pneumatik: Fairness

pneumatik (

pneumatik) wrote,
@ 2008-11-20 09:37:00

Current location:	Alexandria, VA
Current mood:	sitting quietly

Fairness
Jack and Jill live in a small town with one well, from which they both draw the same amount of water every day. The well is a public resource, owned and run by the government and supported through income taxes. Jack makes $10,000 a year and is taxed at 10%, or $1,000 per year. Jill makes $100,000 per year and is taxed at 5%, or $5,000 per year. Is this policy unfair, and if so, to whom?

Pretty unrelated, I found the UAW discussion in the comments to this blog post fascinating.

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	jeffxandra 2008-11-20 03:24 pm UTC (link)
	What is the operating cost of the well? What other government activities are funded by the income taxes? (Reply to this) (Thread)

	kyriotate 2008-11-20 03:36 pm UTC (link)
	Ahh that's jeffxandra for you, already asking how many other things the government is supposed to be doing. :) Why does that even make a difference to whether the policy is unfair to someone? (Unless it's unfair to the government itself!) (Reply to this) (Parent)(Thread)

	jeffxandra 2008-11-20 03:51 pm UTC (link)
	Because part of the argument is based upon equal usage and access. If they're using equal amounts of water and the government does nothing else, then does it cost $21,000 to operate the well? Is the government running a deficit? Is the government running a surplus? (Reply to this) (Parent)(Thread)

	pneumatik 2008-11-20 09:01 pm UTC (link)
	The well requires regular and occasional maintenance. Some of the taxes cover the regular maintenance, and the rest is saved to pay for the occasional maintenance. (Reply to this) (Parent)

elengul
2008-11-20 03:56 pm UTC (link)

I think it's a perfectly reasonable question, but the answer doesn't really matter. At the end of the day, Jack is netting $9000 per year, and Jill is netting $80000 per year. She's still doing a hell of a lot better then Jack is.

Either you or

pneumatik is going to jump on this and say that I'm penalizing Jill for being more successful then Jack, and, if you want to be a pessimist about it, then you can certainly see it that way. The way I look at it, the people that do better in a society owe the society more. I'm not saying that Jill's tax rate should be 91% to even her out with Jack (since I think the author probably intended Jill to be "suffering" under a %20 tax rate), but paying a greater percentage then jack is reasonable and perfectly fair.

What I would like to see different, though, is a smooth curve to the tax rate. To use hard-and-fast numbers with no basis in reality to illustrate my point, let's say, in the author's example, that you get the 10% tax rate if you make $50K or less, but at $50001, you tax rate goes to %20, and you're suddenly netting less then the you used to, that's a whole lot of bullshit. I know it's done to keep the tax code simple, but that doesn't reduce the bullshittiness of it.

(Reply to this) (Parent)(Thread)

kyriotate
2008-11-20 07:11 pm UTC (link)

LOL. (I was teasing Jeff he was just going out of scenario for fun! )

I agree that a progressive tax is the appropriate thing, it's all about degrees. 20% doesn't seem unreasonable at 100K, it seems low to me in fact, but it depends on the brackets and total wealth of society etc...

To be clear btw, what you are talking about for a smooth curve is what the progressive tax is at this time in it's basic form. (Ignoring deductions, shelters, and all of the far too many exceptions) IE in your scenario, Jill would pay 10% on her first 50K made, and then 20% on the 50.1K to 100K.

Now if her actual taxes paid were 20K that would mean the first bracket was 10% (she pays 5K) and then next bracket would have to be 30% (15K of the next 50K) if she were to pay a total of 20K in taxes.

(Reply to this) (Parent)(Thread)

elengul
2008-11-20 07:32 pm UTC (link)

I didn't realize that (about the progressive tax, I mean). I was under the impression that (again, using the fake numbers) that if I made $50K, I'd net $45K, and if I made $50.1K, then I netted 40.08K, which always seemed really retarded to me, but I never put retardation past the government, so ...

I looks like what you're saying, though, is that at $50K, I'd net $45K, and at $50.1K, I'd net $45.07K (based on the 30% for the second 50K number you posted), which is more of a reasonable thing to me.

