August 2011 - Tax and Revenue 2

      Consider this an addendum to my last post.

      The decay in the VAT return is assumed to be linear, but the range of data is really too small to say for certain. The data could just as easily be an exponential decay. Exponential decay obeys the relationship that the gradient of the function is proportional to the local value of the function. Over short spans it can also look linear. However, it never quite goes to zero.

      A curve fit of the data with both an assumed linear gradient and exponential gradient is shown below. The linear fit represents a conservative approximation, while the exponential decay represents an optimistic approximation. We would therefore expect the actual response to fall within the bounds of the two approximations. What this tells us is that the maximum %GDP we can get with VAT is between 11% and 13%.

      This is actually a fairly important finding. 

      All of the arguments associated with use of a sales related revenue assume a constant relationship between revenue and tax rate. The data tells us otherwise. More importantly, we have bounded the maximum value obtained with this method at a much lower level than would be required by a stand-alone tax.

      What this means is that a variety of tax mechanisms may be required to reach the higher revenue levels required in our current economy.

20 August 2011 - tax rates and revenues 1

I have reviewed a variety of data sources to put together the table below.

The items in orange are data I got over the internet.

The Items in Green are derived from the orange items

Total revenue                    Combined revenue from all sources as %GDP

Individual Tax                    Revenue from tax on individual return as %GDP

Corporate Tax                   Revenue from Corporations as %GDP

VAT                                      Revenue from VAT (Sales Tax) as %GDP

VAT Rate %                        Nominal tax rate of VAT

VAT 100%                           Hypothetical VAT rate required to pay all revenue

%GDP/%VAT                      Ratio of VAT to VAT Rate %

Individual/Total Ratio of individual Tax to Total revenue

One thing we notice right away is that the US has a relatively small tax burden compared to other countries but with an individual tax to total revenue ratio larger than any country except New Zealand.

We see that the reliance on personal tax in the US has provided the perception that our tax burden is very large.  Other countries rely on a variety of taxes to ease the apparent burden. It is all designed to hide the actual tax burden and make the most obvious portion as small as possible.

For the US to actually pay all of its current obligations with revenue would require a rate near 37% GDP, which puts us in line with the average Revenue collection. If we are not going to raise income taxes then our only source of extra income is a VAT. Based on the average return we would need to set the rate to about 16% to break even. That’s this year.  Each year the VAT will need to go up to support the extra cost of entitlements.

So what happens if we wish to get all of that 37% revenue from VAT? We need to set the rate to about 97% (i.e. 37/0.38). Actually things are a little stickier than that. If we plot the return as a function of the rate we see there is diminishing return with rate increase

This means we need to solve a quadratic equation to get the required VAT rate. Plotting this quadratic equation we get the following.

This plot indicates that we can never get much more than about 11%GDP using the VAT, and that by setting VAT higher than about 45% we rapidly reduce return. This same curve should apply to plans like the Fair Tax as well, indicating that other forms of taxation will be needed to supplement it, no matter how well the tax is applied.

The only sane move is to reduce the entitlements, but is going to be a lot more tricky than just “throw the bums out”. It is all well and good to talk about dumping those “no-good free loaders” off of the dole, but there is a whole range of people who are impacted by these measures. Some of these people are family, which puts things in a little different perspective.

Econ Thoughts from 4 Sept 2009

     When "Biggie" Bernake announced the economy's growth was not sufficient to withdraw stimulus, and that quantitative easing would remain until March of 2010, it seemed to contradict his statement that the recession was mainly over. 

     Will consumers now resume their spending, and the banks their lending? The banks certainly don't seem to be falling for it. By leaving the stimulus in place longer than originally planned, isn't the Fed confirming that economic recovery isn't nearly as imminent as Biggie has misled? 

     The markets players were believers till yesterday. There seemed to be a belief that the Fed rates would stay near zero a while, but now they think about what will happen when the government begins to remove stimulus. Stock markets fell Wednesday, and the Treasury rates rose. 
     What happens with the Fed when commercial real estate continues its sand-State craterings and Unemployment continues at a real rate over 20%? I see a recession-level existence for many people, at least into 2012.

     Looking at the only real leading indicator of a continuing world economic decline: Gold is soaring 4/9/09 at $1,014. 

The Paper Hero and The Darkness - Economic Future is The Divisive Present

There’s a legal limit to federal debt which must be raised when the government keeps running deficits, and the limit will be reached again sometime this spring. Otherwise, they say, a government shutdown will stop the provision of “essential services”. More likely, the very public political sh*tstorm that ensues will weaken our currency, our financial markets and what little is left of America’s reputation as a world leader.

Meanwhile, back at the ranch, Fed Chair Ben Bernanke is begging for “a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits” in order to combat the massive and growing unemployment, while Mr. Alan Simpson rejoices “I can’t wait for the blood bath in April. ... When debt limit time comes, they’re going to look around and say ‘what in the hell do we do now? We’ve got guys who will not approve the debt limit extension unless we give ’em a piece of meat, real meat,’ - And boy, the blood bath will be extraordinary!”

With the aftermath of the current opinion poll (the election) breathing fear into demagogues who are trying to hang on to a public paycheck, some are blocking an extension of unemployment benefits, voting to continue a tax break for the rich and block aid to small business. Other demagogues want money for the new arms treaty, a new bailout and new everything to save us.

