Taxation and maths illiteracy

I read, again, about the arguments over taxation and how the rich should pay more and how society is ever more polarised between rich and poor. Many people have read the appended joke about the ten guys who go for a beer, which I have appended without attribution (not through lack of trying; the joke is so ubiquitous I couldn't find any).

Throughout all the rants and faves over tax rates, tax thresholds and tax credits etc, one thing seems obvious to me: a significant number of the people arguing about it are illiterate at maths!

One of the ideas that gets floated repeatedly and dismissed as being unworkable is "flat tax". Can it be that people who oppose it think that it's a fixed absolute amount of tax, rather than a rate?

Taxation is usually expressed as a percentage, which means that if you earn more, you pay more! There's no need to have a higher percentage for higher incomes, it's already taken care of.

Let me really spell it out. For example, if you earn 100,000, and pay a rate of 40%, you pay 40,000 in tax. If you earn 200,000 then you pay 80,000.

Am I missing something here? Have governments simply made tax so complex that most people cannot cope and have switched off their brains? Has tax simply become a political game? Is it too much to hope for a clear, simple and understandable tax system that the average person can deal with and see is fair?

To try and understand, I found someone whom I thought might represent the average person in the street and asked them to explain percentages and tax. She struggled to explain percentages and had only the very vaguest idea of how taxation was calculated, whether income tax or sales tax (known as "value added tax" in the UK ).

Ok, the above example is oversimplified a little, there's usually an income threshold below which no tax is paid, but it doesn't defeat my argument.

P.

--- the old joke ---

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 one 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. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore.