How to distort facts with percentages

[Scarecrow]

We have a heated debate going on in MN (just like the rest of the nation) on whether to balance our budget by raising taxes or cutting spending or both. One side wants to simply cut spending while the other side wants to raise taxes along with cutting spending. One statistic the raise taxes side cites is a report from the State that says: “Minnesota effective tax rates: Middle-, lower-income Minnesotans pay 12.3 percent in taxes. Wealthiest pay 10.3 percent.” Of course they are mixing apples with oranges, including things like sales tax and property taxes and adding those taxes in with income taxes to come up with a percentage of income paid out in taxes. Is it fair to compare a person’s percentage of income earned that is paid out in property taxes and sales tax?

I counter with the following example:

Rich guy makes $10 million, middle class guy makes $60,000. If rich guy pays 10.3% of his income for MN income tax, sales tax, and property taxes, that means he pays $1,030,000 to MN in total taxes. If middle class guy pays 12.3% of his income for MN income tax, sales tax, and property taxes, that means he pays $7,380 to MN in total taxes. Rich guy’s 10.3% tax rate is 14,000% greater in total revenue collected than middle class guy’s 12.3% tax rate. So which percentage do you like better? Rich guy’s tax rate 2% less than middle class guy’s tax rate, or rich guy’s total tax 14,000% greater than middle class guy’s total tax?

Of course neither percentage means anything. If you are arguing for wanting the rich to pay for your budget deficit, you are going to point out the fact that the rich in MN pay 2% less of their income in taxes than the middle class. If you are arguing for holding the line on taxes and balance the budget with spending cuts, you are going to point out the fact that a guy making $1 million in MN is going to pay 14,000% more in total taxes than a guy making $60,000.

Without getting into a political debate, this illustrates how partisan politics can distort reality by playing with percentages. When it comes to numbers, you can make them say just about anything you want.

[Snaggletooth]

Similar Discussion

Many of you know TN does not have an income tax (generally speaking). It's not because the govt here doesn't want one. Every time they try to vote one in, the citizens and talk radio shows rise up in near rebellion.

A similar (but not exact) argument to the original post has occurred here, to delude people from the truth. The argument goes like this: Since the income tax would be a tax deduction, Tennesseans would get their money back from Uncle Sam.

I would hope people in our state are not this stupid, although those who forge this propaganda obviously believe we will believe anything we hear on TV. Of course, you can easily figure out the real truth:

1) Like ALL deductions, you only get back a fraction (if anything) of what extra you pay.
2) You have to itemize in order to get any benefit. Less than half of Tennesseans would.
3) At least for the time being, we can deduct sales taxes in lieu of a state income tax.

[thomtax]

Speaking of statistics, there is only one that I have heard that seems to be 100% true. Of the people born between 1900 and 2000, 100% will die someday. Gruesome maybe, but true.

LT

[JohnH]

Everybody knows that 78% of all statistics are made up on the spot anyhow.

[David1980]

Well, yes, it is fair to look at the sales tax as a percentage of income. That is, if you're trying to look at tax rates for people versus their income. Is that a useful metric in trying to raise an income tax? I don't know. Somehow I doubt it's very useful for that. If you wanted to look at an economics of sales tax versus income tax then yeah, absolutely. Sales taxes are regressive in that they hit the lower income people harder.

So you could use the same statistic to push for eliminating the sales tax. Somehow I never see politicians wanting to get rid of taxes though.

[Scarecrow]

Well, yes, it is fair to look at the sales tax as a percentage of income.

A person making $10 million is much more likely to save a higher percentage of income than a person making $60,000. Thus, by the very fact that a rich person does not have to spend as high of a percentage of his income on items subject to sales tax, the statistic is obviously skewed to make it appear the rich person pays a lower tax rate.

What about property taxes? Let’s say a billionaire decides to live in a middle class neighborhood and pay the same property taxes as a middle class guy. Let’s say he spends exactly the same amount of his income on his standard of living as that middle class guy, and gives all the rest to charity. Is that rich person somehow guilty of reaping the benefits of an unfair tax system that only requires him to pay a small percentage of his income in property taxes?

The alternative is to make sales taxes and property taxes progressive. That is, make everyone fill out an income statement at the checkout line at the store so that the checkout lady can determine what rate of sales tax one has to pay on purchases. Or make every homeowner send in an income statement so the county can determine what rate of tax to charge on the property you own. If you are not in favor of that, then don’t throw sales tax and property tax into the percentage of income debate.

[David1980]

A person making $10 million is much more likely to save a higher percentage of income than a person making $60,000. Thus, by the very fact that a rich person does not have to spend as high of a percentage of his income on items subject to sales tax, the statistic is obviously skewed to make it appear the rich person pays a lower tax rate.

More of a philosophical question. Is it fair if someone pays the same fixed amount of tax? If everyone pays $10,000 tax for example, regardless of income. After all, just because someone earns twice the income doesn't necessarily mean they get twice the benefits from the govt so why should they pay twice the income tax?

Or do you pay the same %? Or do you change the % based on how much income? Too much of it depends on what your goal is, what you consider fair, what you want taxes to do.

My own view, if the richer people pay lower taxes it encourages wealth accumulation. Someone who inherits $5 million will be able to grow that money and become richer, while someone born with $0 who has to work for a living will end up paying higher tax rates and it will be much more difficult for them ever catch up, due to the higher tax rates. So it creates an economic situation that encourages "the rich get richer, the poor get poorer".

The alternative is to make sales taxes and property taxes progressive. That is, make everyone fill out an income statement at the checkout line at the store so that the checkout lady can determine what rate of sales tax one has to pay on purchases. Or make every homeowner send in an income statement so the county can determine what rate of tax to charge on the property you own.

Very unrealistic, which is why if you want tax rates to be % based an income tax makes a lot more sense than sales tax or property tax. The different kind of taxes have their own goals, trying to apply a sales tax to be a % of income is doomed to fail.

If you are not in favor of that, then don’t throw sales tax and property tax into the percentage of income debate.

Which is why I don't like those taxes. I'd like to see taxes simplified. We try to make it look like tax rates are low by nickle and diming people with all these different types of taxes. If people only paid 1 kind of tax, say only income tax, then it would be simple to fiugre out what someone really pays in tax.