A Turnover Tax Instead of a Profit Tax? A Proposal, American Experience and Slovak Conditions

A discussion proposal for replacement, not an approved additional tax. The taxpayer population and receipts base remain to be defined; the sole-trader example does not mean sole traders are automatically included.

A tax based on business receipts has an obvious attraction: the taxpayer cannot reduce that base simply by presenting more deductible costs. I consider a differentiated gross receipts tax a proposal worth examining as a possible replacement for corporate profit tax. I do not consider it a proven source of higher revenue, and I do not support choosing rates from an attractive-looking table of sector averages.

The important word is differentiated. A wholesaler and a specialised service business can have similar sales but very different amounts left after paying their operating costs. A uniform percentage of receipts can therefore impose radically different burdens. Yet differentiation itself creates boundaries, classification disputes and opportunities for lobbying. The proposal must confront both sides of that problem.

Three American taxes that must not be confused

An American retail sales tax, a gross receipts tax and federal corporate income tax are different instruments. Washington’s Department of Revenue explains that businesses collect retail sales tax from customers and remit it, while purchases for resale and purchases for a business’s own use are treated differently.6 This is not evidence that American businesses generally pay one small turnover levy instead of all other taxes.

The same administration describes Washington’s business and occupation tax as a gross receipts tax measured by the value of products, proceeds of sale or business income. Ordinary costs such as labour and materials are not deductible, rates vary by classification, and specified credits exist.2 Those features make it relevant to a differentiated receipts proposal, while also demonstrating that a short tax formula does not eliminate detailed rules.

Federal corporate income taxation remains a separate layer. The IRS’s explanation of the 2018 corporate rate transition discusses federal income tax on taxable income, including the rate introduced by the Tax Cuts and Jobs Act.3 A state business-tax arrangement must not be presented as proof that the United States abolished federal taxation of corporate profits.

These distinctions are enough for the comparison. No Delaware or Wyoming rate is needed to make the argument, and no claim about either state’s current tax burden is made here. What matters is the base, the level of government, the person liable and the interaction with other obligations—not a state name attached to a low percentage.

The unpaid sole-trader invoice

My original proposal used illustrative sector rates of 1.5–5%. These are discussion parameters, not recommended rates, verified American rates or a calibrated Slovak schedule. Evidence may require different parameters or rejection of the replacement.

The unpaid invoice from a cash-accounting sole trader to an accrual-accounting s.r.o. remains an open question: for a genuine service, could the customer’s income-tax deduction precede taxation of the supplier’s cash receipt? This is not a VAT-deduction question or evidence of an established corporate tax timing advantage. An unpaid receivable remains recorded.16

Accounting recognition alone does not establish tax deductibility. Financial Administration corporate-income-tax guidance expressly illustrates an accounting-service expense booked by a company in 2026 but paid in January 2027: the expense is added back for 2026 and deducted in 2027 under the applicable payment condition. That is a concrete counterexample to a supposed universal advantage from leaving suppliers unpaid, not a conclusion for every kind of service.17 The personal-income-tax guidance cited during development of this example does not by itself settle a corporate customer’s case.14 The outcome depends on the service, period and applicable payment conditions, as well as relevant overdue-liability adjustments under section 17(27).15

A receipts-based replacement could remove the customer’s expense deduction under that tax, but coverage of sole traders and the timing of their taxation remain design choices. Compare any remaining mismatch with targeted fixes; do not infer a universal loophole.

A deliberately simple business example

Consider two hypothetical companies, each with annual receipts of €1,000,000. Assume the first has a pre-tax profit margin of 2% and the second 20%. Their assumed profits are therefore €20,000 and €200,000. A hypothetical 1% receipts tax would charge each €10,000: half of the first company’s profit but only 5% of the second’s.

These figures are hypothetical illustrations, not Slovak sector statistics or proposed statutory rates. They isolate the relationship between receipts, margins and tax. They exclude reliefs, losses, behavioural changes and the interaction with other taxes. Precisely because they are simple, they show why saying that a rate is “only one percent” is economically uninformative.

For another illustration, assume a profit tax of 20%. Matching that charge in these examples would require receipts rates of 0.4% and 4%, respectively. Again, these are hypothetical equivalents, not recommendations. A real sector contains firms with different margins, so a rate matching its average would not reproduce each firm’s existing burden.

The sharper problem is a loss-making year. A positive receipts base can remain when profit disappears. A tax on that base may still fall due unless the law provides relief. Whether that is acceptable depends on the policy’s objectives, the firm’s ability to pay and the design of any floor, credit or hardship mechanism. It cannot be settled by calling the base transparent.

