Who Really PaysWho Really Pays

Understanding How Cash Understanding How Cash Flows, and to Whom, Through Flows, and to Whom, Through Common Taxation SystemsCommon Taxation Systems

Copyright 2004 c.e.r.e.s.Copyright 2004 c.e.r.e.s.

Who Really Pays? Who Really Pays? Two Person SocietyTwo Person Society

Suppose there is a Suppose there is a society that has two society that has two people.  One person people.  One person earns $100,000 a year. earns $100,000 a year.

The other person earns The other person earns $10,000 a year. $10,000 a year.

Let’s say the Let’s say the cost of cost of maintaining maintaining their shared their shared assets is assets is $55,000 a year.$55,000 a year.

WhatWhat are shared assets are shared assets??

Shared assets, Shared assets, similar to what is called similar to what is called the the social capitalsocial capital, are all the assets that , are all the assets that are owned equally by all members of a are owned equally by all members of a society. Herbert A Simon, a Nobel society. Herbert A Simon, a Nobel laureate in economics has calculated that laureate in economics has calculated that 90% of everyone's income in western 90% of everyone's income in western countries is acquired through the social countries is acquired through the social capital. These assets include such things capital. These assets include such things as education, research and development; as education, research and development; government agencies; health services; government agencies; health services; roads; and natural resources like water.roads; and natural resources like water.

Two methods to pay for Two methods to pay for Social CapitalSocial Capital

Going back to our two person Going back to our two person society, we see on the graph society, we see on the graph that the green column is the that the green column is the $100,000 person. Next to it, is $100,000 person. Next to it, is the $10,000 person represented the $10,000 person represented by the blue column. The red by the blue column. The red column is the $55,000 column is the $55,000 social social capital capital costs owed by this costs owed by this society. There are two society. There are two principle methods to pay for principle methods to pay for the the social capitalsocial capital: one is taxing : one is taxing as a percentage of income and as a percentage of income and wealth. The other way is to tax wealth. The other way is to tax as fixed charges. The rest of as fixed charges. The rest of this section will illustrate these this section will illustrate these two methods for our 2 person two methods for our 2 person society.society.

-$60,000

-$40,000

-$20,000

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$100,000Person

SocialCapital

$100,000 Person$10,000 PersonSocial Capital

$10,000

Person

Taxation as a percentage of Taxation as a percentage of income and wealthincome and wealth

The key principle is that we allThe key principle is that we all own own an equal an equal percentage of percentage of the social capitalthe social capital, therefore, , therefore, we all owe and pay an equal percentage of we all owe and pay an equal percentage of our income for its useour income for its use and maintenance and maintenance. . Social capitalSocial capital costs to society are costs to society are traditionally calculated and expressed as traditionally calculated and expressed as percentages of everyone's income or wealth. percentages of everyone's income or wealth. In short that means after we find out what In short that means after we find out what the actual costs are for maintaining, the actual costs are for maintaining, developing, and funding the developing, and funding the social capitalsocial capital assets for a given year, that cost is expressed assets for a given year, that cost is expressed as an equal percentage of everyone's income as an equal percentage of everyone's income or wealth and billed, in the form of taxes, or wealth and billed, in the form of taxes, accordingly. This is the standard way taxes accordingly. This is the standard way taxes are normally calculated using a variety of are normally calculated using a variety of different types of taxes based on percentages different types of taxes based on percentages of wealth and income. of wealth and income.

In our 2 person society, the cost of the In our 2 person society, the cost of the social social capitalcapital is divided such that each person is is divided such that each person is paying the same percentage of their income. paying the same percentage of their income. In this case, a 50% tax is what is require to In this case, a 50% tax is what is require to pay for the cost of the pay for the cost of the shared assets or social shared assets or social capitalcapital..

