Office of the Game Moderator

[Fmr. Representative Encke]

Budget Request Analysis: Part I, VAT

Budget Committee Proposal: 5% VAT on a narrow tax base; exclusions for ' financial services without explicit fees, existing housing services, primary and secondary education, and other services provided by government agencies and nonprofit organizations for a small fee or at no cost, new residential housing, food purchased for home consumption, health care, and postsecondary education.

The first thing I'll say about the VAT is that I think it would be better served in a separate bill rather than a line in the budget, because there are plenty of implementation/collection-related variables that exist. For instance, will this be a credit-invoice VAT or a subtraction-method VAT? The CBO estimate says that their estimates are for the former, but unless you have a link to the source in the budget, then you'll have to specify those details somewhere.

Economic effects of a VAT would include a sharp decrease in consumption immediately following implementation of the tax, followed by a 'bounce-back' in ensuing years. This will directly affect any tax on consumption levied by either the regions or the states (the Southern region will see the most effect because some of the states there still have in-game sales taxes). Current consumption comprises 69-70% of GDP, while consumption in the narrower base is 43%. The current proposal would reduce retail spending by roughly 130 billion dollars in its first year, representing a roughly 0.6% drop in GDP and around a 0.9% drop in consumption.

My personal estimate of VAT revenues, based on various sources, in the first year of implementation is 122.857 billion (which aligns rather well with the 130 billion CBO estimate). This is including economic effects but excluding the administrative costs, discussed below. With those changes, the expected first-year estimate is 120.777 billion.

A VAT would require the creation of a new administrative apparatus for collection within the IRS, which is estimated to cost 2.08 billion in the first year (FY2020). 71% of that amount if dedicated to audits (a much higher audit rate is required in the early years of the tax to monitor and ensure compliance), and the audit rate will decrease as time passes. The presence of exemptions increases administrative costs, of course.

Compliance costs for businesses would be significantly greater than compliance costs for the current corporate income tax. The compliance burden as a percent of annual sales would be approximately 2 percent for businesses with less than $50,000 in sales to 0.04 percent for businesses with over $1,000,000 in sales (therefore, a VAT is significantly more regressive for businesses than it is for individuals).

A 5% VAT would also increase CPI by around 2.7%. Some government programs are directly tied to CPI and therefore this would result in increased spending (As an aside, the FY2019 budget did not, to my knowledge, adjust spending numbers at all, which was a major oversight considering the fact that spending should be increasing by virtue of the number of programs whose funding is tied to some version of the CPI (CPI-U, C-CPI-U, CPI-E, CPI-W). Hopefully the budget committee has been figuring things out on the spending side while waiting for the revenue analysis). By increasing consumer prices, real wages also decline (this is accompanied by a 0.4% increase in unemployment). This will result in a roughly 0.25% decline in income tax revenues in the first year.

Another thing to keep in mind (and something that I'm sure the budget committee has discussed) is the regressivity of a VAT, even with the narrower tax base proposed here. Data from the Urban-Brookings TPC Microsimulation Model suggests that the current proposal (a narrow base) will result in a -3.7% change in after-tax personal income for people in the lowest quintile, and a -2.9% change in after-tax personal income for people in the highest quintile (note that some alterations were made to the real numbers for Atlasia-related purposes). The difference between narrow-base and broad-base VAT regressivity is around 0.1%. An alternative that significantly reduces the regressivity of the tax for consumers, and somewhat decreases administrative and compliance costs is to use a broad base accompanied by a demogrant or a refundable tax credit. However, that takes a lot more planning and detail.

Another thing I'll mention is that the economic analysis for this type of 'add-on VAT' (one that is used solely for deficit reduction with no corresponding decrease in the corporate or individual income tax rates) is very different from the analysis of a VAT that is offset by some other tax decrease.

Note: The other elements of the Budget Committee's proposal have also been costed/analysed also, I just have to type it all up. Also I may edit this information is I find mistakes in my work.

