Taxes Never Add Up

In the preceding post, Jim Gust's suspicion of the $11 billion "tax cost" of the proposed new deductions for car buyers seemed justified. I tried a few extremely off-the-cuff calculations:

Say 10 million cars are sold this year (we're fantasizing, O.K.?) at an average price of $25,000. Total sales: $250 billion.

Of that, say $200 billion is financed at 8%. Total interest paid for year: $16 billion.

At an average income tax rate of 20%, $16 billion in interest deductions would cost the Treasury $3.2 billion.

Now suppose all 10 million cars are subject to sales tax averaging 8%. (8% of $250 billion = $20 billion.) At an average interest rate of 20%, $20 billion in sales-tax deductions would cost the Treasury another $4 billion.

$4 billion + $3.2 billion = $7.2 billion.

Suppose we raise the assumed average income-tax rate to 25%. That would bring the "tax cost" for 2009 alone to $9 billion.

Any resemblance to reality in the above is strictly coincidental. Still, maybe the $11-billion estimate isn't as far off as we thought.

One thing for sure. To Jim Gust's charge of Congressional hypocrisy you can add an indictment for outrageous, ever-worsening complexity. Read Howard Gleckman's column at Tax Vox and weep:

The University of Michigan’s Joel Slemrod, estimates that it costs individuals $85 billion-a-year in time and money to prepare their taxes. Businesses spend another $40 billion. This is nuts.