What simplification would actually mean

A receipts-based replacement could remove some tax-specific arguments about expense deductibility. That is a meaningful potential benefit. It would not make accounting unnecessary: owners still need reliable information about profitability, banks about repayment capacity and managers about costs. Nor would invoices cease to matter for VAT or other continuing obligations.

The new base would need precise definitions. Does it follow invoiced revenue or received cash? How are refunds, discounts, bad debts and customer deposits treated? Does an agent report only its commission or the full payment passing through its account? How are grants, asset sales and related-party transfers distinguished from ordinary sales? Each answer affects both revenue and fairness.

Washington’s description explicitly includes classifications and credits.2 The relevant lesson is not that this is a bad system, but that simplicity must be measured in work actually removed. A Slovak replacement that abolishes one reconciliation and creates several new classifications may be simpler for some firms and harder for others.

The supply-chain problem

A gross receipts base can tax transactions at multiple stages without the input-credit mechanism associated with VAT. Imagine a product passing through an independent manufacturer, wholesaler and retailer. If each stage pays on its receipts, the cumulative burden can differ from that of a vertically integrated business carrying out equivalent activities internally. This is a mechanism implied by the proposed base, not an empirical estimate of its size.

Sector differentiation may moderate some effects, but it does not automatically remove them. Relief for intermediate sales could reduce repeated taxation while narrowing the base and introducing eligibility checks. Group consolidation could change the result again, but it would require rules for group membership and cross-border transactions. Every corrective device has a revenue and administration consequence.

The strongest counterargument is therefore substantial: a tax intended to simplify compliance could penalise low-margin firms and independent supply chains, discourage investment during weak years and reward organisational restructuring rather than productivity. Supporters must model these effects, not dismiss them as resistance from tax advisers.

Differentiation needs rules, not favoured sectors

I would start with actual distributions of margins, not broad labels such as “IT” or “industry.” A service business reselling expensive third-party inputs may differ greatly from one selling mainly its own labour. A manufacturer investing heavily may differ from a mature competitor. Mixed businesses create an additional choice between enterprise-level classification and classification of individual revenue streams.

Any differentiation should be supported by published economic reasoning, transparent boundaries and a review process. The legal assessment must examine whether distinctions create impermissible advantages or other conflicts with European obligations. This article does not establish their compatibility. Neither the American comparison nor the word “sectoral” supplies that legal conclusion.

I accept a proportionate minimum annual tax in principle, not merely a study of whether any minimum should exist. It can be examined as a floor within the design, provided exemptions, treatment of inactive or newly formed businesses, payment capacity and interaction with the main tax are explicit. The floor should not become a concealed second charge simply because it appears in a different part of the legislation.

Slovakia cannot ignore the international layer

The EU minimum-tax directive addresses multinational and large-scale domestic groups meeting its consolidated-revenue threshold.7 A replacement proposal must therefore analyse the treatment of covered groups rather than assume that changing the domestic label removes all profit-related calculations. Whether a particular receipts tax qualifies within relevant international rules requires specialist assessment; no such finding is asserted here.

Treaty treatment, cross-border allocation, transitional losses and existing investment positions also belong in the legal and fiscal work programme. The legal review must also examine the levy’s substance, including its relationship to Article 401 of the VAT Directive; no compatibility conclusion follows from calling it a receipts tax. The Court of Justice’s analysis in Viking Motors, C-475/17, distinguishes levies by their characteristics rather than their label; it is not advance approval for this proposal.18 The reform team should publish the questions and their answers before promising a single universally simpler return. If large firms need parallel profit calculations, that administrative reality must appear in the cost comparison.

The proposition worth testing

My proposal is to investigate a differentiated replacement, not to add an unexplained turnover tax on top of the existing corporate tax. The study should publish who would pay more, who would pay less, what rules would disappear and which new ones would be necessary. It should compare full replacement with narrower alternatives, including simplification of the existing base and a proportionate minimum tax.

Higher revenue remains a hypothesis. A broader, harder-to-reduce base might improve collection; lower investment, restructuring, reliefs or concealed receipts might offset that gain. Until those possibilities are tested on credible Slovak data, the honest conclusion is conditional: receipts taxation offers a different incentive structure, but only a specified, legally reviewed and distributionally tested design can show whether it would be a better one.

Include direct sales, resellers and bundles of software with delivery in the test cases; distinguish own receipts from pass-through payments before estimating effects. Reject the proposed range or the entire replacement if classification costs, repeated taxation or burdens on loss-making and low-margin firms outweigh gains. Businesses should continue current accounting and tax compliance; no alternative rate in this article is available for use.