2. Cyclicality of the VAT

The Treasury points out that a VAT system provides better revenue stability (for the State government) than a profits tax. This occurs because business income is far more affected by cyclical swings in the economy than business revenue. While this stability in revenue is often cited as beneficial to the state, the converse of that cyclical stability for the taxing authority is increased cyclicality for the tax-paying business. [8]

In poor economic years, SBT-paying businesses must pay tax even if they lose money. In good economic years, SBT-paying businesses pay taxes out of healthy profits, although less tax than they would under an equivalent profits tax. The tax burden is far greater in bad years under a VAT than an income tax. Conversely, the tax burden is lighter in good years under a VAT than an income tax.

Thus, in terms of net (after tax) income, the use of a VAT-type business tax increases the cyclical sensitivity of Michigan businesses (making bad years worse and good years better), while reducing the cyclical sensitivity of Michigan government.[9]

Cyclicality of a VAT
The VAT-type SBT limits the cyclicality of revenue to the State government, but increases the cyclical pressures on taxpaying businesses. "The benefits of better cyclical stability of tax revenue under a VAT must be discounted by the cost of increased cyclical instability for the taxpaying businesses and individuals.