Progressive Taxes
moultano
Creator of ns_shiva. Join Date: 2002-12-14 Member: 10806Members, NS1 Playtester, Contributor, Constellation, NS2 Playtester, Squad Five Blue, Reinforced - Shadow, WC 2013 - Gold, NS2 Community Developer, Pistachionauts
Creator of ns_shiva. Join Date: 2002-12-14 Member: 10806Members, NS1 Playtester, Contributor, Constellation, NS2 Playtester, Squad Five Blue, Reinforced - Shadow, WC 2013 - Gold, NS2 Community Developer, Pistachionauts
On both sides of the debate, for some reason it seems that everyone thinks progressive taxes are about wealth redistribution. While some people may have that aim, fundamentally, that's not the logic behind them. Progressive taxes are a just method of creating taxes that are fair given that money does not have a linear value.
First of all, money does not have linear value. Consider these games.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->You can only play the following game once. Which would you choose:
[A] 50% chance of winning 1 million dollars
[B] 15% chance of winning 4 million dollars
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Or for an even more extreme example:
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->How much would you pay to play the following game?
The game starts with one dollar in the pot.
I'll flip a coin. If it lands on heads, I give you the money in the pot, put in twice as much money, and flip the coin again.
This process repeats until the coin lands on tails, in which case the game is over and you get nothing other than what you may have already won.<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Most people chose the first option in the first game, and some small amount of money to play the second game. However, let's mathematically analyze the options.
In the first game the expected value of option A is $50,000, and the expected value of option B is $60,000.
In the second game, the expected value of the amount of money you will receive is infinite. (It takes more work than I want to put in to explain this here, but trust me, its correct.) You could justify spending any amount of money to play the second game.
If humans valued money in a linear or greater than linear fashion, their choices would correspond to the mathematically rational choices. Empirical evidence shows that they don't. If these don't convince you, consider the relative worth of $1 dollar to a multimillionaire or to a homeless person.
Economists use many different "Utility" functions to model the amount of satisfaction that people get out of money, but the most common is a logarithmic curve. (Something of the form U = a log(M) ) This choice is borne out by evidence, as it has been found that in general, people are willing to put in the same amount of additional work to double the amount of money they recieve regardless of their economic situation.
With this in mind, the government has the task of assigning tax rates fairly across all income levels. The philosophy behind progressive taxes is that rather than naively taking a percentage of each person's money, the correct approach is to take a percentage of each person's utility. Let's work out the math.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->
U = utility
a = the fraction of utility kept
b = the fraction of money kept
M = money
U = log(M)
aU = log(bM)
a log(M)=log(bM)
M^a = bM
M^(a-1) = b
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
As you can see, the amount of money that a person keeps after taxes in this model of fairness is a polynomial with a negative exponent.
This is why we have progressive taxes.
First of all, money does not have linear value. Consider these games.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->You can only play the following game once. Which would you choose:
[A] 50% chance of winning 1 million dollars
[B] 15% chance of winning 4 million dollars
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Or for an even more extreme example:
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->How much would you pay to play the following game?
The game starts with one dollar in the pot.
I'll flip a coin. If it lands on heads, I give you the money in the pot, put in twice as much money, and flip the coin again.
This process repeats until the coin lands on tails, in which case the game is over and you get nothing other than what you may have already won.<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Most people chose the first option in the first game, and some small amount of money to play the second game. However, let's mathematically analyze the options.
In the first game the expected value of option A is $50,000, and the expected value of option B is $60,000.
In the second game, the expected value of the amount of money you will receive is infinite. (It takes more work than I want to put in to explain this here, but trust me, its correct.) You could justify spending any amount of money to play the second game.
If humans valued money in a linear or greater than linear fashion, their choices would correspond to the mathematically rational choices. Empirical evidence shows that they don't. If these don't convince you, consider the relative worth of $1 dollar to a multimillionaire or to a homeless person.
Economists use many different "Utility" functions to model the amount of satisfaction that people get out of money, but the most common is a logarithmic curve. (Something of the form U = a log(M) ) This choice is borne out by evidence, as it has been found that in general, people are willing to put in the same amount of additional work to double the amount of money they recieve regardless of their economic situation.
