I'm about to the point now where I have to suppress my gag reflex when one of my liberal Democrat friends uses the "tax cuts for the wealthy" canard. Well, here's an example that you can use to poke holes in their little argument. I realize that economic education in this country sucks, so this example uses simple mathematics. Okay, people in this country aren't great at math as a rule either, but I have to start somewhere. Here goes:

Let's assume a 2 taxpayer economy(it's a small country). Person A makes $10,000 a year. Person B earns $100,000 a year. Both pay 10% of their earnings in taxes. Let's work out the numbers:

1) Taxes paid by person A- $1,000
2) Taxes paid by person B- $10,000

Person B currently pays 91% of all taxes; he also earns 91% of all income. Easy, right? So now let's give the people a tax cut.

1) A receives a 50% tax cut, reducing the amount he pays annually to $500.
2) Person B receives a 10% tax cut, reducing the amount he pays to $9,000.

"Look!" you say. "B received a $1,000 tax break while A only received a $500 cut. Person B therefore received 2/3 of the total tax cut. Unfair!"

Okay, let's interpret what's happened. You are correct that B has received a greater dollar amount reduction than A. However, as a percentage of their taxes, A received a 50% reduction while person B received only a 10% reduction. Translation: B now pays 9% of his salary in taxes while A only pays 5%.

1) A pays $500 a year
2) B pays $9,000 a year

Person B now pays 94.7% of the total tax burden while still earning only 91% of all income. Yes, he received a greater total monetary tax cut, but percentage-wise, he's now paying a greater share of the overall tax burden. Now let's move on to a more realistic example. Same people, same salary, but different tax rates.

A still earns $10,000 a year and his tax rate is 10%. B hasn't gotten a raise in salary, so he still earns $100,000 a year. However, his tax rate is now 20% because it's fair that he pay a higher rate. After all, he can afford to. Right? Anyway, here's the taxpayer breakdown:

1) Taxes paid by person A- $1,000
2) Taxes paid by person B- $20,000

Person B currently pays 95.2% of all taxes. Let's provide a tax cut for this example:

1) A receives a 50% tax cut, reducing the amount he pays annually to $500.
2) B receives a 5% tax cut, reducing the amount he pays to $19,000.

Once again, B garners a $1,000 tax cut while poor old working stiff A only gets a puny $500 cut. B now pays a tax rate of 19.5% while A pays only 5% of his income in taxes. How does this affect the overall tax burden? Person B was paying 95.2% of all taxes before the cut. After the government lets him keep a little bit more of his money, he now pays 97.4% of all taxes. And still, poor old B earns only 91% of the total income in this small country.

"How can this be? The "rich" received twice as large a tax cut in each example, but his total share of all taxes increased! I'll ignore the result because it must be wrong."

Uh no, it isn't. So pay attention: if you already pay the vast majority of the taxes, any tax break that doesn't pretty much exclude you will give you a large dollar amount cut than someone paying diddly squat. Even then, that cut may not mean much as a percentage of your income. Not that you-the evil, evil rich- will turn down the tax cut. However, the reality is that you didn't receive anywhere near the same percentage cut as someone on the lower end of the income spectrum.

Class is over now. Club this simplistic information over the head of the baby seals strident income reditributionists you meet.

Update: Looks like I should have read other blogs before posting this. Turns out Wizbang has the actual numbers from the IRS proving this very thing.

Posted by: Physics Geek at 04:33 PM | No Comments | Add Comment
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