Saturday, May 15, 2010

Ineptitude with numbers

Quite frequently, one comes across comments which clearly demonstrates that a person hasn't got a grasp of the numbers involved, and today I came across one such comment.

It was in the comments to a NY Times Op-ed on taxes, and it stated the following

If the United States had a Value Added Tax of 22-25 percent on consumption, we could eliminate the personal and corporate incomes taxes altogether. We would not need to send tax forms on April 15 because all the money would have been collected as we purchased goods and services. And if we were frugal in our consumption, then all the money we did not spend would be ours. Plus, we could design such as system, as dozens of other nations have, so that the VAT on essentials such as food and medicine and housing would be low and thus socially equitable. Not only would we have low administrative costs for such a system, it would be very difficult for cheats to avoid payments, as they so easily do now. Finally, it would generate more than enough money to balance our federal budget. Too bad, that so many special interests have so many loopholes and fight so hard to keep this antiquated, corrupt, inefficient and inequitable approach to taxes -- and our elected representatives capitulate to them.


I found this comment quite amusing for several reasons, and pretty damn annoying for a much more simple reason.

First of all, the annoying part - taxation through consumption is an unfair way of taxation, since it hits the poor disproportionally hard. Rich people use less of their money on consumption than poor people, and for people who live below the poverty line (13.2% in 2008) and shift from income taxes, where they don't pay anything, to a consumption based tax, would mean a decrease in their coverage of their basic needs.

And now for why I find it amusing.

I live in a country which not only has a much higher income tax than the US (it's not possible for an American to reach the tax rate I pay for my last earned money), but it also has a sales tax of 25%. Many goods, such as cars, electricity, and water, have additional taxes on them (e.g. cars have approximately 200% taxes on top of their price).

Out of the 800 billion kroner paid through taxes of all sorts, 491 billion kroner came from income taxes and 40 billion kroner came from corporate income taxes, while only 168 billion came from the 25% sales tax (called moms in Denmark). All number are from Danmarks Statistik.

As these numbers make clear, a 25% sales tax would be nowhere near compensating for removing income taxes and corporate taxes. Not in Denmark, and not in the US, even when one take into consideration that Danes pay more in taxes than Americans.

According to this website the income taxes collected in the US in 2008 was $2.3 trillion. The corporate taxes were $354 billion. Altogether, $2.7 trillion or so.

The US Bureau of Labor Statistics conducts a Consumer Expenditure Survey (.pdf) which we can use to find the US consumption. The 2008 survey found that there are ~121 million consumer units in the US, each of which, on average uses $50,486 per year. Multiplying these two numbers gives us a total consumption of ~$6.1 trillion. If we assumed that people had paid 25% sales tax of this consumption, this would result in ~$1.5 trillion - a shortfall in the region of $1.2 trillion compared to the current tax income from income taxes and corporate taxes alone.

Even if all the money saved from not paying taxes would be added to the consumption (an unlikely case, as muchof it would be invested), the idea would still call short - the sales taxes this would generate would only amount to $675 billion, bringing the total up to ~$2.2 trillion, still half a trillion short.

And then we haven't even addressed the deficit, which this new taxation should somehow also solve.

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