Wednesday, February 04, 2009

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.

3 comments:

Jim Gust said...

Isn't an 8% interest rate a bit high? Or is that really the going rate the car dealers are offering? Seems to me that not so long ago they offered no interest loans to get sales moving, which would generate zero tax deductions.

On the other hand, once the deduction is in place, an 8% rate will be easier to sell to the prospect. So you might be quite correct.

10 million seems optimistic too, based on January's crash, but they are going to include the last month and a half of December.

Anyway, perhaps it's not as wild a guess as I first thought.

Jim Gust said...

I meant the last month and a half of 2008, sorry, too bad I can't edit the comments.

JLM said...

I thought I saw the typical rate on auto loans listed at 7.8% the other day, but I could be wrong.

The 10 million cars sold? As I said, we're fantasizing.