1. Analysis of the Michigan Single Business Tax,(Taxation and Economic Policy Office, Michigan Department of the Treasury, January 1935). [Hereafter cited as Analysis of the Michigan SBT (1985)]. I. Introduction, page 2. The Introduction continues; "A secondary purpose of this report is to investigate the revenue variability of the Single Business Tax and how and why changes in economic conditions affect revenue variability."

  2. Analysis of the Michigan SBT (1985), II. History, p. 19.

  3. See the discussion in section II.D., The SBT and Capital Investment, below.

  4. See the discussion of "fairness" in taxation in section IV. Note that "comprehensiveness" here means the inclusion of all types of economic behavior in the tax base.

  5. The principle known as "Occam's Razor" holds that, among two alternatives of equal effect, the simpler is better.

  6. Mutual Cease-fire and Unilateral Disarmament, the Report of the Kalamazoo Chamber of Commerce SBT Taskforce, Kalamazoo, Michigan: Kalamazoo Chamber of Commerce, 1984, [hereafter cited as The Kalamazoo Chamber Report (1984)] lists eleven initial purposes for the SBT, including better equality of treatment.

  7. The Governor's 1985 "Tax Fairness Plan" and 1987 "10/20" plan both call for taking the domestic insurance industry out of the SBT system and placing it under a sales-type (premiums) tax, along with increasing the intangibles tax on bank deposits.

  8. The use of a tax system that stabilizes the government rather than the private economy turns the traditional Keynesian notion of countercyclical fiscal policy on its head. Keynesian macroeconomic theory proposed that the Federal government could stabilize the private economy, by spending more (or taxing less) during downturns, and spending less (or taxing more) during upturns. The SBT has an opposite effect: it places a larger tax burden (as a percentage of income) on the private economy during bad years, and a smaller during good years.

    Keynesian macroeconomic theory has little use in the analysis of State fiscal policy. First, the Michigan constitution requires a balanced budget, which sharply limits the freedom of fiscal policy. Second, a state economy is more "open" (dependent on trade and capital flows) than a national economy, which virtually eliminates the effectiveness of fiscal policy. Third, states cannot pursue independent monetary policies. Classical macroeconomic theory, (of which the recent emergence of "supply side" analysis is an example), particularly the analysis of tax incentives, has proven more useful in explaining State economic growth.

  9. Patrick L. Anderson, Michigan in the Current Recovery: A Historical Perspective, Chicago, IL: The Heartland Institute, 1986, page 18. While this study focuses more on personal taxes in Michigan than business taxes, it does point out the importance of business climate factors, including business taxation, in determining economic growth.

  10. Analysis of the Michigan SBT (1985), II. History, p. 19.

  11. To be more precise, the federal corporate income tax system in the United States over the past half-century has allowed depreciation deductions, with the schedules changing frequently. Allowing full deductions for capital expenditures in the year they were made is called expensing capital expenditures, and would have the same neutrality between current consumption and investment (postponed consumption) that a consumption-type VAT exhibits.

    In addition to periodically changing the depreciation schedules, the U.S. Congress has periodically allowed an Investment Tax Credit (ITC) to offset part of the inherent bias against investment stemming from depreciation schedules, particularly in times of high inflation. Full expensing, like in the SBT, exhibits neutrality without additional credits.

  12. Michael A. Schuyler, Consumption Taxes: Promises and Problems, Washington. DC: Institute for Research on the Economics of Taxation (IRET). 1984. Schuyler's book discusses many types of consumption-based tax systems, including a consumption-based VAT for businesses.

  13. The expensing of capital investments under the SBT eliminates the taxflation effect inherent in depreciation schedules. However, since the exemptions to the SBT are stated in nominal terms, their real value is whittled away by inflation, leaving some taxflation. See section III.A.1., Data, for a discussion of the data taken from an inflationary year.

  14. Patrick L. Anderson, Michigan in the Current Recovery: A Historical Perspective, Chicago, IL: The Heartland Institute, 1986, details the higher costs associate with hiring workers in Michigan. The study's short discussion of the SBT deserve; greater comment. As discussed below, the SBT is technically neutral between capital and labor, but also admits a labor-subsidizing special deduction, and fully includes Michigan's expensive total labor costs in the tax base. Incorporating all these factors. Michigan's entire cost structure (including the SBT) favors capital over labor.

