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Applying The Pareto Principle to Tax Collection

Jim Ridings 19 December 2012 No Comment

The drumbeats are sounding again about making the “rich” pay their “fair share” in taxes.

Liberals want to know why anyone would be against fairness, and why those who have more should not have to pay more. Conservatives want to know why the money they worked hard to earn should be forcibly taken from them and given to those who did not, and will not, work for it.

It’s a debate that will not win converts from one side to the other.

With today’s liberals, it is not really about fairness. It is about trying to make people equal who will never be equal. It is what socialism and communism have always striven toward, and it is something their philosophy has never achieved. It can never be achieved.

And that is because people are not equal. Created equal, yes; equal under the law, yes; equal in many ways, yes; but ultimately not equal because people are all different. Despite ecumenical pleas that we are all one, that we are all the same, we really are not.

And neither is the tax situation. Liberals cry that the rich are not paying their share, and they are right about that – just in the wrong direction.

The top one percent of earners pays 40 percent of all income taxes. The top 10 percent pays 70 percent of all taxes. The top 50 percent pays 98 percent. The bottom 50 percent of earners pays two percent.

That is the truth. However, the truth, historically, has always been the biggest enemy of the liberals, socialists and communists.

Their goal has never been to be “fair,” or to make rich people pay a “fair share.” Their goal is to make everyone equal in the egalitarian utopia that socialists have always desired. The trouble is, it usually ends with everyone being equally poor and equally miserable.

Presidents Kennedy and Reagan proved that lowering taxes brings more revenue to the government. It is because businesses have more money to invest in expansion and hiring. More taxes are collected from booming corporations and from individuals with jobs.

Illinois governors and Chicago mayors proved that raising taxes brings less revenue to the government. Businesses and individuals move out of the city and the state to friendlier climates, and their tax money also leaves.

Raising taxes on cigarettes and liquor and other items means more tax money coming in, doesn’t it? However, politicians don’t factor the market, human nature and common sense into their equations (maybe it’s because they dislike and don’t understand the market, human nature or common sense). Raising taxes on cigarettes in Chicago always results in less tax revenue, because people go across the border to buy their cigarettes. The cost difference is worth the trouble. They are looking out for their own self interest. And the result is fewer cigarettes (and other items) are sold in Chicago.

Look at the situation in Kankakee, where at least four dozen Chicago and Cook County businesses have set up sham offices. They run their paperwork through the Kankakee office, and sales that are made in Cook County are credited to Kankakee County, where the sales taxes are much lower. The businesses make more money, even after kicking back part of the skim to the city of Kankakee.

You may call that crooked, and the courts are in the process of deciding whether or not it is legal. But people will always try to avoid taxes when they feel they are too high or unjust. And people have always acted in their own best interest, whether it is a corporation taking advantage of a loophole, or an ordinary person taking a tax deduction for his home mortgage or church donation.

It’s called common sense, and human nature – something the liberals and socialists never factor into their ideology.

And that brings me to my point about equality and fairness – not as a concept, but as a reality.

When you talk about unfairness and inequality, consider the work of Vilfredo Pareto, an Italian engineer and sociologist turned economist. More than a hundred years ago, he saw disparity and it made him wonder – why was 80 percent of the land in Italy owned by 20 percent of the people? He saw the rich and the poor, and he wondered why some people became rich and some remained poor.

His observations – known as the Pareto Principle, or the 80/20 Rule — are worth noting, and apply today as much as they did a hundred or a thousand years ago.

Pareto noted that 80 percent of a company’s profit came from 20 percent of its customers; 80 percent of a company’s sales come from 20 percent of its salesmen, and from 20 percent of its clients; 80 percent of a company’s complaints come from 20 percent of its customers; in his garden, 80 percent of the peas came from 20 percent of the peapods. In other words, 80 percent of achievement comes from the efforts of 20 percent.

The principle has been adapted and expanded by a number of economists in the years after Pareto. Microsoft, for example, did its own study showing that fixing 20 percent of the most reported bugs eliminates 80 percent of errors and crashes. Safety experts know that eliminating 20 percent of hazards prevents 80 percent of injuries. Supervisors know that 20 percent of the work takes 80 percent of the time.

There are many stories in the news of a poor man winning ten million dollars in the lottery and being broke within five years. And there are stories of rich people losing everything and becoming millionaires again in a few years.

It isn’t that one person has the deck stacked against him while the other gets all the breaks. It’s the Pareto Principle.

Pareto’s Principle isn’t really a philosophy, it is more of a mathematical law based on hard evidence. It is an observation of how things have always been.

A 1992 study by a United Nations committee found that the richest 20 percent of the world’s population controlled 82 percent of the world’s income, while the poorest 20 percent controlled 1.4 percent (and the poorest 60 percent controlled 5.5 percent). The U.N. didn’t need a study to show that.

It does seem unfair that so many have a lot while so many others have so little. But that is life, and life is unfair. The Democrat liberals and socialists have turned America from a society that praised and rewarded hard work, to a society that scorns and punishes it. We now are a society that has made a cult of worshipping the poor. There’s an old saying that it isn’t a crime to be poor, but it isn’t a great achievement. Well, now it is considered a great achievement.

Of course, there also is the crass political motive of the Democrats to keep as many people poor and dependant as possible, in order to ensure themselves a constituency to keep voting themselves goodies. But that’s for another topic.

It was Pareto’s education as a sociologist, where human nature came into the mix, that made him understand why utopian theories didn’t work out in reality.

But as long as liberals can tug at your heartstrings about how unfair things are, and about people having so little, reality will never come into play.

Pareto could tell you why Cook County doesn’t get the sales tax from sales that are made there by the companies we mentioned, and why Kankakee County gets that revenue, even though the sales weren’t made there.

I found the Pareto Principle on a local level, anytime I had to do a story about any of the high schools my newspapers covered. I noticed that the students at the top of the class were involved in the most activities, while those at the bottom of the class were involved in no activities. That didn’t make sense to me on first glance. The students involved in so many activities, like sports, music, service clubs — shouldn’t they have the lowest grades because they don’t have time to study, and shouldn’t those with no involvement have the highest grades because they have all that free time to study?

No, it was just the opposite. Those who worked the hardest, in an out of the classroom, were the smartest and the most successful.

Just like in real life.

And those who were the laziest were the dumbest and the most unsuccessful.

Just like in real life.

Despite all the good intentions, despite all the efforts to make unfairness “fair” and the unequal “equal” by fiat, liberals will never be able to repeal the laws of common sense or human nature, any more than can repeal the law of gravity.

Liberals will always be part of the lower 20 percent, who aren’t smart enough to know that they aren’t smart enough. And that’s what makes them so bitter and angry.

**

Jim Ridings is a frequent contributing columnist and the author of several books, including “Len Small: Governors and Gangsters.”

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