A numerical analysis of eliminating taxes
Okay... somehting funky was goign on while try to post this elsewhere... so I'll post it here:
Okay... all this talk about taxes being the government taking ones labor and how we'd be better off without them got me thinking. Exactly how much money would one save if all taxes and social security were removed, as well as all government services supported by these taxes, and that these services were then provided by one person.
So, i decided to crunch some numbers.
Obviously, I make many assumptions and estimations because there are many things which are hard to quantify, and others which I don't know enough about to assign monetary values. I tried to give what I felt was a conservative estimate on everything. If you think I estimated something wrong, I'd like to hear so I can make the numebrs more accurate.
Let us take the case of a small retail business owner. He is single (and remains so his entire life), and has a gross income from his business of $200,000. Under our current system, he pays about 40% of his income in taxes and social security (33% federal, 3% social security, or 7% of 100,000 of his income, and the rest in state taxes). Thus, he loses $80,000 a year to income taxes. The $200,000 he makes is after applying sales tax.
Oh his $200,000 gross, he pays about $50,000 to hire the equivelent of 3 full-time emplyees. Assuming he does as much retail work as the other employees, that means the 3 employees are earning him $50,000 a year each (This is about 3 or 4 times how much they make themselves). Further, once every five years he hires contractors and other specialists for a total of about $10,000 a year, for home improvement, fixing things, balancing the books etc.
Of his gross income, on the average 10% (20,000) goes to paying off his non-college related debt a year (i.e. mortagages, car-payments) over the course of his lifetime. 5% (10,000) goes to paying for the shipping costs of what he sells, and another 5% to insurance on his business, home, and car. His present marginal propensity to save is .1 (he saves 10% of what he earns), which is the same as the society he lives in (I heard that Americans spend 90% of their income)
We will also assume he went to a public college for 4 years and paid his own way using student loans. he will work 43 years until he retires.
The block his business is on has 14 other businesses on it, and the street he lives on has 19 other households.
I figure that this kind of a person is the one who will benefit the most from all taxes being removed (as he benefits extra from the sales tax and claims no dependants).
Throughout, I will assume this person will choose to spend money to keep the quality of his life the same as it was before we removed taxes. Obviously, one benefit of removing taxes is that he can choose to take some risks in order to save money, but the idea here is to see how much money he would save if he maintained the same quality of life.
I have not yet accounted for property taxes in this model, btw.
The Benefits of Removing Taxes
There are three main ways this person benefits from removing taxes
Money Gained from Removing Income tax
-This is straight-forward.
200,000 x .4 = +$80,000
Income Increase from Removing sales tax
-I assume that the owner now gains all the money the sales tax was taking, that is, I assume he makes 15% more gross income.
200,000 x .15 = +$30,000
Money Saved by Removing Sales tax
-I will save this for the end, because we need to know how much he has to spend before we can determine how much he saves here.
Total increase to after-tax earnings without Sales tax savings: $110,000
New Costs Caused by Removing Public Goods and Social Security
Okay, a few more assumptions here. First, i assume that removing public goods, such as police, increases the crime rate and thus the cost of many transactions. I also assume that the shop-owner's workers now would no longer have the same level of education as they did previously, because they could not afford private school. Finally, I assume that the increased crime rate and insecurity about retirement funding has changed the shop-owner and society at large's marginal propensity to save from 10% to 25% (which isn't unreasonable. The Japanese save around 25%, IIRC). I also assume minimum wage stays about the same, or that paying the workers less would make their productivity fall enough to compensate for it, given the same level of education in the workers.
Productivity Costs
These costs are by far the hardest to actually quantify. i tried to be conservative, but many may feel i over-value education.
Productivity lost due to lower worker education
-The hardest cost to quantify, i assume illeteracy and poor math skills reduce the worker's productivity by 10%
$50,000 x 3 x -.1 = -$15,000
Lost Customers due to Higher cost of Transactions (i.e. crime)
-Due to crime, lack of traffic laws, higher death rates etc. I conservatively assume the shop-owner loses 3% of his income, from customers that don't come but otherwise would.
$200,000 x -.03 = -$6,000
Lost Customers due to Increased Saving
-with a higher marginal propensity to save, customers who purchase spend 15% less (25%-10% = 15%)
(200,000 - 6,000) x -.15 = -$29,100
Productivity lost: -$50,100
Increased rates Costs
These are costs due to the costs of other things going up, such as intrest rates, isurance premiums, and transportation costs.
Increased Transportation Costs
-Due both to insecurity and a combination of worse roads and toll roads (roads are now privately owned), i estimate transportation costs go up about 5%. I feel this is a very conservative estimate.
-$10,000 x .05 = -$500
Increased Intrest Rates on Loans
-due to it being harder to assure that a business owner will pay back (there is some law, but not much) the shop-owners monthly payments rise 10%.
