAT is 10e but gross prof.is 80
1muflon1
CC BY-SA 4.0
2020-09-15T12:00:22.660Z
Ah so your point is that gross profit isn't revenue-materials, it's revenue-materials-processing costs. And VAT is paid on the former so gross profit is the wrong word. Why didn't you just say so?
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2020-09-15T12:01:42.677Z
@user253751 I mentioned that in the second part of my comment. Regardless, I am probably having some room for improvement in my communication skills if I did not get that point across right away. I will try to work on that.
1muflon1
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2020-09-14T16:00:05.833Z
2020-09-14T16:35:10.437Z
2020-09-14T16:35:10.437Z
1muflon1
<p><em>Note: there is a closed question that is similar (<a href="https://money.stackexchange.com/questions/126677/paying-taxes-revenue-vs-taxes-profit">https://money.stackexchange.com/questions/126677/paying-taxes-revenue-vs-taxes-profit</a>) but the response offers a perspective that I would like to challenge and understand.</em></p>
<p>Companies pay taxes on gross income (revenue - cost of sold goods) while individuals pay directly on revenue.</p>
<p>Several sources I could read (including <a href="https://money.stackexchange.com/a/126684/29745">the answer to the question I mentioned</a>) mention fairness between companies and the fact that they &quot;spend to make money&quot; and not &quot;consume&quot; as in the case of an individual (why would one be better than the other?)</p>
<p>Not being an economist, I still do not understand why the difference in treatment.</p>
<p><strong>If taxes were paid on revenue, wouldn't the money flow stabilize somewhere else?</strong> (prices would go up, and so would salaries in order for people to afford the new prices).</p>
<p><sup>One of the advantages I imagine would be that countries that have lower taxation would not be artificially used as a consolidation center to show a &quot;zero (or small) gross income&quot; (and therefore low or zero taxes) in other countries.</sup></p>
<p>To be clear: I am not trying to be the Robin Hood of economics, I am trying to understand whether there are <strong>fundamental</strong> reasons why the market would not stabilize elsewhere.</p>

