Income Tax Debate: Figures Lie and Liars Figure
With a new Administration on the way in, we are already hearing the debate over future tax policy and whether or not cuts will remain in place or be eliminated and so on. This has lead to each side citing statistics to support their side of the debate but the problem is that the figures are not exactly accurate.
For example, those who support keeping the tax cuts in place cite figures stating that the top 1% or 5% or 10% of taxpayers are responsible for paying 20% or 30% or 50% of the taxes, implying that there is some massively unfair burden on those families.
Those who support shifting the cuts are the ones who bring up the claims that over 50% or 60% or 70% of the cuts go to the top 1% or 5% or 10% of taxpayers, suggesting that these families are somehow getting way more of a deal that everyone else.
One would think that it is impossible for both of these claims to be correct, and indeed there is some deception, but depending on how you calculate the figures the numbers could work.
For example if you have three families, one of them makes $ 1,000,000 a year, one makes $ 100,000 a year and one makes $ 50,000 a year.
Now assume that for the 1st family the tax rate is 30%, for the 2nd it is 20% and the third is 10%.
Family #1 would pay $ 300,000 in taxes, family #2 would pay $ 20,000 and family #3 would pay $ 5,000. So from the perspective of the first group (the too much taxes group) the first family pays 92.3% of the total taxes. But at the same time they have $ 700,000 left while the other families have $ 80,000 and $ 40,000 respectively which means they have over 85% of the money left.
It is true that their tax burden is a higher percentage of the three but they also have much more money left at the end.
Now let’s assume that a 10% across the board tax cut is applied. So family #1 saves $ 30,000, family #2 saves $ 2,000 and family #3 saves $ 500. Looking to our ‘tax cuts are for the rich’ group we could see them arguing that family #1 got the same 92.3% of the total tax cuts while the others got just 7.7%.
But if you look at it in terms of amounts paid, family 1 still pays a far higher percentage of the total burden.
The purpose of this post is not to debate the relative merits of tax cuts or new tax programs, it is to point out the fallacy of the rhetoric from both sides. If you want to have a debate about the pros and cons of a progressive versus a flat tax system, then go to it. But don’t play games with the numbers, it insults all of us.
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6 Responses to “Income Tax Debate: Figures Lie and Liars Figure”
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. “Since you are all such good customers,” he said, “I'm going to reduce the cost of your daily beer by $20.”Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men — the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before.
And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,”declared the sixth man. He pointed to the tenth man,” but he got $10!”
“Yeah, that's right,” exclaimed the fifth man. “I only saved a dollar, too.
It's unfair that he got ten times more than I!” “That's true!!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn't get anything at all. The system exploits the poor!”
The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works.
I don't see how either statistic is a fallacy as they are both right, they just have different focus points.
The point about overall tax burden is an argument about the “fairness” of the tax system.
However, most of the pragmatic rationale for giving tax cuts is to stimulate growth. On that measure, giving massive tax cuts to the wealthy may or may not do this depending on current investment levels. When investment levels are very high (or there is even a glut) such as the US has seen in the last 20 years, then tax cuts to the rich won't really help economic growth that much and actually encourage investment bubbles. Increasing the debt to support these tax cuts just compounds the issue. However, if private investment levels were really low, then tax cuts for the rich might have a large impact.
They aren't fallacies at all, one is talking about overall levels and one is talking about how you can expect things to change if tax cuts were enacted.
“Fairness” has routinely been misused by the Left to refer to “progressivity.” Why the bogus euphemism? It is malevolent class envy. The only people that are standing on partially firm ground are the amoral utilitarians, and even they stand on moral and frequently also on economic quicksand.
