A Story About the Progressive Tax System

Let me tell you a story. This is a story where you and your two mates. Let’s call them  Tom and Jerry. You all grew up in the same town in a similar family. You all have the same IQ, the same skills, and you all had the same opportunities. You are all married and have two children. You all work in the same industry, earning roughly the same amount per hour. Say $25 per hour.

Now, you and your friends have different opinions on what constitutes a good life-work balance. Tom chooses to only work 20 hours per week, while you choose to work 40 hours per week, and Jerry loves his job and works 60 hours per week.

You should also know that Toms wife chooses not to go back to work after having their kids. Your wife works part-time as a real estate agent and makes 25k per year. And Jerry’s wife has a full-time job earning 70k per year.

You and Tom spend all of your family income, and since you are paying into social security, you figure you don’t need to save for retirement. Jerry, on the other hand, has been investing money into stock and bonds and other investments.

Overall, Tom’s family earns around 25k per year, Your family earns 75K per year, and Jerry’s family earns 150k.

One day you go out for dinner with Tom and Jerry. It’s a fancy place, exceptional food and wine, and the prices are exceptional too. Exceptionally expensive.  You all decide to go on a group family vacation together, kids and all. You all decide that if you pool funds together you would be able to buy accommodation and travel at a discount. The total trip is going to cost around $30,000. Since you assumed that you and your friends would pay equally you know that it will cost $10000.

You think this is quite steep, after all, 10k on a holiday is a lot when you only earn 75k. Tom thinks the same way.  Why do I have to pay as much as Jerry, when Jerry earns much more money than we do.

Jerry was confused. What do my annual earnings have to do with it? Me and my wife earn more because we work long days, 60 hour weeks, and save any excess money to invest. Why should we pay for your proportion of the expenses?

Jerry says to you and Tom, why don’t you just work more hours to increase your family’s income.

Tom replies that he and his wife want to enjoy life now, not in 25 years time.  

Tom, do what you want, it’s a free country, Jerry says, but don’t expect me to pay for your share of the holiday costs.

I can’t believe what a bad friend you are being right now, Tom says to Jerry. Tom argues that Jerry has a lot of money and should be more generous to Tom.

Since you don’t like your friends to argue and fight over money, you come up with an Idea. The combined income of all three families is 250k and the vacation is 30k, which is 12% of the total. Why don’t we all pay 12% of our annual income to pay for the holiday?  That way we each pay the same percentage of our income

Tom would pay 3k, you would pay 9K, and Jerry would pay 18k.

Tom has a better idea. He suggests that he pays $2200, you will pay $7420, and Jerry would pay $20380.

You look at his number and think it sounded completely arbitrary and not really fair, but under Tom’s formula, you would be paying even less than your own solution, so you decide to be silent.

Jerry, on the other hand, was stunned by this, you want me to pay solely for 70% of the total holidays. Even though each of our families will receive the exact same benefits. Where on earth did you get that crazy idea from…..

The NZ tax system (or any progressive tax systems) Tom said. I think we should use this system to pay for all future holidays. You agree with Tom, so by a vote of two to one, the cost of the holiday was divided as Tom has proposed. Even though each family received the same benefits.

And the only reason that Jerry and his wife earned more money is that they worked 3 times as much as Tom and his wife.

You and Tom lived happily ever after with this new arrangement. Jerry complained a lot about having to pay for 70% of the holidays, but whenever he did, you and Tom said he was being greedy and selfish.

The progressive Tax system

A progressive tax system is one in which rates increase as your taxable income increases. The idea is to reduce the tax burden of people with a lower-income and shifted to people with a higher income.

My issue with it is that, as like the example above, all things being equal it incentivize earning less. As the benefit you receive from the government is much higher than the taxes you pay. And as you earn more and more, more of your income goes directly to tax. So why should I earn more? This is the main reason that high-income earners tend to try to evade tax through different means.

But by all means, it makes sense for actual situations where persons on lower-income need the tax break. And persons on a higher income can usually absorb the extra tax. I just don’t think it makes sense for people who could earn more, but decide not to. Therefore other persons are subsidizing their life choices.

So what do you think about the progressive tax system? Is it fair?

The progressive tax system can sometimes not seem fair for some people. But I would say, that overall, it is probably one of the fairest systems out there.

And defiantly better than some of the other systems. I just don’t like how this system incentives high earning individuals to avoid tax, while lower and middle-income individuals don’t normally have the means to do so. 

Therefore, the majority of the tax burden falls on the middle and lower-income individuals who need the money the most.


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