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2020-09-14T14:25:12.093Z
If taxes were paid on revenue then companies have to consolidate or die. The computer company buys hard drives from the hard drive company which buys metal sheets from the metal smelting company which buys metal ore from the mines? Well, that means they pay tax four times! But the company which owns the mines *and* the refinery *and* the hard drive factory *and* the computer store only pays tax once. So you're giving money to companies to incentivize them to become as big as possible.
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2020-09-14T14:27:43.637Z
@user253751: thank you, this is a very interesting point I did not think about at all (on eof probably many others)
WoJ
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2020-09-14T14:32:18.943Z
A value-added tax (VAT) is a way to tax revenue, but since it is based on value added, no incentive for vertical integration. They are common in the developed, the US is the one of the few countries that does not have one.
Brian Romanchuk
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2020-09-14T16:02:50.217Z
@BrianRomanchuk but US has sales tax and even though from practical perspective for fighting tax evasion VAT is superior to sales tax, if you consider VAT as a tax on revenue you have to consider sales tax as a tax on revenue as well.
1muflon1
CC BY-SA 4.0
2020-09-14T16:41:04.267Z
Sales taxes are normally not applied to every firm, so it’s not a “tax on revenue” that applies universally. (Did we not have this conversation in the past?) If the sales tax were universal, then it would be a tax on revenue.
Brian Romanchuk
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2020-09-14T17:06:14.023Z
Sales taxes and VAT both only tax each dollar of revenue *once*. That is the important distinction here!
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2020-09-14T17:14:06.033Z
Note that individuals are also allowed to pay taxes on profit! But there are not many expenses that count as reducing your individual profit. You generally only get to deduct special expenses that most people don't have.
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2020-09-14T19:13:22.937Z
@BrianRomanchuk but VAT system by its definition includes deductions for VAT payed on materials and so on. Only the final goods and services are really  having any net positive tax impact under VAT and it will be on net for many firms 0 and economically assuming away all real world imperfection the same firms that would pay positive VAT would be the same firms that pay any sales tax. It really only collects information at stages but not the tax itself. Furthermore, even if you would want to just look at things pro forma, income tax is also not applied to all incomes as many people are in zero
1muflon1
CC BY-SA 4.0
2020-09-14T19:14:29.170Z
@BrianRomanchuk tax bracket and some forms of income are excluded altogether yet that does not mean income tax  not applied universally ceases to be income tax and by the same virtue even if you want to put economics aside and just look at the paper trail sales tax would still be revenue tax even if it generates smaller amount of paper trial.
1muflon1
CC BY-SA 4.0
2020-09-14T19:41:15.940Z
This is a semantic point, but every single legal entity in the economy has to comply with the Income Tax Act, even if they end up paying nothing. If my firm produces goods that are end up in a value chain that terminates with exports, I completely ignore a sales tax, but I need to comply with the VAT.
Brian Romanchuk
CC BY-SA 4.0
2020-09-14T19:41:33.853Z
For example, if we have company A that sells materials to company B for 50e, company B then sells to consumer for 100e then under $10\%$ sales tax company B sends to government 10e as consumer has to pay 110e. Under VAT the same occurs as even though company A will nominally charge B 55e (50+5e VAT), B immediately gets 5e rebate so net tax is paid and VAT does not make any economic effect, then when B makes final sale when consumer has to pay 110e 10e is finally on net paid to government and some economically meaningfully effect took place. So they are equal save for paper trail and timing
1muflon1
CC BY-SA 4.0
2020-09-14T19:47:47.110Z
@BrianRomanchuk but universal compliance is not requirement for any tax to be the type of tax it is. For example, Netherlands does not have universal requirement for paying income tax. If your income is below some minimum you don’t need to fill out tax return or even inform any authority about your level of your income. You are simply exempt from the tax. Does that mean that under your semantics argument Netherlands has no income tax?  If you want to use such semantics you of course can but I know of no public economist who would be using such terminology.
1muflon1
CC BY-SA 4.0
2020-09-14T20:00:10.350Z
In addition firms that do not hit certain turnover thresholds are in many VAT countries not required to register for VAT at all. So for those companies VAT won’t be zero but simply won’t apply. Again using your semantics then this would mean that your original analogy won’t apply
1muflon1
<taxation><corporate-finance>
Would the market stabilize if companies paid taxes on revenue instead of gross income?
WoJ
# Would the market stabilize if companies paid taxes on revenue instead of gross income?

(Asked by: username_0 on 2020-09-14)

*Note: there is a closed question that is similar (<https://money.stackexchange.com/questions/126677/paying-taxes-revenue-vs-taxes-profit>) but the response offers a perspective that I would like to challenge and understand.*

Companies pay taxes on gross income (revenue - cost of sold goods) while individuals pay directly on revenue.

Several sources I could read (including [the answer to the question I mentioned](https://money.stackexchange.com/a/126684/29745)) mention fairness between companies and the fact that they "spend to make money" and not "consume" as in the case of an individual (why would one be better than the other?)

Not being an economist, I still do not understand why the difference in treatment.

**If taxes were paid on revenue, wouldn't the money flow stabilize somewhere else?** (prices would go up, and so would salaries in order for people to afford the new prices).

One of the advantages I imagine would be that countries that have lower taxation would not be artificially used as a consolidation center to show a "zero (or small) gross income" (and therefore low or zero taxes) in other countries.

To be clear: I am not trying to be the Robin Hood of economics, I am trying to understand whether there are **fundamental** reasons why the market would not stabilize elsewhere.

