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.