Monday, February 07, 2005

On Taxes

The richest X% people pay Y% of the total tax burden!! This is so unfair! *

I call bullshit on that being unfair, furthermore the statement is a meaningless comparison.

Let’s do a little simple math, and it will be clearly demonstrated that the statement above while may be true, the tax situation it describes is not necessarily unfair and the comparison is nonsensical. First off, let’s make a sample spread of more or less what a model town might look like;

Population and Income Bumfuckville, FL

Persons at Income Income Level

So most are low income working class people, there are fewer people with white-collar jobs doing better, even fewer really industrious salesmen, and one CEO of a company. This is a hypothetical example kept simple to demonstrate a point, but the real world will have people making A LOT more that 500k, and A LOT more people at the lower two income brackets.

Next, we take a look at how the people in this town are taxed;

Tax rates for Bumfuckville, FL
Income Tax Rate

The town has a simple "flat" tax rate. No tax loopholes for big ticket finances, but not a progressive tax either. Just a simple percentage calculation of total income, then send that portion in to run the town.

Let's look at the income buckets and their contribution to the town funds;

Town Taxes per income "bucket" for Bumfuckville, FL

Persons at Income Income Bucket Tax RateTown Collects
100$10,000 5%$50,000

Total Town Taxes Collected = $200,000

The "10k" income bucket puts in a total of $50,000. The "30k" bucket puts in $75,000. The "50k" bucket puts in $50,000 and the "500k" bucket puts in $25,000.

The town ends up with a total of $200,000 to spend that year.

Ok, let's go back and look at the first part of the statement; First the "*". Sometimes this is just "the most", sometimes it is a percentage or fraction of the taxes collected. In any case, the
number always implies that the richest people are paying more than what is fair for them to pay as taxes. That, as I will show below is simply not true.

"The 1% of the richest people"

That identifies the bucket the statement is talking about. In this model, that corresponds with that one guy making $500,000 per year.

The second part of the statement;

"pay Y% of total tax burden!"

This is a switch in scope, the statement is not comparing the rich guy with the poor guy's tax rate, but rather the total income for the town with town income contributed by the "rich guy bucket". Remember, the rate is exactly the same for everybody in the town.

So let's see how much that one CEO contributes to total taxes in the town;

25,000/200,000 or 12.5% or about 1/8 the total tax burden. Wow, that looks like a lot. That one guy is paying for one out of every 8 town employee's salary, 1 out of every streets that get re-paved.

Let's see how one of the housekeepers stacks up;

$10,000 at 5% is $500. So 500/200,000 is 0.25%, one quarter of one percent or 1/400 of the total town budget. This guy pays to paint one mailbox.

In other words, the rich guy pays 200 times the proportion as the poor guy does, while both are taxed at exactly the same rate. Even changing these numbers around by adding more buckets, making the highest income higher (How much does Bill Gates make per year now days?) and changing the total number of people in each bucket... there is still this supposedly shocking number at the end. That the rich guy contributes more as a percentage of the total of taxes paid than the poor guys does.

Heck, even ALL of the poor guys only contribute $50,000 total, which is 1/4 the total taxes collected vs. 1/8 the total for the ONE richest guy.

That rich guy sure must be paying a lot.

True... he is, but he makes a lot more too. However, his tax RATE is exactly the same as everybody else in town. The tax rate being the same for everybody is about as fair as it could be (and makes the numbers in these examples very clear).

Let's increase this model a little bit, and add a few more rich guys (more like real life, the super rich ones);

1 guy earns $1,000,000, one guy earns $5,000,000, and one guy earns $10,000,000. These guys pay in at a rate of 5% again; $50,000, $250,000, and $500,000 respectively. Sum
these up and it's $800,000 for these three guys, added to the original town budget of $200,000 nets $1,000,000 (one million) for taxes. The town now has a lot more money with just these three guys moving in. No WONDER those little po-dunks fight tooth and nail to get those Escalade drivin' FIBs to purchase summer homes in their town...

Ok, so the hypothetical example was a little weak. I made it deliberately conservative to make the numbers easy to follow, as well as build a "worst case" to make my point.

Now let's look at the ratios again lumping in "the rich" from the statement above together to make this more realistic, and for fairness sake let's put in the white-collar guys the low income bucket too.. they can't afford houses without having dual incomes so they are sort of poor. So poor plus white collar; total taxes paid is $40,000. "The rich" pay in $825,000. Those four rich guys pay a little more than four fifths of the total town budget. They could buy the place.

What does this show?

That you can arbitrarily change X in the statement above by simply sliding your "rich" scale ever so slightly. Take that CEO guy out, and the "a little more" part drops out, leaving "the rich" paying 4/5 of the total tax burden. That one guy that screwed everything and ended up paying for 1 in 8 streets is rendered insignificant by these other, richer yet guys moving in.

So the statement is true, even if you play around with the numbers... at cursory glance, or with quick calculations that the listener might do in their head it seems like a valid statement.

How could that statement still be true but at the same time be total garbage as an argumentative point? It's that sneaky little change of scope. The first part of the statement is talking about a tax bracket or income level as a whole, then the second part switches scope comparing what the rich pay to the total town income as a proportion. That is just like saying, which is bigger? 355 ml or 1/3? ... only it's sneakier. Both the numbers in the statement look like ratios. They are not. The first phrase sets up the subject using the ratio as a name for the bucket, the second phrase specifies a ratio (of total taxes). Two % symbols, one ratio one name for a bucket. Sneaky.

It's obvious that "Which is bigger, 355 ml or 1/3?" is a meaningless question. That statement above in bold up there, that's a meaningless statement for the same reason, the two numbers are not in the same scope or of the same units. They cannot be compared.

So. When someone says "The richest X% people pay Y% of the total tax burden!!!" and then go on to imply that this is so unfair are either

a) lying or deliberately misleading you


b) too stupid to understand "Which is bigger, 355 ml or 1/3?" is a meaningless question


c) A Republican bastard trying to sneak you into agreeing a regressive tax is a good idea because those poor rich folk must be overtaxed and deserve yet more tax breaks.

Either way, the statement is false and should be disregarded, along with the opinions and so called "facts" from anybody who offers the statement up as justification for an opinion about tax laws. You might not want to give the Republicans your vote either.


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