With this in mind, the government has the task of assigning tax rates fairly across all income levels. The philosophy behind progressive taxes is that rather than naively taking a percentage of each person's money, the correct approach is to take a percentage of each person's utility. Let's work out the math.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->
U = utility
a = the fraction of utility kept
b = the fraction of money kept
M = money
U = log(M)
aU = log(bM)
a log(M)=log(bM)
M^a = bM
M^(a-1) = b
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
As you can see, the amount of money that a person keeps after taxes in this model of fairness is a polynomial with a negative exponent.
This is why we have progressive taxes.
Comments
Let's put it a different way: the richer you are, the greater % of your income is expendible.
If you made 200k a year, and lost half of it, you'd still be well off (unless you lived in California). You buy a $20k car instead of a $50k or $70k car, oh the horror. You'll manage.
If you make 20k a year, and lost half of it, you're on the brink of starvation. You lose your home. You sell some of your children to get by. (kidding, but not by much)
That is exactly how a flat tax would work (but not 50%). It is a poor tax, even if it's "even." A progressive tax is an absolute must.
That said, there is a reason other than greed that people push for a flat tax: the current tax system is broken, overcomplicated, and full of loopholes. That an "EZ" tax form even exists indicates a fundamental design problem. Those all need to be fixed too, but a flat tax is <i>not</i> the answer.
The only tax form should be a simple one. If you want to give exemptions for green cars, capital investment in business, buying a home, or whatever, then it needs to come out somewhere else. You could reduce the tax taken from the manufacterer, and then force them to reduce the price by the same amount, but that's tricky in getting complaince. I'm sure there are other, better ideas hiding out there somewhere.
Sorry if i sound like a idiot, but it isn't really relative unless you live where ever this... <i>thing</i> is happening. You need to explain the basis behind it more for anyone outside of whatever country this tax system is used in. I can just barely touch the idea behind it, but the math denies me a answer.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin--> for some reason it seems that everyone thinks progressive taxes are about wealth redistribution<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
If everyone ends up in the middle does it really matter? <!--emo&:p--><img src='http://www.unknownworlds.com/forums/html//emoticons/tounge.gif' border='0' style='vertical-align:middle' alt='tounge.gif' /><!--endemo-->
Sorry if i sound like a idiot, but it isn't really relative unless you live where ever this... <i>thing</i> is happening. You need to explain the basis behind it more for anyone outside of whatever country this tax system is used in. I can just barely touch the idea behind it, but the math denies me a answer.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin--> for some reason it seems that everyone thinks progressive taxes are about wealth redistribution<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
If everyone ends up in the middle does it really matter? <!--emo&:p--><img src='http://www.unknownworlds.com/forums/html//emoticons/tounge.gif' border='0' style='vertical-align:middle' alt='tounge.gif' /><!--endemo--> <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
This is just one approach to thinking about progressive taxes in general. I don't know of any country that actually modelled the rates on an economic model of fairness like this.
I'll edit a bit for clarity.
First of all, money does not have linear value. Consider these games.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->You can only play the following game once. Which would you choose:
[A] 50% chance of winning 1 million dollars
[B] 15% chance of winning 4 million dollars
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Or for an even more extreme example:
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->How much would you pay to play the following game?
The game starts with one dollar in the pot.
I'll flip a coin. If it lands on heads, I give you the money in the pot, put in twice as much money, and flip the coin again.
This process repeats until the coin lands on tails, in which case the game is over and you get nothing other than what you may have already won.<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
Most people chose the first option in the first game, and some small amount of money to play the second game. However, let's mathematically analyze the options.
In the first game the expected value of option A is $50,000, and the expected value of option B is $60,000.
In the second game, the expected value of the amount of money you will receive is infinite. (It takes more work than I want to put in to explain this here, but trust me, its correct.) You could justify spending any amount of money to play the second game.
If humans valued money in a linear or greater than linear fashion, their choices would correspond to the mathematically rational choices. Empirical evidence shows that they don't. If these don't convince you, consider the relative worth of $1 dollar to a multimillionaire or to a homeless person.