  15. Analysis of the Michigan SBT (1985), V11. Economic Effects of the SBT Reduction Features, p. 50.

  16. Analysis of the Michigan SBT (1985), II. History and Description, Table I Their are conceptual difficulties in applying a VAT to financial companies, including the problem of double-counting, and the fact that interest costs and earnings become costs of materials and value-added for a financial firm. The SBT has special provisions applying to financial firms that adapt the VAT concepts. Nonetheless, some questions remain about the proper way to tax financial companies under a VAT. These are beyond the scope of this study.

  17. Patrick L. Anderson, Michigan in the Current Recovery: A Historical Perspective, Chicago: the Heartland Institute, 1986, provides a detailed comparison of Michigan's business cycle performance with the nation's.

  18. This phenomenon is known as taxflation. See section II.D., The SBT and Capital Investment, on why a consumption-type VAT does not cause taxflation.

  19. The mean of all industries (the average of the group averages) willbe different than the mean of all businesses (the average of all the businesses in all the categories). The size-weighted mean will be identical to the mean of all businesses, and is the appropriate measure of the "average" tax burden.

    The variation of tax burdens cannot be calculated, because the group data do not contain information on the variation within each group. Thus, a Standard Deviation cannot be calculated for the tax burden ratio.

  20. See the discussion of progressivity in the SBT in section III.B.4, Measures of "Fairness," below.

  21. Analysis of the Michigan SBT is complicated by the fact that many firms do business in more than one state, and SBT liability is based only on the apportioned Michigan tax base. Apportionment is based on a three factor formula for most industries, with the Michigan apportionment fraction equal to the equally weighted average of three ratios: Michigan property over total property, Michigan payroll to total payroll, and Michigan sales to total sales. However, the apportionment formula for some industries, such as the financial industry, differs. The difference may cause some bias, but this report does not investigate it.

  22. This formula could also be calculated by the subtractive method to yield the same results: Value-Added equals Sales – Materials – Capital Purchases. Analysis of Michigan SBT (1985), II. History and Description, p. 21.

  23. Analysis of the Michigan SBT (1985),"Myths and Realities," p. 16.

  24. Analysis of Michigan SBT (1985), IT. History and Description, p. 23.

  25. Analysis of the Michigan SBT (1985); II. History and Description, p. 21.

  26. One argument for the use of the Michigan Tax Base is that it is "broader" than the Adjusted Tax Base. However, by neglecting to expense capital expenditures, the use of the Michigan Tax Base actively distorts the tax base, rather than merely making it "broader." Neglecting to deduct materials purchases would also make the tax base "broader" (larger), yet would likewise distort the tax base.

    In addition, as noted in the text, the notion that ignoring capital expenditures makes the tax "broader" ignores the reality of capitalism, which relies on capital expenditures.

  27. An additional example is the decision of the firm to either lease or buy: under the proper description of the SBT, the full expensing of capital expenditures and the exclusion of lease payments make the tax neutral between leasing and purchasing – a point properly made by the Treasury on page 21 of their report. If, however, capital investments were neither expensed nor depreciated, firms would have a massive disincentive to purchase rather than lease.

  28. Analysis of the Michigan SBT (1985), IV. Tax Base, p.29.

  29. Analysis of the Michigan Single Business Tax: A Business Development Perspective, Lansing: Office of Revenue and Tax Analysis, Michigan Department of Management and Budget, October1981. This study did not provide detailed comparisons of industry tax burdens, but noted on page 3 the relative tax burdens "as a percent of value-added". Table 1.2 on page12 outlined the calculation of this tax base.

  30. See sections III.B., The SBT Tax Burden Ratios, and III.C., The Fairness of the SBT.

  31. It is possible to overestimate the tax burden for an individual firm using this approach; if a firm has sold more capital assets than it purchased during a year, its net Capital Acquisition Deduction would be negative. Of course. on an economy-wide basis, each negative CAD from a sale of a capital asset is balanced by a positive CAD from its purchase. Furthermore, the economy as a whole normally invests. Each industry category had positive CAD's in the sample period, so the issue is only of academic interest.