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Obama isn't in a hurry to raise taxes (to end the Bush tax reductions) out of a sense of goodness, but for the same reasons his misnamed “progressive” fans are so upset with him. He is constrained by what he can do by the current state of the economy and he is reluctant to risk making the economy worse by implementing a tax increase. Not only would higher income taxes be harmful, but any stupid environmentalist meddling in the economy would not only be economically harmful as well (higher new taxes or other costs imposed on business or on consumers) but destructive in other ways. (Don't worry, greenes; the lunacy will be unleashed someday, once the economy is set right and ripe for exploiting. Same goes for “tax reform” [sic] in general. Higher taxes, not limited to energy taxes, and other cost introductions are on their way eventually. Once the economy is set right, higher taxes and new costs can be imposed up to what the market effectively will bear, because if they're federal taxes or costs, there's no way to vote with your feet by moving from a worse to a better state. Very few people actually will leave the country, the way more publicly stupid lefties have vowed in retaliation for two consecutive elections of George W. Bush to the Presidency. Plus in the next 20+ years, higher taxes are inevitable, anyway, in order to keep Social Security and Medicare from collapsing.)
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“They didn't have enough money between all of them for even half of the bill!”
It's not quite that bad, but there will be a Ponzi-scheme “discovery” made too late by too many dunces, who have been told over and over and over about Social Security's current unsustainability, including by the Trustees of the program themselves. But (kind of like the dunces in Detroit and many of their defenders, who have insisted on decades of denial) in ten years or less, the deficits with Social Security (which is not a pay-as-you-go or a fully-funded retirement welfare plan, but something else) will begin, and redeeming the “trust fund” “bonds” will require additional revenue to be raised, from redirecting revenue already raised, or by more taxes or more borrowing. In other words, the dunces eventually will “discover” only when it cannot be avoided (or denied) any longer that the money isn't all there.
“However, most of the pragmatic rationale for giving tax cuts is to stimulate growth.”
Yes — in fact, a tax reduction (further tax reductions) are in order, which are consistent with government spending increases and on the monetary side, an increase in the money supply and a devaluation of the dollar, as stimulative devices, according to the (real) Keynesian approach that some, even free-market-ordinarily, economists are now, currently advocating. (The feds are already moving toward a zero interest rate policy.) As none of these will guarantee changes in people's and business's minds and attitudes, what's next would be the kind of thing that the Dems would like to engage in because it's the opiate of the masses — cheap money, substantial inflation, to reflate our way out of any slump plus keep inflating our way to feel-good nirvana. (So far, lefties remarking on the economy have refrained from also including “free” bread and circuses to accompany the flood of cheapened money, no doubt provided in large part to the “right” voters through entitlement schemes of one kind or another. It's all there, waiting to be tried, if the conventional Keynesian maneuvers fail, as they failed in Japan's case years ago. “All the low interest, and all the public-works spending failed to put the Japanese juggernaut together again.”)
“It is true that their tax burden is a higher percentage of the three but they also have much more money left at the end.”
Doesn't your statement imply (as it does, in fact, to many) that taking even more from those at the top is justified? Ideally we could take everything but the reasonable minimum or income-tax exemption most of us would envision, in the case of income taxes (amounting in a better world to a re-examined and re-defined poverty level) and take everything above that, and have government(s) spend it all on what is seen as “necessary,” or at least desireable.
And the right way to view progressive taxation from a purely mechanical standpoint is to expand the scope of progressivity of the income tax to everything else. What if the price of everything paid, for everything people acquired or used, were based on income (or wealth, say)? The same car, the same house, costing ten times much for person B whose income (or wealth) is ten times that of A? Is that, too, “fair”?
Be careful of what you wish for, or even of what you merely consider or conjecture.
These statistics are abused by both sides, as you note, and is a core argument in the “class warfare” debate.
The root of the question is what is a “fair” tax policy, or whether “fairness” is really the ultimate goal. I don't think those questions are easily answerable, since it depends on what you think the purpose of taxes are, and on how progressive you think the fair tax policy is, which is entirely subjective and not a matter of statistics.
This question is one I have been wrestling with, which I have written a little about here: http://sovereignmind.wordpress.com/2008/10/21/t…