Economists use many different "Utility" functions to model the amount of satisfaction that people get out of money, but the most common is a logarithmic curve. (Something of the form U = a log(M) ) This choice is borne out by evidence, as it has been found that in general, people are willing to put in the same amount of additional work to double the amount of money they recieve regardless of their economic situation.
With this in mind, the government has the task of assigning tax rates fairly across all income levels. The philosophy behind progressive taxes is that rather than naively taking a percentage of each person's money, the correct approach is to take a percentage of each person's utility. Let's work out the math.
<!--QuoteBegin--></div><table border='0' align='center' width='95%' cellpadding='3' cellspacing='1'><tr><td><b>QUOTE</b> </td></tr><tr><td id='QUOTE'><!--QuoteEBegin-->
U = utility
a = the fraction of utility kept
b = the fraction of money kept
M = money
U = log(M)
aU = log(bM)
a log(M)=log(bM)
M^a = bM
M^(a-1) = b
<!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
As you can see, the amount of money that a person keeps after taxes in this model of fairness is a polynomial with a negative exponent.
This is why we have progressive taxes. <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
I totally agree.
i dont know how its in the us/world but i wanted to say that.
im only 16 so i dont pay taxes so i dont care. propably i wont be worrying "noes 50% income tax" for another few decades, if ever.
<!--emo&:)--><img src='http://www.unknownworlds.com/forums/html//emoticons/smile-fix.gif' border='0' style='vertical-align:middle' alt='smile-fix.gif' /><!--endemo-->
I am 23 years old.
<sarcasm>
I feel that is completely fair.
</sarcasm>
I am 23 years old.
<sarcasm>
I feel that is completely fair.
</sarcasm> <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
I feel you, but what does that have to do with the topic?
The only tax form should be a simple one. If you want to give exemptions for green cars, capital investment in business, buying a home, or whatever, then it needs to come out somewhere else. You could reduce the tax taken from the manufacterer, and then force them to reduce the price by the same amount, but that's tricky in getting complaince. I'm sure there are other, better ideas hiding out there somewhere. <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
If you are referring to price controls I would highly suggest another alternative. Price controls do nothing but create shortages (greater demand) and in the long run, cut down supply (which even increases shortages). Mind you, firms have little choice about what price they charge (at least successful ones), its purely dependent on supply and demand a.k.a "The Market". They of course can influence prices manipulating supply (amount of goods they produce) and demand (advertisement, quality etc).
I have no problem with a slightly progressive tax; It makes sense concerning the economic concept of decreasing marginal utility. In my opinion though, no American should pay more then 50% of his/her income to taxes. A overzealous progressive tax can kill economic growth and in the long run the standard of living.
I am 23 years old.
<sarcasm>
I feel that is completely fair.
</sarcasm> <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
I feel you, but what does that have to do with the topic? <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
Oh, I just felt that it had to deal with the whole discussion about progressive taxes and all.
Progressive taxes make my blood boil because they insinuate that I do not know how to properly apply my money. Forced charity.
The top 1% pay 35% of our taxes.
The top 5% pay 50% of our taxes.
We have a several trillion dollar government. I realize this thread is to tell about how we redistribute taxes, but I'd like to point out the obvious. <!--emo&:)--><img src='http://www.unknownworlds.com/forums/html//emoticons/smile-fix.gif' border='0' style='vertical-align:middle' alt='smile-fix.gif' /><!--endemo-->
The top 1% pay 35% of our taxes.
The top 5% pay 50% of our taxes.
We have a several trillion dollar government. I realize this thread is to tell about how we redistribute taxes, but I'd like to point out the obvious. <!--emo&:)--><img src='http://www.unknownworlds.com/forums/html//emoticons/smile-fix.gif' border='0' style='vertical-align:middle' alt='smile-fix.gif' /><!--endemo--> <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
That is very true, our tax system is quite progressive. Keep in mind though many of the industralized countries are worse (mainly western europe). In 2001, i beleive the goverment tax revenue (including state and local) was about 37% of our GDP. We are one of the least taxed nations in the industralized world. In France, the tax burden is 60% of the GDP. Essentially, the goverment has more direct control over its economy, which is fine since the French vote people into office who are anti market. You don't get in office in France supporting markets. I doubt the United States will adopt the western european model.
