In the modern world, a huge amount of important information is summarised as numbers, percentages, charts and tables. As an ex college maths teacher, I can assure you a good portion of our population struggle to digest information in this form. Which makes them ripe for manipulation.
An example of this came about when the minister of finance gave a response in parliament purporting to show that the top 10% of our households (by income) pay 70% of our tax. Were that true, it would be a startling figure. This appeared in newspaper columns, blogs, letters to the editor and financial newsletters.
Doubtless it also made its way into the conversations at the sorts of dinner parties I don’t get invited to. You can see the appeal. One of the most significant political acts of our current government came in their first term, when they dropped the top tax rate back form 38% to 33%, so providing a nice little bonus payment to that sector of society that, you might imagine, least needed it.
That’s a fairly outrageous move, and you can imagine that even some of the primary beneficiaries might be feeling a bit embarrassed about it. How heartening then to discover that they are already paying the lion’s share.
Trouble is, predictably enough, the figure isn’t close to true. A mathematical trick was pulled, relying upon the assumption that the majority wouldn’t much understand percentages. So let me explain. The easy way of calculating tax burden would be to rank households by earnings, look at the contribution made by each decile and divide that by the total to get the percentage contribution. Do this and it shows the top 10% pay about 37% of the income tax take, a touch over half of the claimed amount. So, how to transform this more accurate figure to fit the myth?
Well, it was noted that the bottom earning households, while they pay some tax, in total receive more back in terms of income support. For example drawing national superannuation, a solo parent receiving assistance, or on such a low wage that working for families payments balance out the tax contribution. If you take sales tax payments into account, then about a third of households are in this category. For all our system’s flaws, we are at least still civilised enough to provide some support to those who need it most.
That means the other two thirds of households do in effect pay all of the available tax. We might attempt to increase this figure by providing more jobs, higher wages or perhaps a more stable social environment. However the needy are always going to be with us, so there’ll never be 100% household contribution, and nor should there be.
Now for the sleight of hand. Look at the net tax contribution of the top 10%, and compare this to total net taxation, that is all the tax that is taken in, after transfers to welfare recipients are deducted. You see the figure is equivalent to seventy percent of the tax available. If you gave up on math early on in college, that might seem the same as saying the top income bracket pay seventy percent of all tax, but it isn’t. Here’s why not.
The top ten percent of households earn $150 000 a year or more. If we look at households between $80 000 and $150 000, just over a quarter of households, we see they pay about the same amount as the top ten percent. By this measure, the top ten percent pay 71% of our tax, the next 25% pay 69%? Hang on, can’t be right. Aren’t percentages meant to add up to 100?
Yes they are, if we are talking about percentages of something. And here we’re not. We’re taking money paid in tax, and comparing it to the amount of tax left over after some of that tax has been distributed to beneficiaries.
Essentially we’re calculating a percentage contribution to a list that includes negative numbers, and that’s a cheat. And at this point we’re not entitled to say 70% of anything. By using the figure, they are implying that they’re paying most of the tax, and they’re not. Nothing like.
Bernard Beckett