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$100,000Person

$10,000Person

SocialCapital

$100,000 Person$10,000 PersonSocial Capital

Taxation as a percentage of Taxation as a percentage of income and wealthincome and wealth

continuedcontinued

The green column representing the The green column representing the $100,000 person has $50,000 remaining $100,000 person has $50,000 remaining after paying after paying a a 50% income tax on 50% income tax on the the social capital. The $10,000 person in the social capital. The $10,000 person in the blue column has blue column has $5,000 remaining$5,000 remaining after after paying a 50% income taxpaying a 50% income tax. The red . The red column column showsshows the the $55,000 social $55,000 social capitalcapital costscosts paid paid. Note that no one is in debt. . Note that no one is in debt. Everyone has income and resources left-Everyone has income and resources left-over after paying an equal percentage of over after paying an equal percentage of their income. Each person is able to pay their income. Each person is able to pay for the for the social capitalsocial capital and has free access and has free access to their resourcesto their resources and use and use. This is what . This is what is generally meant when a society is said is generally meant when a society is said to have free education and free health to have free education and free health services.services.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$100,000Person

$10,000Person

SocialCapital

$100,000 Person$10,000 PersonSocial Capital

Taxation using fixed chargesTaxation using fixed charges

Fixed charges are such things as ratesFixed charges are such things as rates (ie (ie,, uniform annual charges)uniform annual charges) GST, user pay and GST, user pay and resource taxes. These are all forms of fixed resource taxes. These are all forms of fixed charges.charges.

Taxation using fixed charges:Taxation using fixed charges:continuedcontinued

This system is based on the idea that the cost This system is based on the idea that the cost of the of the social capital should besocial capital should be divided divided equally among the population. Each person equally among the population. Each person pays the same amount regardless of thepays the same amount regardless of the amount ofamount of income income or resources they have or resources they have taken out of societytaken out of society. This implies that the . This implies that the person who acquires the most wealthperson who acquires the most wealth and and resourcesresources from society is entitled to from society is entitled to pay pay less less of of a percentage of thea percentage of their income because they ir income because they are somehow using less of a percentage of are somehow using less of a percentage of societies resources than everyone else. This societies resources than everyone else. This is of course completely false.is of course completely false.

After dividingAfter dividing the the social capitalsocial capital costs costs of of $55,000$55,000 by the number of people in our 2 by the number of people in our 2 person society, each person is required to pay person society, each person is required to pay $27,500. The $100,000 person indicated by $27,500. The $100,000 person indicated by the green column on the left has $72,500 the green column on the left has $72,500 remaining. The $10,000 person represented remaining. The $10,000 person represented by the blue column is in debt $17,500. by the blue column is in debt $17,500.

-$20,000-$10,000

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000

$100,000Person

$10,000Person

SocialCapital

$100,000 Person$10,000 PersonSocial Capital

Who really paysWho really pays?? ccomparison and conclusionomparison and conclusion

This is a comparative chart This is a comparative chart representing the two taxation representing the two taxation methods for our 2 person methods for our 2 person society.society.

The columns on the left The columns on the left represent taxes based on represent taxes based on percentages of income and percentages of income and wealth. wealth.

This is the system that is This is the system that is traditionally used to determine traditionally used to determine equity. In this system equity. In this system everyone has money and everyone has money and resources left over and has resources left over and has free access to health, free access to health, education, and other resources education, and other resources of the of the shared shared assets.assets.

-$20,000-$10,000

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000

% of Income FixedCharges

$100,000 Person$10,000 PersonSocial Capital

Who really paysWho really pays?? ccomparison and conclusionomparison and conclusion

The columns on the right represent The columns on the right represent taxes based on fixed charges.taxes based on fixed charges.

In this system we can see that the In this system we can see that the low income earners are having to low income earners are having to go in debt in order to go in debt in order to subsidisesubsidise the the wealthier people to use the same wealthier people to use the same public resources that everyone public resources that everyone owns an equal percentage of. They owns an equal percentage of. They in fact are having to go in debt to in fact are having to go in debt to pay for the wealthy to go on pay for the wealthy to go on welfare. Welfare payments can be welfare. Welfare payments can be defined as any targeted payment or defined as any targeted payment or tax transfer in the form of a tax tax transfer in the form of a tax relief, break, cut, rebate or subsidy relief, break, cut, rebate or subsidy which is not a payment in return for which is not a payment in return for productive services but represents productive services but represents an income redistribution. Fixed an income redistribution. Fixed charges are often put in place to charges are often put in place to compensate for tax cuts in order to compensate for tax cuts in order to pay for society's shared assets or pay for society's shared assets or social capital.social capital.

-$20,000-$10,000

$0$10,000$20,000$30,000$40,000$50,000$60,000$70,000$80,000

% of Income FixedCharges

$100,000 Person$10,000 PersonSocial Capital