Sales Taxation of Business Purchases: A Tax Policy Distortion

Abstract

Actual state and local sales taxes diverge dramatically from the popular and textbook vision of the tax. One major flaw is the exclusion of a wide range of consumer services from taxation, which renders the consumer tax base much narrower than the textbook description suggests. The other crucial flaw, which is the focus of this article, is the imposition of tax on a wide range of business purchases; taxes on those purchases account for roughly 40 percent of nationwide sales tax revenue. The taxation of business purchases impedes economic efficiency and hides the true tax burden from the public.