[Kingpoleon]

I do want to clarify on behalf of the Budget Committee; our exemptions on the tax doesn’t just mean we want additional administrative costs accounted for. We want the exemptions to be included in calculations.

So, we believe that it should be noted that, because it excludes government spending, any increase in CPI - as a result of this value-added tax - will not result in a price increase on food stamps and any other program that adjusts in response inflation.

[Fmr. Representative Encke]

I do want to clarify on behalf of the Budget Committee; our exemptions on the tax doesn’t just mean we want additional administrative costs accounted for. We want the exemptions to be included in calculations.

So, we believe that it should be noted that, because it excludes government spending, any increase in CPI - as a result of this value-added tax - will not result in a price increase on food stamps and any other program that adjusts in response inflation.

My mistake; for that bit I mixed up two sources, one of which was for a narrow base and one of which was for a broad base. All other economic information, however, is correct for a narrow tax base.

[tmthforu94]

I, Mr. Reactionary, by the authority vested in me by the Laws of the Republic of Atlasia as Game Moderator, first officer of the game engine thereof, hereby nominate Tmthforu94 for the position of Deputy Game Moderator.

- R

I have reached out to several folks, including the VP, about opening this confirmation hearing and have been ignored. I have a journalism degree and was hoping to put that to use. In terms of partisanship, even though Sestak has done basically nothing as Deputy GM (yet no one seems to care) I plan on running each story by him to ensure everything is fair. I hope having stories from the GM team MIGHT help create an environment where people start voting based on actual issues/activity instead of just party affiliation (aka election simulation).

Jimmy has stated on Discord that he will open a confirmation hearing tonight, we'll see if that is the case. Atlasia is LONG overdue for a Deputy GM who regularly posts stories.

[Fmr. Representative Encke]

Federal Wealth Tax Estimate

K, this raises 62.566+/-35 billion dollars.

One annoying thing that delayed costing this:
Pretty much the only good way to estimate the size of the tax base for this comes from manipulating estate tax numbers using estimated mortality rates. However, the IRS data only goes up to 50 million, which makes estimates of the surplus tax revenues difficult and required me to cobble together information from other sources. I included an error column because, due to the extremely narrow tax base, error is quite large.

Also, since this will be implemented in FY2021, this might need tweaking at that time, since I'm using FY2020 estimates as a baseline.

Side note: Lincoln has also added a 3% wealth tax for their budget this year. Therefore, any effects of the additional 2% federal tax will be more pronounced in Lincoln and revenues there may decrease upon implementation.

[Fmr. Representative Encke]

I have just resigned from the position of DGM (something I honestly should have done a month and a half ago); I have not had time to dedicate to Atlasia for a while now, and will not have any time to do so in the near future (if I did, I would have made maps for October ). I truly regret having to do this (especially considering I left the game during budget-time in 2017 as well). However, I will not be disappearing off the face of the Earth like I did in 2017, so I will be around to provide any resources I have available to allow the completion of the budget (keep in mind, however, that my laptop died over the summer, and a folder of raw data from various sources like the IRS was not backed up; so I have the spreadsheets I was using to produce final numbers but a lot of the raw data would have to be re-compiled or updated if anyone wants to recalculate numbers).

[Mr. Reactionary]

I, Mr. Reactionary, by the authority vested in me by the Laws of the Republic of Atlasia as Game Moderator, first officer of the game engine thereof, hereby nominate AustralianSwingVoter for the position of Deputy Game Moderator. Tmthforu94 and JK2020 are hereby relieved of their duties and thanked for their service.

- R

[AustralianSwingVoter]

I, Mr. Reactionary, by the authority vested in me by the Laws of the Republic of Atlasia as Game Moderator, first officer of the game engine thereof, hereby nominate AustralianSwingVoter for the position of Deputy Game Moderator. Tmthforu94 and JK2020 are hereby relieved of their duties and thanked for their service.

- R

Thank you Mr R for the opportunity!