The Shortcomings of the Texas Margin Tax

Abstract

Under the Texas margin tax, firms are taxed on their gross receipts, without a full deduction for business expenses. The margin tax is similar to a turnover tax, which tax economists have long condemned as inefficient because it imposes uneven tax burdens on labor used at different stages of the production chain and creates artificial incentives for firms to merge with each other. Although the margin tax diverges from a simple turnover tax in several respects, the modifications generally do not make the tax more efficient. Indeed, some of the modifications may actually magnify the inefficiencies.