Arrgh! One does not need to be an accountant to understand the difference between assets and income.
Assets are what you own. Income is what you earn; and importantly between 2 dates, usually 12 months apart.
Ignorance of this important distinction usually results in idiotic statements and policy. Much like this nugget from an otherwise quite intelligent commentator:
Microsoft – a company larger than the entire economy of Canada– is fighting the good fight.
The size of Microsoft is its market capitalisation calculated by multiplying its share price by the number of shares on issue. This is a point in time measure.
The size of Canada’s economy is its GDP. A calculation over 12 months.
This is the same idiotic nonsense that we get from policy makers, usually in discussions of tax. Particularly with calls for taxing the rich or tax cuts going to the rich.
Our current tax system, for various logical reasons, does not tax wealth but taxes income. Although the current Labor government and the Greens would like to change that.
Who is wealthier? Someone with no assets but an annual income of $200,000, or someone with no income but assets of $200,000?
Trick question. It’s the person with the assets because the $200,000 of income would be subject to tax.
I could go on and on about this, but I think you get it.
But really. Can we stop this class based nonsense anyway and have a neutral flat tax. If there is a social objective to aid the poor, that should be done through the transfer system and not the tax system. The productivity benefits of a simple flat tax would save this nation billions.
Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100. If they paid their bill the way we pay our taxes, it would go something like this...
The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.
So, that's what they decided to do.
The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. "Since
you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20." Drinks for the ten men would now cost just £80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share? They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.
And so, the fifth man, like the first four, now paid nothing (a100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).
Each of the last six was better off than before with the first four continuing to drink for free.
But, once outside the bar, the men began to compare their savings. "I only got £1 out of the £20 saving," declared the sixth man. He pointed to the tenth man, "but he got £10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"
"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!" The nine men surrounded the tenth and beat him up.
The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.
[via the Telegraph]