I don’t fear a government shutdown – it happened under Clinton and the idiots who thought they wanted it had to turn government back on before Americans realized how little of their government they really needed. And what I fear is not the hardship and dislocation of an economy on the ropes – we got through that one before, too.

I fear the bitter, vindictive, divisiveness – and the total ignorance of what is at stake here – that is taking us over the brink into this Brave New World. That most Americans still don’t understand the reality of our position (thanks in part to government and press “spin” as well as learned ignorance) may presage the angry mobs which govern our future. 

And I guarantee to those who have never seen a mob, you will not like it.

To Libba R. on her 21st birthday

Libba R., while studying at Dennison
Drank strawberry tea and read Tennyson
But as she "came of age", She
Told her sister (quite sagely)
"I'll trade that book for a bottle of Jameson!"

Limerick to JFW

David Riggi wrote:

"A gentleman-barrister named Wiley
with famous wit, sometimes sharply, sometimes dryly,
did spread much good cheer
and soothed many a fear
leaving his friends happy and smiley"

Robert C. Byrd, Senator and Statesman

They tell me that Robert C. Byrd is gone from us this dark day. We will not live to see his like again.

He had recently become the longest-serving lawmaker in our history. "I look forward to serving you for the next 56 years and 320 days," Byrd said in a statement.

His career in Washington began in 1952 with election to the House and elevation six years later to the Senate. Since June 12, 2006, Byrd has been the longest-serving senator and later that year he was elected to an unprecedented ninth term. His colleagues have elected him to more leadership positions than any senator in history.

He cast more than 18,000 votes and, although his deteriorating health had kept him from the Senate floor this year, he had a nearly 98 percent attendance record over the course of his career which, by Byrd's count, had then spanned 20,774 days.

Byrd rose up from ignorance and poverty as a supporter of the Ku Klux Klan to later support civil rights, to write the history of the Senate and other books, to earn of a law degree from American University while serving in Washington, and to live to cheer for the nation's first black president.

He was a champion of Constitutionally-permitted project spending called "earmarks" and he brought $326 million in such projects to West Virginia for 2008 alone.

In October, despite a long illness and hospital absences, Byrd still personally managed a $44.1 Billion spending agreement on security measures against natural disaster, terrorist attacks and other threats.

Friday the 20th of November, 2009 was his 92nd birthday. It was his last.

Byrd wrote in his weekly column that week that his birthday should be about Thanksgiving. What did he give thanks for in his 92nd year? The privilege of representing "our great people in the U.S. Senate." He did so better and longer than anyone.

And he didn't apologize for representing one of the poorest and least developed of these United States.

"They call me 'The Pork King,' they don't know how much I enjoy it. When I was a member of the West Virginia House of Delegates 51 years ago, West Virginia had four miles of divided highway. Four miles. Today the state has about 37,000 miles of highway."

My son in law recently drew my attention to just a few of the many, many items Byrd's Billions in federally funded projects has brought to this once poor State during his tenure:

Robert C. Byrd Drive, from Beckley to Sophia (Byrd's hometown)

Robert C. Byrd National Technology Transfer Center at Wheeling Jesuit University

Robert C. Byrd Highway

Robert C. Byrd Federal Correctional Institution

Robert C. Byrd High School

Robert C. Byrd Freeway

Robert C. Byrd Center for Hospitality and Tourism

Robert C. Byrd Science Center

Robert C. Byrd Health Sciences Center of West Virginia

Robert C. Byrd Cancer Research Center

Robert C. Byrd Technology Center at Alderson-Broaddus College

Robert C. Byrd Hardwood Technologies Center, near Princeton

Robert C. Byrd Bridge between Huntington and Chesapeake, Ohio

Robert C. Byrd addition to the lodge at Oglebay Park, Wheeling

Robert C. Byrd Community Center, Pine Grove

Robert C. Byrd Honors Scholarships

Robert C. Byrd Expressway, U.S. 52 near Weirton

Robert C. Byrd Institute in Charleston

Robert C. Byrd Institute for Advanced Flexible Manufacturing

Robert C. Byrd Visitor Center at Harpers Ferry National Historic Park

Robert C. Byrd Federal Courthouse

Robert C. Byrd Academic and Technology Center

Robert C. Byrd United Technical Center

Robert C. Byrd Federal Building (there are two)

Robert C. Byrd Hilltop Office Complex

Robert C. Byrd Library and Robert C. Byrd Learning Resource Center

Robert C. Byrd Rural Health Center

Robert C. Byrd Clinical Addition to the veteran's hospital in Huntington

Robert C. Byrd Industrial Park, Hardy County

Robert C. Byrd Scholastic Recognition Award

Robert C. Byrd Community Center in the naval station, Sugar Grove

Robert C. Byrd Clinic at the West Virginia School of Osteopathic Medicine

Robert C. Byrd Biotechnology Science Center at Marshall University

So go ahead and criticize his accomplishments if you wish, while you travel his roads and his bridges, attend his schools, read his books, are treated in his hospitals or in work in the businesses his gracious generosity has provided.

Without his help, God knows the rest of this country would have been content to continue to forget the State that has suffered such an disproportionally high number of deaths per capita serving in our wars, and whose dedicated miners through the years provided more traditional fuels to this nation's production and energy needs than any other.

For myself, I intend to celebrate the life of, and to mourn the loss of one of the greatest statesmen, and the greatest of men.

- And I say God Bless Robert C. Byrd.