Calculation Methodology

Sources of Data

The Tax Foundation's VAT calculator uses data from a variety of different sources in order to estimate the user's VAT burden. To estimate GDP, national wage income, and national economic profits, we use numbers from the Congressional Budget Office [1]. Budget deficit projections are from the Office of Management and Budget's analysis of the President Obama's budget proposals. [2] (There is considerable uncertainty regarding the size of future deficits, which depend on a number of things, not the least of which is the extension or expiration of the Bush tax cuts, which, as of this writing, is an unresolved question.) We also use the CBO's GDP price index to adjust everything to 2010 dollars. Additionally, we use numbers from the U.S. Department of Health and Human Services to estimate health care as a percentage of GDP over the next decade [3]. Our consumption categories are based on the U.S. Bureau of Economic Analysis's National Income and Product Account tables for year 2009 [4]. We also need to estimate the user's consumption in each category based on data from the Consumer Expenditure Survey [5]. Finally, we obtain information about total wealth in the economy from the Federal Reserve's 2007 Survey of Consumer Finances [6].


Calculating the VAT burden

Our calculation is based on the method outlined by Eric Toder and Joseph Rosenberg of the Urban-Brookings Tax Policy Center [7]. We begin by placing the user in a specific category based on his or her household size, age, and income, and use data from the Consumer Expenditure Survey to estimate consumption across 21 different economic sectors for that user's category. (Because our categories are based on the BEA NIPA tables rather than the Consumer Expenditure Survey, we had to reconcile the two systems. For detailed information on our NIPA-CEX "bridge", click here.) Once we have a rough picture of the user's consumption, we can estimate his or her share of total consumption, as well as total taxable consumption, based on the categories included in the VAT base. We also need to calculate the user's share of national labor income and national wealth, based on the financial information entered combined with national data from CBO and the 2007 SCF. Once we have these numbers, it is a simple matter of plugging them in to the formula described in the appendix of the Toder-Rosenberg article.


  Extrapolating to 2020
We grow our various parameters out to 2020 using relatively simplistic methods. We scale labor income up using CBO wage numbers. Business income is scaled up using CBO economic profits. Health care as a percentage of the economy is projected to increase relative to other sectors, so we scale our Health Care and Medicine categories up based on the HHS study - other categories are scaled up using CBO wage numbers. The SCF wealth estimates scale according to CBO's GDP projections. Finally, everything is deflated to 2010 dollars using the CBO's GDP Price Index.

[1]. Congressional Budget Office. Pub. No. 4156 - The Budget and Economic Outlook: An Update
http://www.cbo.gov/ftpdocs/117xx/doc11705/08-18-Update.pdf
[2]. Office of Management and Budget. Mid-Session Review: Budget of the United States Government, Fiscal Year 2011.http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/11msr.pdf
[3]. United States Department of Health and Human Services, Centers for Medicare and Medicaid Services. National Health Expenditure Projections 2009-2019 (September 2010).
https://www.cms.gov/NationalHealthExpendData/Downloads/NHEProjections2009to2019.pdf
[4]. United States Department of Commerce, Bureau of Economic Analysis. National Income and Product Accounts Table 2.4.5 - Personal Consumption Expenditures by Type of Product
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=70&Freq=Year&FirstYear=2008&LastYear=2009 (visited October 19th, 2010).
[5]. United States Department of Labor. Consumer Expenditure Survey. http://www.bls.gov/cex/
[6]. Board of Governors of the Federal Reserve System. Survey of Consumer Finances, Year 2007.
http://www.federalreserve.gov/pubs/oss/oss2/2007/scf2007home.html
[7]. Toder, Eric and Joseph Rosenberg, Urban-Brookings Tax Policy Center. Effects of Imposing a Value-Added Tax to Replace Payroll Taxes or Corporate Taxes. March 18, 2010.
http://www.urban.org/UploadedPDF/412062_VAT.pdf