stewartcs said:
Scenario 1:
Person A makes $40,000.
10% tax rate = $4,000.
Person B makes $100,000.
10% tax rate = $10,000.
Person A is "poorer" than person B. Person B is paying 250% of the actual dollar amount Person A is paying with the same flat tax rate (i.e. 250% of $4,000 = $10,000 when both pay a flat 10% tax rate).
With a 10% tax rate, the amount they pay per cent is the same. In other words both pay the same proportion of tax based on a different income.
Person A: $4,000/$40,000 = 10%
Person B: $10,000/$100,000 = 10%
Scenario 2:
Person A makes $40,000.
10% tax rate = $4,000.
Person B makes $100,000.
30% tax rate = $30,000.
Person A is "poorer" than person B. Person B is paying 750% of the actual dollar amount that Person A is paying with a lower tax rate (i.e. 750% of $4,000 = $30,000 when person B pays a higher tax rate than person A).
With a 10% tax rate for person A and a 30% tax rate for person B, the amount they pay per cent is not same. In other words person A pays less per cent than person B pays per cent.
One can see plainly by comparing the two scenarios that person B will pay 3 times more tax than person A if person B's tax rate is 3 times more.
Question:
Which scenario seems fair to both people?
CS
Red herring. Tax brackets don't work that way. Here's how the scheme actually works:
Suppose there are two tax brackets: $40k and below, which are taxed at 10%, and then 30% for the next bracket up to $100k. Then:
Person A: Makes $40,000
10% tax rate = $4,000.
Person B: Makes $100,000
10% tax rate on first $40k = $4,000
30% tax rate on next $60k = $18,000
Total tax = $22,000
It's actually quite fair. Both people are taxed exactly the same rate on the first $40k they earn (and Person A, if he were given a raise, would enter into the exact same higher tax scheme that Person B pays).
Why do we tax the lower income brackets a lower overall rate, you may ask. It's not just for charity. It is good for America as a whole (including Person B!) if Person A is taxed less; because if Person A has enough money to make ends meet without having to worry, then Person A will feel more comfortable about buying things beyond the most basic necessities. Person B probably produces a few of those things (like computers, microwaves, wristwatches, whatever), and so Person B will have a bigger, more diverse market to sell to. And if Person A has enough means to raise a stable family, then this is good for America too, for similar reasons.
Yet another way to look at it is this:
Suppose everyone were taxed the same percentage rate. How would we choose the rate? Well, we would have to consider how it would affect both Person A and Person B. We want Person A to have enough money to live on, after taxes; after all, why should he take a grueling, low-wage job if he can't even make enough at it to live?
For the sake of argument, let's say the minimum yearly salary needed to maintain basic needs was $36,000. And if Person A is only able to make $40,000, then we would be shooting ourselves in the foot if we tax any higher than 10%, because if Person A can't make enough money to meet basic needs, then he cannot participate in the economy, and the economy as a whole falls apart.
OK, so based on that data, we decide to tax everyone 10%. But then we have a problem with our budget: we don't have enough to fund all of our programs! And I don't mean things like welfare programs; this isn't about redistribution at all. I mean basic programs like building and maintaining roads, bridges, education, etc. We can't fund it that way; we would be forced into deficit spending just to maintain infrastructure.
So we have to tax
somebody. But we already established that we can't tax Person A any further, because it would cripple him as a player in the economy. So we must instead increase the tax rate on those people who make
more than Person A.
The key idea here is that you want to make sure as many people as possible are able to participate in the economy, because that is the source of growth. To tax Person A any more would be to cut off our nose to spite our face; to tax Person B any less would mean we can't afford necessary programs.
And we can't just tell Person A to get a better job or to start his own business; while such things are occasionally successful, we have to remember that the vast majority of people really are doing the best that they can, and the fact is that
most of them are going to be "poor". These low-paying jobs are just as important to our economy as the higher-paying jobs, and as citizens we had better make sure that it is
possible, numerically, for someone to work such a job and still get by.
So yes, as a nation, we
should partially subsidize the poor. We couldn't function otherwise.
