February 10, 2011

A lesson in economics

You've heard the phrase your entire life: tax cuts for the rich. What exactly do people mean when they say that "the majority of the tax cuts go to the wealthy"? And assuming that the wealthy do receive the majority of the tax cuts, how is it that the rich's share of the tax burden increased over the last forty or so years? Allow me to illustrate:

Suppose that there are two people, person A and person B. Person A earns $100,000 each year (evil rich person- cue ominous sounding music), whicl person B brings home a salary of $10,000. When this story starts, the tax rate for both wage earners is 10%. This isn't a real world example of course, as the 100k earner would be paying a much higher rate, but let's keep it simple.

Anyway, A pays $10,000 per year in taxes while B pays $1,000 per year. Person A's share of the total tax burden? 91%. Person B, on the other hand, pays 9% of the taxes in this two person economy.

Now the politicians decide to cut taxes for everyone. Person A gets a 5% cut in his tax rate while Person B gets a 50% cut. B's tax rate is now 5% of his income, while A's rate is now 9.5%. B pays $500 per year, A pays $9,500 per year and the total tax revenue is now $10,000, instead of the previous $11,000.

Let's look at what happened each person's share of the total tax burden. A's $500 is now %5 of the total tax burden, while B, who is paying less taxes than he did the year before, is now paying 95%. A received a much smaller percentage cut than B, but now ends up paying a greater share of the taxes.

Okay, let's now state that evil rich person A isn't paying his fair share. Person B gets his taxes reduced to 0.5%, or $5 per year. Since it's an election year, person A also gets his tax rate reduced to 9%, or $9,000 per year. Person B received a 99% reduction in his taxes whiler Person A received only a 5.26% decrease in his taxes. However, Person A received a somewhat larger dollar tax cut, $500 versus $450 for Person B. Person A now pays 99.99% of the total tax burden in this two person society. Yet since A received a $500 per year tax cut versus $495 for B, this is considered unfair.

Let me be clear: if you can look at the example above and still claim that (a) the rich aren't paying their fair share and/or (b) tax cuts "unfairly" target the rich, you should be wearing a sign that says: "Welcome to Stupidville. Population: me."

Posted by Physics Geek at February 10, 2011 08:04 AM | TrackBack StumbleUpon Toolbar Stumble It!

5th paragraph, second sentence seems to have A and B transposed.

Posted by: Clickey Fingers at February 14, 2011 09:52 AM