What I was saying, though (and it's somewhat invalidated by my new understanding of our tax system) is that your tax percentage would be a smooth function of your income, so:

T = f(I), where T was the taxes paid, I was the income, and the function f(I) was defined in such a way that f(I) was continuous (no sudden jumps in tax percentages), f'(I) was continuous (no sudden changed is rate at which the tax percentages were changing), f(I) was monotonically increasing, and I - f(I) was also monotonically increasing (meaning that not only would your taxes always increase as your income increased, but you net take home would also increase as you income increased). I don't think defining such a function would be all that difficult, but I've never really tried.

I agree that 20% on 100K would seem low to me, too. I was just using the fake numbers that were given to me.

(Reply to this) (Parent)(Thread)

	pneumatik 2008-11-20 08:59 pm UTC (link)
	I don't think f'(I) is continuous, at least in the U.S. I'm pretty sure that there's a sharp elbow in the tax rate when you go from one bracket to another, which I think would translate to a discontinuity in the derivative of the tax rate. (Reply to this) (Parent)

	pneumatik 2008-11-20 09:03 pm UTC (link)
	Even if you correct my typo with another typo (see my post below) and say Jill is taxed 20% (I meant 5% and $5,000, but for now assume 20% is correct), why should he pay more for the same commodity that Jack pays for? By your thinking, Jill should pay more for everything than Jack does. (Reply to this) (Parent)

kyriotate
2008-11-20 03:39 pm UTC (link)

And oh, if Jill is paying 20K per year she's being taxed at 20% as an overall, not 5%. Not sure if that was a typo or part of the point. :)

Assuming it is meant to be 20% for Jill it's still just a question of what level of graduated tax system still creates opportunity, investment, and fairness amongst the difference in peoples incomes.

If she is supposed to be paying 5% then it's a regressive tax and a pretty raw deal for Jack.

(Reply to this) (Thread)

	pneumatik 2008-11-20 08:56 pm UTC (link)
	5% is the correct part (see my post below). It is a regressive tax. But why should Jill pay 5x what Jack is paying for the same service and goods? (Reply to this) (Parent)

	elengul 2008-11-20 03:45 pm UTC (link)
	You missed a quote in your hyperlink, rendering it not a hyper link. (Reply to this)

pneumatik
2008-11-20 08:55 pm UTC (link)

Okay, some clarification. First of all, Jill's only taxed at 5%, or $5,000 (I don't know what I did wrong). That's a lower percentage but higher amount than Jack. The only service provided by the taxes is the well and taking water from it. So, Jack and Jill spend different amounts of money to get the same thing.

If you replace the well with buying a car, you might expect Jack and Jill to pay the same, irrespective of how much money they make. Or if they were buying bottled water at the store. From that point of view, it's unfair to Jill. OTOH, Jill makes more money than Jack but pays a lower overall percentage of her income in taxes, so it's unfair to Jack. OTGH, they both get the same services yet Jill is paying more in taxes every year than Jack, so it's unfair to Jill.

That's how I see it. Discuss.

(Reply to this) (Thread)

beguine
2008-11-20 09:36 pm UTC (link)

A car is something you chose to buy, for your personal use rather than as something you do a member of the community. Jill can chose to buy the same car as Jack, and re-invest the money she didn't chose to spend, or she can chose to buy a hybrid for more initial money and then end up eventually saving money on gas, or buy something sporty and absurdly expensive, or be a bit eccentric given her income level and insist on public transportation. Likewise, Jack can buy a cheaper car, or take public transport and save up for a nicer car next year, or let himself be sweet-talked into believing he can afford the car Jill can afford and land hideously in debt.

The well is an expense that cannot be avoided and is for the common good. Even if Jill chooses to have all her water flown in from a spring in Poland, she still has an obligation to her neighbors to make sure that water is available, something she might be glad of if there's a sudden shortage of spring water. Since this is an expense that can't be avoided with frugality or good planning, it's unfair of the community to demand a larger portion of Jack's yearly budget for maintenance, since for him even a few dollars can make a big difference. After all, there's a huge difference between the buying power of $9000 and $10,000. On the other hand, there's a lot less difference between the buying power of $90,000 and 95 or 100,000. The additional money isn't going to mean that Jill is worrying about how she's going to pay for food AND heat this month, though it might effect how often she can afford to eat out. Therefore, demanding a larger percentage is most unfair to Jack, even if it's a smaller absolute amount.

(Reply to this) (Parent)(Thread)

pneumatik
2008-11-21 01:21 am UTC (link)

How much money does Jack have to make until he should pay the same amount of money for water that Jill is paying? Is it fair for Jack to make $85,000 and pay $5000 to water, like Jill? Or should he only pay %5 of $85,000 = $4,250? Or should he pay a smaller percentage of his income than Jill?

