As the Bush tax cut nears expiration, and the economy continues to struggle, I've been reading around the blogsphere many outlandish claims about how the wealthy have it so bad, and the corporations are barely eking by (despite escalating profits). But the one meme that bothers me the most is this canard that the wealthy pay 80% of the taxes. Join me below for a short lesson in fuzzy math...
I'm not going to bore you with income tables parsed from the IRS, or taking US GDP figures and total revues to arrive at some proof. Nope. This is quite simple, and perhaps many of you already know this.
Besides outright lying (which is also possible with Republicans), how does one arrive at this 80% figure? Well, first a bit of semantics, but in this case, very important semantics. What blowhards and pundits mean when they say 80% (or whatever percentage they gin up tomorrow) is that wealthy contribute this percentage to the tax revenue base, not that they are TAXED AT 80% which is ridiculous. Here's a thought experiment (Einstein was fond of them) for clarification:
Imagine in your Nation of Richlandia your total tax revenue is $1000. An 80% contribution to that revenue is $800. This is what your wealthy pay. Everyone else contributes 20%, or $200. But this does NOT tell you the actual tax rate of each group.
Here's the fuzzy:
A tax rate of 33% for each group means the following gross income:
Wealthy $2424
Others: $606.
Are you seeing the picture?
$2424 * 33% is roughly $800
$606 * 33% is roughly $200
There's our tax revenue and there's the mythical "80% of taxes".
But wait, there's more!
We know that tax rates aren't equal across income levels. So let's try this:
Our tax revenue base is still $1000. The wealthy still contribute 80% to the tax base. But now they're paying LESS taxes.
Tax rate on wealthy @ 10%
Tax rate on Others @ 33%
This means wealthy have an income of $8000, and Others, well they still have an income of $606. (Damn stagnant wages).
$8000 * 10% = $800
$606 * 33% = $200
which gives us our tax base of $1000.
You can continue to interpolate this until the wealthy are only paying 1% tax rate (or less), still paying $800 to the tax base, but making $80,000. Let's see how that looks:
$80,000 * 1% = $800
$606 * 33% = $200
This simple thought experiment tells you everything you need to know about the last 30 years in America.
One last bit of math (because math is fun!). Let's say in Richlandia, the wealthy make $8000. But the Others were able to elect Representatives with a spine, so that the actual tax rate IS equal (I won't even shoot for progressive tax rate here).
We end up with $8000 * 33% = $2640
Others: 606 * 33% = $200
Well, you can see how much more revenue we'd have -- nearly 3x as much revenue in this thought experiment.
If you take anything from this small example, take this: When the Cons try to push these outlandish tax percentages on you, it's not a tax rate their talking about, but a percentage contribution to the base.