Monday, July 1, 2013

It’s all in the percentages: Simple math and the ‘death of the middle class’

How do the rich get richer and the poor get poorer? It’s simple.

I still remember Mr. Damms yelling at our sixth-grade class back in rural New Jersey. He was so frustrated because the whole class was struggling with the concept of percentages.

“Only Bluhm and Smith and maybe Jones, they’re the only ones who get it! What’s wrong with you? You need this!” (I actually forget Smith and Jones’ real names; I only remember the mixed emotion of being singled out for praise and embarrassed about being picked out from the crowd. This was sixth grade, after all.)

I think back on that day when I see so many struggling with what amounts to misunderstanding percentages.

How do the rich get richer? In part it’s our insistence that everyone get the “same” pay raise, defined by percentages – 1 percent, 3 percent, whatever. When Joe Lunchbucket at $10 an hour get a 3 percent raise, he has 30 cents an hour more. Call it a 40-hour week and he’s getting a $12 raise. When Mary Manager at $40 gets the “same” 3 percent, she gets $48 more a week.

Mary used to get $1,200 more than Joe every week ($1,600 minus $400); after everyone gets a 3 percent raise, Mary gets $1,236 more than Joe ($1,648 minus $412). The gap between the highest and lowest wage widens – this isn’t an evil plot by the rich, it’s everyone agreeing that giving the same percentage increase across the board is fair. It’s math.

What Joe needed to do was ask for Mary’s raise – not 3 percent, but $48.

People have the opposite disconnect with taxes. Here, we say most people’s “fair share” is, say, 15 percent but rich people’s “fair share” is 39 percent. Why? How is it fair that the government confiscates 15 cents on the dollar from one taxpayer but his neighbor must pay 39 cents?

If you make $50,000 a year, your 15 percent is $7,500. If you make $1 million, your 15 percent is $150,000 and your tax bill is three times the gross income of your neighbor. But the math-challenged say that’s not fair: The tax bill ought to be $390,000. Why? What makes that fair, if by “fair” we mean equitable treatment?

Is it “fair” because the million-dollar earner has more to surrender? She earned it – who are we to decide the government has a better idea or a more worthy cause for spending her earnings? Do you even realize how absurd it is – when you have already taxed this person what amounts to six, seven, eight times the average person’s entire gross income – to say he has not paid his fair share?

When I hear the arguments for progressive taxation – which is not about progress at all in a positive sense, but is about taking progressively more as a person earns more money – I hearken back to that sixth-grade room and wonder if this is why Mr. Damms was so emotional.

If you don’t understand percentages, you think high earners don’t pay their fair share of taxes.

If you don’t understand percentages, you think it’s fair that all workers receive the same percentage increase.

If you don’t understand percentages, you think raising a sales tax from 4 percent to 5 percent is a 1 percent increase. (It’s 25 percent.)

If you don’t understand percentages, you think there’s a chance you could win the lottery, or at least your money back.

If you don’t understand percentages, you think it’s a great deal to receive a 5 percent reward from a credit card that charges you 27 percent interest.

If you don’t understand percentages, you may think the growing gap between the richest and the poorest is the result of the rich deliberately pushing you down. But you did it to yourself when you gratefully accepted the same percentage increase as your boss. Do that for long enough, and the widening gap should surprise no one – if you understand percentages.


Anonymous said...

No wonder when I was a kid I thought the price increase of penny candy to 2 cents was outrageous. That was a 100% increase.

A recent study showed that 37% of auto accidents are caused by drunk drivers. it seems to me we ought to be concerned with sober drivers driving if they are the cause of the other 63% of accidents.

As the old saw goes, "Figures don't lie, but liars figure."

So, is an increase from 4% to 5% an increase of 1% or 25%?

Warren Bluhm said...

1 is 25% of 4. Therefore raising a 4% tax by 1 percentage point to 5% is a 25% increase.

Anonymous said...

Got it. 1%=25%