Value Added Taxation in the United States: The Michigan Single Business Tax
Smith, Bradley A.
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Michigan's unique business patterns and powerful labor unions have long made the state the site of high-pitched, emotional political battles concerning the treatment of the state's business community, but rarely has a measure generated as much controversy as Public Act 228 of 1975; the Single Business Tax Act. Signed into law on August 27, 1975, and put into effect on January 1, 1976, the tax was immediately hit with thundering broadsides of criticism. It is perhaps surprising that this tax has generated so much controversy, as it was expected to greatly simplify Michigan's business tax structure. Why, then, the controversy? The Single Business Tax itself is a consumption based value added tax. It is defined in the law as a tax upon, "the privilege of doing business, and not upon income." In the United States, where income has traditionally defined ability to pay and ability to pay has been a key factor in the tax system during the 20th century, this marks a radical departure from the accepted definition of tax equity. It is, however, a very common method of taxation in most of the rest of the industrialized, non-communist world. Proponents of value added taxation argue that the tax is proportional to the economic size of a business, and is not affected by the business' chosen means of organization, finance, or production. Thus all businesses are taxed equally, and equity exists on a basis of 'benefits received' rather than 'ability to pay'. In the United States today the public outcry for tax reform has lead to increased interest in this form of taxation. The value added tax has been viewed by many as the answer to recurring fiscal problems on both the state and federal levels. As Michigan's Single Business Tax provides us with the only functioning example of a value added tax in the U.S., it is worth studying from both an economic and a political point of view. Unfortunately, there is little data on which to judge the effects of the SBT. The kind of data that would be needed for a truly accurate portrayal of the tax is generally not public information. Still, it is worthwhile to review the stormy history of this tax and to make what judgments we can from the information available.