Taxation Simulator

Selkies · 15-10-2011 5:23pm #1

There was a march today organised by the unions saying that the government is ****ting on the poor.

I have no idea what options are available to them. So I'd like to be able to simulate changes in the tax system and see different ways in which the government would be able to get money without causing low income earners too much grief.

To build a simulator you would have to have:

1. The data
2. Knowledge of how our govenment taxes and spends
3. Programming skills.

I have programming skills.

Before I start picking up books on how the tax system works I'd like to get my hands on the data.

To better illustrate how this would work, imagine a system where you could increase the tax for people earning over 50k and compare that to raising taxes accross the board.

Granted this wouldn't take into account the effect of raising taxes however it would help create an understanding of what the government face.

andrew · 16-10-2011 9:17pm

Selkies wrote: »

There was a march today organised by the unions saying that the government is ****ting on the poor.

I have no idea what options are available to them. So I'd like to be able to simulate changes in the tax system and see different ways in which the government would be able to get money without causing low income earners too much grief.

To build a simulator you would have to have:

1. The data
2. Knowledge of how our govenment taxes and spends
3. Programming skills.

I have programming skills.

Before I start picking up books on how the tax system works I'd like to get my hands on the data.

To better illustrate how this would work, imagine a system where you could increase the tax for people earning over 50k and compare that to raising taxes accross the board.

Granted this wouldn't take into account the effect of raising taxes however it would help create an understanding of what the government face.

That sounds like a class idea. I'd be surprised if something like this doesn't already exist in government, given the estimates they regularly give about the expected consequences of tax changes, but if they don't then they should. A problem would be the fact that people change their behaviour in response to tax changes. It'd be hard to model the consequences of such behavioural changes.

Selkies · 17-10-2011 9:08am

andrew wrote: »

That sounds like a class idea. I'd be surprised if something like this doesn't already exist in government, given the estimates they regularly give about the expected consequences of tax changes, but if they don't then they should. A problem would be the fact that people change their behaviour in response to tax changes. It'd be hard to model the consequences of such behavioural changes.

Yeah that's a good point, any idea how I would find that sort of thing out?

I'd like to make a web version of it, if it already exists.

noodler · 19-10-2011 3:39pm

http://www.revenue.ie/en/press/budget/2011/budget-2011-summary.pdf

http://www.revenue.ie/en/about/publications/statistical/2010/index.html

Second link might be even more helpful as it shows you the income tax distribution.

later12 · 21-10-2011 7:20pm

As Andrew said, this would be extremely difficult to model across the various different tax heads.

The Adam Smith Institute did a nice paper on the laffer curve's effect on Irish Capital Gains Taxes a number of years ago

http://adamsmith.org/files/CGT-II.pdf

Between 1968 and 1972 rates increased by 10 percentage points and revenues fell 21%.
• In 1978 the rate fell by 15 points from 35% to 20% and revenues increased by 46%.
• In 1986 the rate was raised by 8 points to 28% and by 1991 15% less revenue was being raised.
• In 1996 the rate was reduced by 8 points to 20% again and by 2000 revenues had grown by some 50%
• In 2003 the rate was cut to 15% and revenues grew by
45% over the following three years.

In 1989 Senator Bob Packwood asked the US Joint Committee on Taxation to estimate the revenues that would be raised from a 100 percent income tax rate on all Americans with earnings above $200,000. You don’t have to be a genius to know the answer to that question is zero, as no-one would bother to work if all their income was being confiscated. But the Joint Committee on Taxation, after having run the numbers through their model, answered as follows:

In the first year the 100% tax rate would raise $104 billion. In the second year it would raise $204 billion. In the third year it would raise $323 billion.

Senator Packwood was understandably perplexed. “Our models assume people will work if they have to pay all their money to the government. Clearly anyone in their right mind will not.”

Essentially, I think any attempt to model behaviours in response to such a wide range of different tax reform scenarios and account for any distortions in the tax base would be extremely difficult and overall quite unreliable.

krd · 21-10-2011 9:17pm

later10 wrote: »

As Andrew said, this would be extremely difficult to model across the various different tax heads.

The Adam Smith Institute did a nice paper on the laffer curve's effect on Irish Capital Gains Taxes a number of years ago

http://adamsmith.org/files/CGT-II.pdf

I wouldn't really trust anything from the Adam Smith Inst. There are questions over who funds them and why.

The principle of the Laffer curve is sound enough, as an idea. That there is an optimal point, above which revenue decreases, and below which revenue also decreases. The problem is finding that point. It's a Goldilocks point - neither too hot, or too cold.

I wouldn't trust those figures on Irish capital gains revenue, for the simple reason, there was a lot more going on in the Irish economy than people making a decision to buy or sell capital assets than the rate of tax.