Or another to think about it: What if the well dried up, and Jack and Jill had to dig their own wells on their own property. Digging a well isn't difficult, but it generally needs to be done by professional. Should the well-digging company (assume there's only one in town) charge Jack less than Jill, or the same amount? Which is more fair?

You say heat and food are necessities. Jack and Jill pay the same for those things. Is this fair?

(Reply to this) (Parent)(Thread)

beguine
2008-11-21 02:37 am UTC (link)

I'm in favor of a progressive tax; Jack should pay a smaller percentage of his income than Jill, since Jack needs a larger percentage of his income for things not provided by the community and are not luxuries. If we are talking about a theoretical society where most necessities are provided for by the community, and money is mostly spent on luxuries (porridge and stone soup are free, as are shoes to live in, but pies and palaces are bought with your own money), then a flat tax becomes fair, though the flat tax is likely to then become very high (welcome to Swedish fairyland).

It would be fair for the well-digging company to charge based on what people can afford, but in general businesses are run based on what is profitable, not on what is fair. There are historical exceptions to this, found mostly in small towns, of doctors and the like charging based on what their clients could afford to pay, but the larger and more faceless the business (and the less benevolent in general purpose) the less likely it is to charge based on a sense of civic duty. Instead the well diggers are likely to try to charge Jack as much as they can get away with, but not so much that he decides he has to try and dig his own damned well. If they think that Jill won't pay more for identical service, they will try and talk her into lifetime warrenties and hand carved marble facades and cherrywood buckets and the like, and thus use extras to charge her more for what is functionally the same service.

It is unlikely that Jack and Jill actually pay the same amount for food or heat, since both these things transition from luxuries to necessities at a certain point. Jack is likely to buy cheaper food than Jill, and have a smaller house or apartment which costs less to heat, although he is likely to spend a greater percentage of his income on these things. This is at least sustainable. It is actually defining where something transitions from a luxury to a necessity that the issue starts to become more complicated. For example, almost everyone can agree that pies made of four and twenty black-birds are luxuries, not necessities. It's fair that Jack and Jill pay the same absolute amount for these things, and at the least it's not unfair that Jill's larger income gives her access to more pies than Jack. But what if Jack's income only allows him access to food that is nutrient poor and fatty, whereas only Jill's income allows her access to food that is good for her? In that case, the issue of fairness is raised again.

(Reply to this) (Parent)(Thread)

pneumatik
2008-11-21 02:06 pm UTC (link)

A well-digging company that uses your fair system to charge people will lose business to a company that is unfair, so they only way to keep the fair system in place is to legislate and enforce it. Is it fair for the government to legislate how I'm supposed to charge people for the work my well-digging company does?

Imagine two towns, one full of rich people and one full of poor people. Each town has one well-digging company, and the towns are too far apart for the companies to work in the other town. If the companies are both charging fair prices, one will get lots of money and the other will get very little, even though they're doing the same work. An unfair pricing model that charges everyone the same amount for the same service will earn each well-digging company the same amount of money for the same work. Which situation is fair?

Your point about Jack and Jill paying the same for food and heat is interesting. For a family of our size living where we live, we'd be hard pressed to pay less for food, overall, than we do now. I know because the wife is always looking for cheaper places to buy food ("Beans are beans. Why do I care if they're Goya or store-brand?").

As far as the quality of Jack's food, multivitamins are cheap, as are fiber supplements. I think that covers everything, once you have enough calories.

A final fairness question: McDonalds loses money on every sandwich sold and makes it back on fries and soda. If Able and Baker go into a McDonalds and Able buys two burgers while Baker buys fries and soda (and they don't share with each other), Baker is subsidizing Able's food. Is this fair?

(Reply to this) (Parent)

fate_child
2008-11-21 04:40 pm UTC (link)

It seems like a bit more info might be needed to truly judge this scenario... but ok, let's start by assuming that the well represents all goverment tax services, and that Jack and Jill represent all members of the taxable populace. We still need to know the price of the well to actually judge this, so here are some possibilities:

1) Going by the amount paid, the well costs $6,000 per year. Jill pays five times as much as Jack ($5,000 vs $1,000), but with the result that both still have the majority of their yearly income to rely upon. If the price was split evenly between them - Jack paying $3,000 and Jill paying $3,000 - then Jack is suddenly losing almost a third of his income. Is he able to survive on the rest, or is it an undue burden? Hard to say, in this scenario, without knowing what his other costs are.

