Saturday, January 31, 2009

Industry, Perseverance, and Frugality Make Fortune Yield

Apropos of the post prior to the previous post, here are some very simple revenue projections for taxes other than the personal income tax.

Since it is assessed at a flat rate, a value-added tax is regressive. Poorer people, who spend a greater amount of their income, end up paying more tax as a percentage of their income than the well-off do with a VAT, or with any other consumption tax for that matter. This can be somewhat mitigated by excluding certain items. Food and housing are the most common. If consumption stays at 70% of GDP, a 12% VAT excluding food and housing would yield just about 6% of GDP. If consumption falls to 58% the rate would have to go to 15%. For comparison, the median rate in the EU is 20%.

Ah, the gas tax. One would think after two wars directly related to oil (yep, they were) people would be gung-ho about this source of revenue. The current federal gas tax is $0.184 per gallon, with an additional $0.00 (Alaska) to $0.416 (New York) in state taxes. Taxes on diesel are slightly higher. Increasing the federal tax to $1.50 would yield about 1.5% of GDP at the current consumption rate of 9.5M barrels per day. The total pump price would go up to about $4.00 per gallon.

This is an attempt to look at a carbon tax in a slightly more sophisticated way - but I don't have a background in economics so this initial cut could be completely wrong. Anyway, there are three sets of lines - no reduction, a 2% decrease for each $5 per ton increase in the tax, and a 4% decrease. Applying the 2% factor resulted in consumption falling by 45% at the highest price, and the 4% factor resulted in a reduction of 70%. Nice results, but they in no-way reflect what might happen if a big tax was slapped on tomorrow - pure chaos. But applied over time - increasing by $5 per year, and by $10 after several years - there would be significant reductions without harm to the economy, though the change in consumption would not follow a simple curve.

For reference, the Iraq War has cost about $600B so far, and the total long term cost will be much higher. If we had tried to pay for the war in real-time, a gas tax of $1.00 or $1.25 would have covered it.

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