At the minute the Irish government could drastically cut capital gains, and they probably wouldn't see, much if any, increase in economic activity the tax would be applicable to.

And the same with income tax. If it was cut to zero, there wouldn't be a huge jump in employment. Unless you're of the absurd opinion, that unemployed people are unemployed simply because they do not want to work.

In 1989 Senator Bob Packwood asked the US Joint Committee on Taxation to estimate the revenues that would be raised from a 100 percent income tax rate on all Americans with earnings above $200,000. You don’t have to be a genius to know the answer to that question is zero, as no-one would bother to work if all their income was being confiscated. But the Joint Committee on Taxation, after having run the numbers through their model, answered as follows:

In the first year the 100% tax rate would raise $104 billion. In the second year it would raise $204 billion. In the third year it would raise $323 billion.

Senator Packwood was understandably perplexed. “Our models assume people will work if they have to pay all their money to the government. Clearly anyone in their right mind will not.

You know the people who drive me up the wall as much as the "let's burn out money, and trade cabbage leaves with each other" brigade. It's the horsh1t "rugged individualists" with their clap trap about high tax acting as a disincentive to work. This is nonsense.

Whatever the Joint Committee on Taxation were using to model their revenue is obviously insanely wrong. 100% taxation would result in an absolute collapse of any economy. The only way an economy like that could function would be by throwing bales of the collected cash out of helicopters, immediately on collecting it.

The Laffer curve would also apply to income tax.

Right wingers, wing-nuts, tea-partiers, etc, have a deluded belief, that the lower taxation is the harder people will work. Why would that be true?

I can't lay my hands to it this minute. But in the 80s, Thatcher sponsored a study, to "prove" people work harder if left keep more of their income. She wasn't happy with the results of the study and tried to bury it. It showed, people on lower incomes work harder to earn more money. People on higher incomes work less.

So, if you want "wealth creators" to work harder, you tax them at a higher rate.......let them keep too much they're liable to kick their heels up. The thing is, it's nearly impossible to tell the optimum point. To high, you create the incentive to evade tax - In Ireland in the 80s, when income tax was very high, tax evasion was rampant.

If tax becomes too onerous, people will seek to evade it, long before they'll hang up their tools in an Ayn Randian shrug/strike.

This does happen. In Somalia, one of the greatest contributing factor to the recent famine has been down to over-taxation. (Islamic Jihadi thugs taking farmers crops as "tax" - they ship this grain to markets where they receive cash). Many farmers were over taxed to the point, it wasn't worth their while, or could they afford to plant more crops. What's the point if someone is just going to turn up and take most of it.

Essentially, I think any attempt to model behaviours in response to such a wide range of different tax reform scenarios and account for any distortions in the tax base would be extremely difficult and overall quite unreliable.

It's impossible. And that's a reason no one should ever trust anyone waving a real world example of the Laffer curve. If you think about it. In the real world, there's no way it could manifest itself as a lovely smooth curve. You'd have to smell a rat, if someone did present you with that curve.

later12 · 22-10-2011 3:26am

krd wrote: »

The principle of the Laffer curve is sound enough, as an idea. That there is an optimal point, above which revenue decreases, and below which revenue also decreases. The problem is finding that point. It's a Goldilocks point - neither too hot, or too cold.

Nobody is alleging anything different, the point I was simply making was that it would not be realistic to relate tax rates to tax revenues in a linear fashion.

I wouldn't trust those figures on Irish capital gains revenue, for the simple reason, there was a lot more going on in the Irish economy than people making a decision to buy or sell capital assets than the rate of tax.

There's always a lot more going on in the real economy, but it's a little daft to suggest that the revenues associated with CGT weren't associated with CGT reform in a major way... so I'm not really sure what your point is here?

You know the people who drive me up the wall as much as the "let's burn out money, and trade cabbage leaves with each other" brigade. It's the horsh1t "rugged individualists" with their clap trap about high tax acting as a disincentive to work. This is nonsense.

You don't think high tax can be a disincentive to work? Really?

Also I'm not particularly sure why you're relating tax reform to employment, that isn't really what the Laffer curve is directly concerned with. We're simply talking here about the state's ability to generate revenue.

Right wingers, wing-nuts, tea-partiers, etc, have a deluded belief, that the lower taxation is the harder people will work. Why would that be true?

Oh I don't really think that's true at all. In that case the right wing would favour zero taxation, because 0% tax would represent maximum efficiency. Of course, 0% taxation would in reality represent economic collapse.

I can't lay my hands to it this minute. But in the 80s, Thatcher sponsored a study, to "prove" people work harder if left keep more of their income. She wasn't happy with the results of the study and tried to bury it. It showed, people on lower incomes work harder to earn more money. People on higher incomes work less.

I presume you mean to argue that in the case of tax increases, the poor work harder and the rich work less hard?