**Tags:** taxation, corporate-finance

> **Comments:**
> **username_1**: If taxes were paid on revenue then companies have to consolidate or die. The computer company buys hard drives from the hard drive company which buys metal sheets from the metal smelting company which buys metal ore from the mines? Well, that means they pay tax four times! But the company which owns the mines *and* the refinery *and* the hard drive factory *and* the computer store only pays tax once. So you're giving money to companies to incentivize them to become as big as possible.  
> **username_0**: @user253751: thank you, this is a very interesting point I did not think about at all (on eof probably many others)  
> **username_2**: A value-added tax (VAT) is a way to tax revenue, but since it is based on value added, no incentive for vertical integration. They are common in the developed, the US is the one of the few countries that does not have one.  
> **username_3**: @BrianRomanchuk but US has sales tax and even though from practical perspective for fighting tax evasion VAT is superior to sales tax, if you consider VAT as a tax on revenue you have to consider sales tax as a tax on revenue as well.  
> **username_2**: Sales taxes are normally not applied to every firm, so it’s not a “tax on revenue” that applies universally. (Did we not have this conversation in the past?) If the sales tax were universal, then it would be a tax on revenue.  
> **username_1**: Sales taxes and VAT both only tax each dollar of revenue *once*. That is the important distinction here!  
> **username_1**: Note that individuals are also allowed to pay taxes on profit! But there are not many expenses that count as reducing your individual profit. You generally only get to deduct special expenses that most people don't have.  
> **username_3**: @BrianRomanchuk but VAT system by its definition includes deductions for VAT payed on materials and so on. Only the final goods and services are really  having any net positive tax impact under VAT and it will be on net for many firms 0 and economically assuming away all real world imperfection the same firms that would pay positive VAT would be the same firms that pay any sales tax. It really only collects information at stages but not the tax itself. Furthermore, even if you would want to just look at things pro forma, income tax is also not applied to all incomes as many people are in zero  
> **username_3**: @BrianRomanchuk tax bracket and some forms of income are excluded altogether yet that does not mean income tax  not applied universally ceases to be income tax and by the same virtue even if you want to put economics aside and just look at the paper trail sales tax would still be revenue tax even if it generates smaller amount of paper trial.  
> **username_2**: This is a semantic point, but every single legal entity in the economy has to comply with the Income Tax Act, even if they end up paying nothing. If my firm produces goods that are end up in a value chain that terminates with exports, I completely ignore a sales tax, but I need to comply with the VAT.  
> **username_3**: For example, if we have company A that sells materials to company B for 50e, company B then sells to consumer for 100e then under $10\%$ sales tax company B sends to government 10e as consumer has to pay 110e. Under VAT the same occurs as even though company A will nominally charge B 55e (50+5e VAT), B immediately gets 5e rebate so net tax is paid and VAT does not make any economic effect, then when B makes final sale when consumer has to pay 110e 10e is finally on net paid to government and some economically meaningfully effect took place. So they are equal save for paper trail and timing  
> **username_3**: @BrianRomanchuk but universal compliance is not requirement for any tax to be the type of tax it is. For example, Netherlands does not have universal requirement for paying income tax. If your income is below some minimum you don’t need to fill out tax return or even inform any authority about your level of your income. You are simply exempt from the tax. Does that mean that under your semantics argument Netherlands has no income tax?  If you want to use such semantics you of course can but I know of no public economist who would be using such terminology.  
> **username_3**: In addition firms that do not hit certain turnover thresholds are in many VAT countries not required to register for VAT at all. So for those companies VAT won’t be zero but simply won’t apply. Again using your semantics then this would mean that your original analogy won’t apply  

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## 1 answers

### Answer by username_3 on 2020-09-14. Score: 1

> If taxes were paid on revenue, wouldn't the money flow stabilize somewhere else? (prices would go up, and so would salaries in order for people to afford the new prices).

This sentence is unclear. If you mean to ask whether market would eventually reach some stable equilibrium the answer would be yes.

However, this is a bit of a moot point. There actually already are taxes on revenue as pointed in comments. VAT and sales taxes are de facto taxes on company's revenue even if they might not be de jure taxes on company revenue. This is because company's revenue is defined as price times quantity sold $R=pq$ so any tax that is levied on price company charges is de facto a revenue tax.

I make a purposeful distinction between de facto and de jure tax because in most tax codes you will see written that firms collect VAT/sales tax from consumers on behalf of the government. So de jure these taxes are applied to consumers, however from economic perspective it does not matter if VAT or sales tax is de jure levied on consumers or producers as tax burden is always allocated by the market (see Mankiw Principles of Economics).