  32. There are some economic justifications for lower tax rates for smaller-incomed individuals or firms, such as the economy-of-scale of large firms in complying with taxes, and the need for a minimum exemption. The primary argument for a progressive tax system remains the redistribution of income, not economic growth.

  33. Analysis of the Michigan SBT (1985), VI. Effective Rates, p. 44. In the sample used in the 1985 Treasury study, 60% of firms paid no SBT, and 76% of the firms had SBT liabilities of less than $1,000. The Treasury states that the statutory exemption and capital acquisition deduction act to reduce the effective tax rates of many small firms. While the action of the statutory exemption clearly makes the tax more "progressive." the capital acquisition deduction is an intrinsic portion of the SBT base, and not an "adjustment." (See the discussions at The SBT and Capital Investment and The Selection of a Proper Tax Base.)

    Table 14 in the 1985 Treasury Report shows the ratios of Tax Liabilities to Michigan Tax Base (which neglects to expense capital expenditures) for businesses of different sizes. However, the measure used to define business size in the table is the Adjusted Tax Base. Thus, the table's entries do not correspond to both the title and the categories listed.

  34. Note that this falls between the simple mean of the category ratios and the ratio of the All Industries Sum, neither of which are the true average of all businesses. See the section Notes on Test Statistics.

  35. Arithmetically, this occurs because the firms with a positive tax base pay tax at the statutory rate, while those with negative tax bases pay no tax. Thus, the ratio of the aggregate sums of tax liability and tax base can exceed the statutory rate. This phenomenon could also spread across years because of tax-loss carry forwards.

  36. Analysis of the Michigan Single Business Tax: A Business Development Perspective, Lansing: Office of Revenue and Tax Analysis, Michigan Department of Management and Budget, October 1981, pace 3.

  37. The Kalamazoo Chamber Report (1984) concludes that the objective of taxing every business on an equal basis has not been met: "The reasons this objective has not been met are contained in the special deductions and credits available under the tax and resulting evidence of who pays the tax."

    The Report reprinted an unpublished Treasury analysis of relative tax burdens, based on 1977-78 SBT data. That Treasury analysis uses the proper tax base, which properly deducts capital expenditures. This appears to be the data underlying the 1981 DMB study.

    The 1981 DMB study concludes on page 112: "The calculation of the tax is made very complex and the horizontal equity of the tax is reduced by the many special credits and deductions written into the law. The removal of many of these provisions would allow a significant reduction in the tax rate."

    While the supporting documentation of both these studies are not extensive, they corroborate the result in this study: the tax burdens vary significantly, and that the Financial industry faces among the highest burdens.

  38. Analysis of the Michigan Single Business Tax: A Business Development Perspective, Lansing: Office of Revenue and Tax Analysis, Michigan Department of Management and Budget, October 1981, page 3.

  39. Analysis of the Michigan Single Business Tax: A Business Development Perspective, Lansing: Office of Revenue and Tax Analysis. Michigan Department of Management and Budget, October 1981, Chapter Seven, page 85.

  40. Analysis of the Michigan SBT (1985), III. Data and Methodology, pp. 23-24. The report states, "Because the sample is very representative, we believe the proportions shown from the sample are also representative."

  41. Bast et al, The Imperative of Tax Reform, Chicago, IL: The Heartland Institute, 1987, Chapter II. This study references over a dozen analyses, withspecial attention to the relative tax burdens of Midwestern states. It concludes that the relatively poor economic performance of the Midwestern states can be explained partially by their relatively high tax burdens.

  42. Two examples are the decision of Mazda to locate in Michigan, after being offered substantial government financial assistance, and the decision of Saturn to turn down huge financial incentives from Michigan and New York to locate in Tennessee, which offered little in the way of direct incentives.

  43. US Department of Commerce, Bureau of the Census, State Governmental Finances, 1984-85; cited in The Imperative of Tax Reform, table 7.

  44. Patrick L. Anderson, Michigan in the Current Recovery: A Historical Perspective, Chicago, IL: The Heartland Institute, 1986. This study presents the data, the theory, and the empirical confirmation that high personal state tax burdens result in lower state economic growth.