The top 1% pay 35% of our taxes.
The top 5% pay 50% of our taxes.
We have a several trillion dollar government. I realize this thread is to tell about how we redistribute taxes, but I'd like to point out the obvious. <!--emo&:)--><img src='http://www.unknownworlds.com/forums/html//emoticons/smile-fix.gif' border='0' style='vertical-align:middle' alt='smile-fix.gif' /><!--endemo--> <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
That is very true, our tax system is quite progressive. Keep in mind though many of the industralized countries are worse (mainly western europe). In 2001, i beleive the goverment tax revenue (including state and local) was about 37% of our GDP. We are one of the least taxed nations in the industralized world. In France, the tax burden is 60% of the GDP. Esentially, the goverment has more direct control over its economy, which is fine since the French vote people into office who are anti market. You don't get in office in France supporting markets. I doubt the United States will adopt the western european model. <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
Thank god for that. Realize, the American mentality is highly against most things towards communism, such as socialism, since we spent the last 50 years or so fighting it. Also, the idea of capitilism is pretty much imbued in how American's think... from an extreamlly young age I might add. A saying I can remember way back when I was two years old, "Money doesn't grow on trees." This frugleness stems from our idea of saving money to reinvest in our capitalism system.
That said, I think our government taxes progressively enough for my tastes.
Unfortuantely, it isn't spent wisely. You humans feel it is more important to kill one another (when very often conflicts can be solved at the deepest cause non-violently) than to get off our little bity planet and explore the frikin huge universe we live in.
Oh wait forgetting: average human = stupid. My bad.
Interesting topic. However, I don't think you adaquately explained why "given that money does not have a linear value ... progressive taxes are (<b>not</b>) about wealth redistribution," which seems to be the thesis of your argument.
Personally, while I would agree with the bulk of your argument, I would disagree with your thesis because even though progressive taxes may be based on the idea of taxing Utility as opposed to taxing wealth, <i>in effect</i> it still redistributes wealth. Am I missing something?
Interesting topic. However, I don't think you adaquately explained why "given that money does not have a linear value ... progressive taxes are (<b>not</b>) about wealth redistribution," which seems to be the thesis of your argument.
Personally, while I would agree with the bulk of your argument, I would disagree with your thesis because even though progressive taxes may be based on the idea of taxing Utility as opposed to taxing wealth, <i>in effect</i> it still redistributes wealth. Am I missing something? <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
I'd say that's a fair assessment. A better thesis would probably be "though progressive taxes do redistribute wealth, we shouldn't get all bent out of shape about it, because they do not redistribute utility."
Interesting topic. However, I don't think you adaquately explained why "given that money does not have a linear value ... progressive taxes are (<b>not</b>) about wealth redistribution," which seems to be the thesis of your argument.
Personally, while I would agree with the bulk of your argument, I would disagree with your thesis because even though progressive taxes may be based on the idea of taxing Utility as opposed to taxing wealth, <i>in effect</i> it still redistributes wealth. Am I missing something? <!--QuoteEnd--></td></tr></table><div class='postcolor'><!--QuoteEEnd-->
I'd say that's a fair assessment. A better thesis would probably be "though progressive taxes do redistribute wealth, we shouldn't get all bent out of shape about it, because they do not redistribute utility." <!--QuoteEnd--> </td></tr></table><div class='postcolor'> <!--QuoteEEnd-->
With that thesis, your argument could be convincingly applied even to governments that don't actually use your "Utility" model as a rational for progressive taxation.
I'd also like to point out that I think progressive taxes are pretty much accepted, in America at least, as fair because that argument is at least intuitively understood. This is a fact even considering the whining that some people (like wizard, in this thread) do about their tax rates (not that I blame them <!--emo&:0--><img src='http://www.unknownworlds.com/forums/html//emoticons/wow.gif' border='0' style='vertical-align:middle' alt='wow.gif' /><!--endemo-->), which really has no bearing on whether progressive taxation is or is not a fair system.
I usually try not to argue on the fairness issue because what is fair to someone, isn’t fair to another. I prefer attacking these questions on economic grounds.