The intuition why they are equivalent can be seen in the pictures below I taken from the Mankiw's book. The intuition is that whether tax is levied on consumers or suppliers (firms) it will have the same effect on new market equilibrium price and quantity supplied.
[![enter image description here](https://i.sstatic.net/U5lOA.png)](https://i.sstatic.net/U5lOA.png)
[![enter image description here](https://i.sstatic.net/paqdO.png)](https://i.sstatic.net/paqdO.png)

So de facto VAT and sales taxes are also revenue taxes. Also since tax burden is split by the market it does not really matter from distributional/welfare perspective if government puts this tax de jure on businesses, so there is no opportunity here to do any redistribution just by changing the de jure designated payer of a tax. This does not mean the burden of the tax is distributed equally or that even there might not be cases where only one side of the market bears the burden. The point is that the burden is determined by the market not government.

In practice the designation of who pays might have political significance. That is an economically equivalent tax on producers might be more palatable to voters to the same tax on consumers but that does not matter for economic analysis.

Furthermore, an important caveat is that sometimes it might be more practical to tax one party because they might have for example lower administrative burden. This is why VAT and sales tax are both collected by companies so in fact they pay the tax even though de jure these are taxes on consumers and de facto the tax burden is always split between consumers and producers depending on parameters of supply and demand regardless of designated payer stipulated in law.

> **Comments:**
> **username_1**: The difference between a revenue tax and VAT is that VAT is refunded on the materials that go into the product. So each dollar of the product's price is taxed once, not once per company.  
> **username_3**: @user253751 but precisely *you can only deduct the VAT from materials and other inputs in order to avoid double taxation*, but not cost of those inputs only VAT that you previously paid over those costs. This is why in the end sales tax and VAT are economically equivalent. But that tidbit aside yes it is a revenue tax because the tax is levied on revenue firm earns minus *tax* paid for COGS not just minus the COGS in which case it would be gross profit tax. Or to be more specific it is revenue tax from perspective of final goods and services.  
> **username_1**: You pay the tax on (revenue minus COGS). Equivalently: You pay (tax on revenue) minus (tax on COGS). You do not pay: tax on (revenue minus (tax on COGS))  
> **username_3**: @user253751 but this is simply not correct generally speaking. VAT is applied to revenue not gross profit. You can look at any accounting book, see for example this accounting for dummies as example https://www.dummies.com/business/accounting/how-to-calculate-vat-2/  
> **username_3**: For example, if there is 10 percent VAT firm buys materials for 10e +1e VAT and then sells the product for 100e the VAT on that 100e sale will be 10e not 9e sure company gets eventually 1e refund for the VAT payed in the first step but the VAT is applied to revenue not gross profit and then you deduct the VAT payed on materials. Company cannot deduct COGS that include also wages for assembly workers from VAT. Also if company produces everything in house there is not even that deduction there.  
> **username_1**: do you know what it's called when tax is paid on revenue and deducted on materials? that's called a tax on the revenue minus the materials. It's not called a tax on just the revenue. You don't "eventually" get a 1e refund, you don't pay it in the first place.  
> **username_3**: @user253751 1. Yes you do on paper even if the tax is settled in net once per month/quarter. 2. Gross profit is Revenue-COGS. Consider this example again company buys materials for 10e+1e VAT then company has 10e wage bill to produce product it sells for 100e+10e VAT. Here the VAT applied to total product is 10e, VAT refund 1e, net VAT paid 9e but the gross profit in this example is 80e so according to you VAT should be 8e but that’s not how things work. Now suppose company produces everything in house and has in-house wage cost 20e again sells for 100e+10e VAT. VAT is 10e but gross prof.is 80  
> **username_1**: Ah so your point is that gross profit isn't revenue-materials, it's revenue-materials-processing costs. And VAT is paid on the former so gross profit is the wrong word. Why didn't you just say so?  
> **username_3**: @user253751 I mentioned that in the second part of my comment. Regardless, I am probably having some room for improvement in my communication skills if I did not get that point across right away. I will try to work on that.  

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