Tax analogy

What does that mean?

let's say you have ten people earning $10,000, and one person earning $100,000.

For the sake of argument and easy numbers, let's say that currently, the 10 people would pay maybe $500 in taxes each. The last person will pay $45,000.

Again, for the sake of argument, let's call the poverty line $9,000 per annum, before taxes. The ten people are pretty much sitting on the poverty line after their $500 tax bill.

That makes a total tax burden of $50,000 spread between the 11 people.

We now need to find a figure x%, such that x% of the total wages of these 11 people give a tax revenue of $50,000. It's fairly easy to see that this figure is 25%.

Now, the man with $100,000 earnings is ecstatic, his take home wage just went up from $55,000 to $75,000 a year. He's laughing all the way to the Merc dealership.

The people earning $10,000, are f***ed. Their take home wage has dropped to $7,500 per annum. Their pre-tax wage is still above the poverty level of $9,000, but their actual take home wage has drastically reduced. In very real terms, the poverty level rises from $9,000 per annum to $11,000. People not in poverty before, are in poverty now.

That's ok, says everyone! We'll increase the minimum wage! Corporations, run by the rich, who just got a big tax cut, can afford to do that! So now the rich must directly give more money to the poor to equalize the burden created by the new tax rule. The rich have the same as they had before (because the reduction got given to the poor), the poor have the same as before (because they got a higher wage to compensate for higher taxes), and the government has the same as before (because we engineered that).

Net change - 0

Arrghhhhh! Too many numbers.... I lost my (already limited) audience. Maybe I should just head over the Maxi's hug thread.

The lowest tax bracket, (if you earn more than 2 grand), is already 22%.

By taxing peoples entire wealth rather than their income, at roughly this figure, we would be able to provide the same services with a fairer system. The poor would be no worse off. Yes the rich would pay more due to assets, but we would all be giving the same proportionally.

Don't worry, I'm back.

22% in the uk, not in the US, where I am. Also remember the tax allowance in the UK, about ?4,000 IIRC (I'm English, moved to the US a couple of years ago).

My example was a gross oversimplification in order to make a point. In the US at least, we are already taxed on total wealth. I pay state tax on my house, my car, indeed everything I own. You'd have to factor everything in both the before and after calculation.

The poor would end up paying more taxes, the rich paying less. I'm not trying to say that it's a bad thing, just that the shortfall for the poor would end up being made up from somewhere, and it's the rich that would be asked to step up. Hence just another way of redistributing the wealth.

If nothing changed over all - why bother changing the system?

I don't see how if the poor don't own anything, and earn very little, they would end up paying more. Their proportion would be very small.

Where as the guy that has 50 million in his bank account, but pays himself 250,000 a year to avoid income tax, would have to cough up for everything he owns.

That said, he would still only be paying the same proportion as the poor man, so the system would be more fair.

But where did the 50m come from in the first place? It must already have been taxed once, surely? So what's fair about taxing it again?

The reason poor people, can't really be taxed the same as higher earner's is because they don't earn as much and they spend a higher proportion of their income e.g. a poor man earns ?100 a week and a rich man earns ?1000 week, a lot of the poor man's would be spent if not all of it, yet a much greater proportion of the rich man's is disposible income. If it was flat rate of 15% then the poor man would be left with ?85 and the rich man would be left with ?850. Now ?85 a week would be barely enough to cover rent or morgate payment and feed the family but ?850 is plenty as well as having some left over.

The only thing that makes anything about tax fair, is if we are all in the same boat!

Agreed. But that 50m probably started as 100m, of which he paid half to the government. If you now tax it again annually, it becomes 45m, then 40.5m, then 36m (ish). Tax the interest by all means, since it's new income, but double taxation can never be considered fair.

but it's not putting anyone in the same boat thats essentially saying to the poor man right we don't give 2 s***es if you can't afford to eat it's your own fault for being in a low paid job. progressive tax puts people in tax brackets and up to a certain amount of tax you pay a set percentage on that amount, e.g. if you earn 5000 - 10 000 you might get taxed at 20% meaning you pay 1000 in taxes, but someone's earning 20 00 - 30 000 and the tax there is 30% but theres a a 25% tax in the middle, that person would pay ?7500 of their income, ?1000 in the 20% bracket, ?2500 in the 25% bracket and ?3000 in the 30% bracket. That provided i've understood it correctly. i still don't pay tax so i'm not really sure (gotta love students)

it's trying to improve equity and make the redistribution of wealth more even, at least trying to make sure people can survive.

Yeh, that's what I'm saying. The income tax system isn't fair. Why should he have to give 50m to the government in the first place? When he dies, his kids will have to pay another 40% in inheritance tax!

What should have happened is. He gets his 100m. Every year he gives 10% of his total wealth, including what he earned that year, to taxation.

Everyone else, including the poor, do the same. As they have and earn nothing, they pay virtually nothing. The rich have a higher burden, but proportionally the same. Making the system fairer.

but the poor's money is far more essential to their living

The minimum income tax bracket is already 22%. If our tax burden were calculated on our total wealth rather than our earnings, the total burden percentage wise would be less than that I guess!

Therefore the poor would be better off, the rich would pay more tax, but everyone would pay the same proportionally.