2) Let's kick it up a step further, into something closer to our own society. In your original typo, you said Jill was paying $20,000. Let's go with that - in this scenario, we have a progressive tax, and so she pays 20% of her income while Jack pays 10% of his. The total cost of the well is $25,000 in this scenario. It seems unfair Jill should be shouldering most of that cost - but what happens if we split it evenly? Jack literally cannot pay half that price... $12,500 is more than his entire annual income.

That's the reason it isn't a matter of fairness. Finding a single equal number that would cover all the needed amount of taxes would result in an amount that a large portion of the populace literally could not afford. Wikipedia says the US average tax revenue per capita, for 2007, was around $8,500. So, that would be a theoretical fair price if we had everyone pay an equal amount - but of course, this is including the total population, which includes children and other dependants, so not really feasible. Let's instead go by the number of taxpayers in 2007, which Wikipedia says was $138 million.

Our result: $20,000 per taxpayer. Glancing at yet another chart shows that 1/3 of taxpayers would be completely bankrupted by such a price. I'd say another 1/4 would be crippled by the price, losing from over half their income to nearly all of it. And a nice 5% - people making over $100,000 - would probably find it easily affordable, if not entirely negligible.

Now, I'm definitely not familiar enough with economic theory (given I've never actually looked at it before this post) to say whether improvements can be made on our current system one way or another. I'm sure there could be an endless number of debates, from the actual proportions, to whether funds should be found elsewhere, to whether government spending should be reduced as a whole. But none of those really tie into this fundamental question, of whether the tax burden should be split evenly or proportioned according to what one can afford.

When dealing with a tax of any actual significance, the latter is clearly the only viable method. An evenly distributed tax simply isn't feasible in a society with such a range of vastly different incomes. In a world where the incomes were much closer in scale, and where the actual amount of taxation needed is less in general, than an equal tax might be doable. (I would say it would still be unfair to those making less, but I'll readily admit that is simply personal opinion based on an admittedly strongly humanitarian outlook.)

I think I've shown that in our society as it currently exists, taxes need to be progressive or at least proportional. Now, the question still stands as to which of those is actually best, as well as (in a progressive tax) where the actual line should fall in the scaling equation.

And that's certainly not a question I feel knowledgeable enough to give an easy answer, nor one I think Wikipedia could educate me in all that quickly. My instinct says one thing, based on the continuing growth of the rift between rich and poor, but I don't think this is a matter so easily settled in any livejournal discussion anyway. ;)

(Reply to this) (Thread)

pneumatik
2008-11-21 09:19 pm UTC (link)

I find the $1,000 / $5,000 situation much more interesting. You mention that it's pretty much impossible to just spread income tax burden out, in absolute dollars, evenly over the tax base. You could fix it with something like the problem as presented - tax richer people a smaller percentage of their income, but arrange the regressiveness of the tax so that richer people still pay more in absolute dollars than poorer people. Rich people are paying more - isn't that fair?

Also, you win the discussion. I'll post again explaining why after I get home and put the boy to bed.

(Reply to this) (Parent)(Thread)

fate_child
2008-11-21 11:35 pm UTC (link)

Yeah, the $1k vs $5k question is much less clear cut (which is partly why I skipped past it pretty quickly). Again, I'm not sure it could be easily resolved without knowing a lot more details, like how much money Jack actively needs to live - and even with that, it might not answer every question.

Say Jack needs $5k to live. If he is paying $1k in taxes, that leaves him $4k for luxuries. He clearly isn't that bad off.

Meanwhile, Jill has $90k for luxuries. Much of this mainly consists of upgrading the qualify of basic living, but that still likely leaves a large amount left over. Can she afford to lose some of that to give what would make a comparitively large benefit to Jack? Should she have to?

Of course, then we get into even more fundamental questions - why the difference in salary in the first place? Is the amount each is being paid itself fair? Which then requires even more questioning to figure that out.

I'm inclined to say the starting point for any tax issue should be an equal ratio from both rich and poor. From there, adjust based on the specific numbers to what works - in this scenario, a regressive tax might work for Jack and Jill, even if a progressive tax might be more fitting for US taxation. There are a lot of elements that go into 'fairness' - not just what is a fair comparison between the two, but also what is a fair burden for each. Balancing those elements against each other is the real challenge, and one that will definitely change from one situation to the next.

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