-$10,000 x .1 = -$1,000
Increased Cost of Insurance
Insurance is both in higher demand, and is a more risky business for the insurers. I estimate this raises insurance costs by 5%
-$10,000 x .05 = -$500
Increased Cost of Tap Water
-With companies now owning the water supply, prices rise. I don't know enough about how much water costs to estimate this correctly, but let us assume it raises his monthly costs by $10.
-$10 x 12 = -$120
Increased Cost of College
-Without public schools, our shop-owner must attend a private institution. I shall assume that his public education cost $20,000 a year, and that an equivelent private institution costs $40,000 a year. I shall also assume his student loans double the cost in the long run, but that he pays them off over the course of 43 years.
(((-$40,000 + $20,000) x 2) x 4) / 43 = -$3,720.93
Increased costs of Hiring Specialists
-with the increased insecurity about retirement, independant contractors would charge more for the same services, as they don't have pensions. i assume this increases their costs about 5%.
-$10,000 x .05 = -$500
Increased Cost of Foriegn Goods
-I won't count this in the figures, but without income our governemnt could not pay it's debts and our credit abroad would plummet, raising the cost of many consumer goods. This is so hard to quantify, i will not even attmept it, but keep in mind i do not account for everything that can occur.
money lost due to increased costs: about -$6,300
Costs of Privately Funding Services
This is what the shop-owner pays to maintain the same services he had before removing taxes. All of these he may choose to fogoe, but this may increase risk from crime or decrease his number of customers (dirt roads do not encourage customers to come to the store).
Hiring security Gaurds
-With law enforcement practically non-existent, the shop-keeper and those around him must pitch in the hire security gaurds, both for their homes and for their businesses. I assume they must hire 4 gaurds at $30,000 a year for both places (so $120,000 a year for each location), and that at home it is split 20 ways and at work 15)
(-$120,000 / 15) + (-$120,000 / 20) = -$8,000 + (-$6,000) = -$14,000
Fire Protection
-again, no public fire-fighters, so the shop-owner must pay to protect both locations. Lets say it costs $150 a month for each location, or $300 a month for both.
-$300 x 12 = -$3,600
Sewer Maintenence and Water Treatment
-For both locations, the shop-owner must now pitch in the pay for sewage treatment. Let's say this is provided at a flat rate of $50 per month at each location, about the same cost as basic cable I think.
(-$50 x 2) x 12 = -$1,200
Cost of Road Maintenence and other necessary-Community Projects
-At each location, let us say the block must hire a single worker who costs $20,000 a year to keep everything fully maintained. This may also be an over-approximation.
(-$20,000 / 15) + (-$20,000 / 20) = -$2,300
Cost of Deposit Insurance
-again, to maintain current standards, the shop-owner would need to purchase deposit insurance. I'll say this would cost $2,000 a year, though this may be either under or over.
-$2,000
Cost of Military Protection
-This one is very difficult to quantify, but let us assume that the shop-owner volunteers $2,000 to the military, which really isn't enough to keep it at it's current level, but is likely what he would be willing to give up for it.
-$2,000
Total cost of services: -$25,100.
Total Costs from Removal of taxes and public goods: -$81,500
Net gain from removing all taxes:
110,000 - 81,500 = $28,500, most of which is from removing the sales tax.
additional benefits of removing the sales tax:
net income = 200,000 + 30,000 (sales tax revenue) -81,500 (added costs) - 50,000 (employees) - 20,000 (loans, insurance, trnasportation) - 10,000 (specialist)
= $68,500 (most of which is probably spent on stock the store)
money saved from removed sales tax:
-I assume the person gains half the benefit of the sales tax on all his spent income. That is, he gains 7% more goods than he otherwise would.
money saved from sales tax: (68,500 x .75 x .07) = $3,596.25
total money gained by removing all taxes: $28,500 + $3,600 =
$32,100
Which is a 16% increase in personal income, most of which is due to the largely costless 15% increase due to removing the sales tax.
Conclusion: This person would probably be best off if we kept the income tax and merely removed the sales tax.
Obviously, this needs some tweaking, but it appears that the system is better with higher incomes. That is, a small business owner who is barely struggling along will have msot of his tax break eaten up in providing the services he lost, whereas a bigger business owner will not. A wage laborer or small-business owner earning less than $200,000 a year gross might even see a reduction in their ability to afford services, and may have the cut corners. And, as you may point out, under this system he is able to cut corners, such as by not donating to the military or by foregoing sewage and running water for his shop.
I am merely pointing out that, without the public goods the governemnt provides, it would be very difficult to afford the same quality of life we currently enjoy, even if our net incomes increased due to removing taxes.
However, as this model shows, removing the sales tax would definately help out this poor retailer. But removing all taxes and public goods would give him a net loss without it.