You might have heard that the top 50% of wage earners pay 96% of the taxes. That is ridiculously unfair. They should be paying much more. And if you don’t instantly see why that is the case, then you have been bamboozled by statistics.
Since big numbers confuse people, let’s look at a “toy” example of an imaginary country called MiniLand. This year, MiniLand had a population of exactly 100. Sixty-five of these people are adults of “employment age” or higher, and the entire population is grouped into forty-seven households of varying sizes. (A “household” can be a single adult, or any combination of adults and children.) Miniland has 74 white people, 12 black people, and 1 Asian. (His name is Branden.)
This is how much these households made this year:
- 4 families made exactly $10,000
- 4 families made exactly $15,000
- 4 families made exactly $25,000
- 6 families made exactly $35,000
- 9 families made exactly $50,000
- 8 families made exactly $75,000
- 7 families made exactly $100,000
- 4 families made exactly $200,000
- 1 family made exactly $10,000,000
The total gross income of the entire country is $12,960,000.
10 of the households in MiniLand live in poverty. Four of them have a single head of household who made $10,000, two of them are two-parent households with multiple children who made $25,000, and the others are in-between.
The family that made $10 million is the Mussberger family, consisting of two parents and a child. The child’s name is Cindy-Lou.
What is the most fair way to tax these people? The absolutely most conservative (and, I think, absurdly naive) notion of “fairness” out there is the idea of the flat tax. Let’s imagine that MiniLand has implemented a flat tax of 30%.
With a flat tax of 30%, the total tax revenue of the country is $3,888,000.
The amount of tax paid by the top 50% of households (that’s 24 out of 47 households) is:
- 4 of the families who made $50,000 pay $15,000 each for a total of $60,000
- the 8 families who made $75,000 pay $22,500 each for a total of $180,000
- the 7 families who made $100,000 pay $30,000 each for a total of $210,000
- the 4 families who made $200,000 pay $60,000 each for a total of $240,000
- the Mussberger family pays $3,000,000
- the grand total: $3,690,000
Can you do the math? Divide $3,690,000 by $3,888,000 to get the percentage of the total tax revenue paid by the top 50% of households.
That’s right: top 50% of households pays 94.9% of the total tax revenue of the country.
That’s with a flat tax.
Let me repeat that: That is with the most conservative tax weighting system out there.
What MiniLand and the United States have in common is that the income distribution is extremely skewed. To put it quite simply: the top 50% of wage earners should pay at least 95% of the taxes in this country, because the top 50% of wage earners make 95% of the wages in this country. That’s just a fact of life in a country where the income distribution is skewed so severely.
Now, what if MiniLand has a deficit of $1,000,000? How could we solve that problem.
Raising the tax rate by 10% on the lowest 10% of wage-earning families (the 4 families at the bottom) will increase the tax revenue by (drum-roll please): $4000. It will solve less than 1% of the deficit problem.
On the other hand, raising the tax rate by 10% on the top 10% of wage-earning families (the 4 families at the top) will increase the tax revenue by over a million dollars: it will actually solve the deficit problem.
Those are the statistics that actually matter: income tax gained as a percentage of the deficit. That’s a functional statistic. Talking about income tax distributions in terms of the percentage of total tax revenue is an absolute scam, and a meaningless statistic. Don’t let it fool you. Don’t let it fool other people, either.