In that case the obvious explanation could be that the poor are on the left hand side of the curve and the rich are on the right...

no one should ever trust anyone waving a real world example of the Laffer curve. If you think about it. In the real world, there's no way it could manifest itself as a lovely smooth curve. You'd have to smell a rat, if someone did present you with that curve.

The laffer curve is not always drawn as a 'lovely smooth curve', of course it could be quite asymmetrical. The only reason people ever draw it so symmetrically and smoothly is for illustrative purposes - which is what the Laffer curve was originally intended to be.

andrew · 22-10-2011 3:58am

krd wrote: »

I wouldn't really trust anything from the Adam Smith Inst. There are questions over who funds them and why.

The principle of the Laffer curve is sound enough, as an idea. That there is an optimal point, above which revenue decreases, and below which revenue also decreases. The problem is finding that point. It's a Goldilocks point - neither too hot, or too cold.

I wouldn't trust those figures on Irish capital gains revenue, for the simple reason, there was a lot more going on in the Irish economy than people making a decision to buy or sell capital assets than the rate of tax.

At the minute the Irish government could drastically cut capital gains, and they probably wouldn't see, much if any, increase in economic activity the tax would be applicable to.

And the same with income tax. If it was cut to zero, there wouldn't be a huge jump in employment. Unless you're of the absurd opinion, that unemployed people are unemployed simply because they do not want to work.

You know the people who drive me up the wall as much as the "let's burn out money, and trade cabbage leaves with each other" brigade. It's the horsh1t "rugged individualists" with their clap trap about high tax acting as a disincentive to work. This is nonsense.

Whatever the Joint Committee on Taxation were using to model their revenue is obviously insanely wrong. 100% taxation would result in an absolute collapse of any economy. The only way an economy like that could function would be by throwing bales of the collected cash out of helicopters, immediately on collecting it.

The Laffer curve would also apply to income tax.

Right wingers, wing-nuts, tea-partiers, etc, have a deluded belief, that the lower taxation is the harder people will work. Why would that be true?

I can't lay my hands to it this minute. But in the 80s, Thatcher sponsored a study, to "prove" people work harder if left keep more of their income. She wasn't happy with the results of the study and tried to bury it. It showed, people on lower incomes work harder to earn more money. People on higher incomes work less.

So, if you want "wealth creators" to work harder, you tax them at a higher rate.......let them keep too much they're liable to kick their heels up. The thing is, it's nearly impossible to tell the optimum point. To high, you create the incentive to evade tax - In Ireland in the 80s, when income tax was very high, tax evasion was rampant.

If tax becomes too onerous, people will seek to evade it, long before they'll hang up their tools in an Ayn Randian shrug/strike.

This does happen. In Somalia, one of the greatest contributing factor to the recent famine has been down to over-taxation. (Islamic Jihadi thugs taking farmers crops as "tax" - they ship this grain to markets where they receive cash). Many farmers were over taxed to the point, it wasn't worth their while, or could they afford to plant more crops. What's the point if someone is just going to turn up and take most of it.

It's impossible. And that's a reason no one should ever trust anyone waving a real world example of the Laffer curve. If you think about it. In the real world, there's no way it could manifest itself as a lovely smooth curve. You'd have to smell a rat, if someone did present you with that curve.

What you've posted is, I think, the perfect example as to why the OP's idea is very difficult to implement. Different theories posit that people behave in different ways to taxation, and in reality, responses to taxation have a huge variance. So the idea that one could build a taxation simulator (while admirable) is quite far-fetched; it is nigh on impossible to pin down people's behavior, and to calculate exactly behavioral changes is also very difficult.

krd · 22-10-2011 5:32am

later10 wrote: »

krd wrote: »

There's always a lot more going on in the real economy, but it's a little daft to suggest that the revenues associated with CGT weren't associated with CGT reform in a major way... so I'm not really sure what your point is here?

The figures may support the theory. But in reality, the shifts in revenue may have been for different reasons.

Between 1968 and 1972 rates increased by 10 percentage points and revenues fell 21%.

The end of the post-war prosperity and the first oil shocks.

In 1978 the rate fell by 15 points from 35% to 20% and revenues increased by 46%.

Fianna Fail spending spree.

In 1986 the rate was raised by 8 points to 28% and by 1991 15% less revenue was being raised.

A bleak recessionary period.

In 1996 the rate was reduced by 8 points to 20% again and by 2000 revenues had grown by some 50%

The Celtic tiger and the beginning of the building boom.

In 2003 the rate was cut to 15% and revenues grew by
45% over the following three years.

The building boom gone mad. I believe that cut in CGT, was to encourage people to speculate in property. Notice the time period for revenue growth - precisely follows the tragic trajectory of the property market to the point it began to stall.

The Adam Smith Institute narrative is wishful thinking.

Taxation Simulator

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