Putting Tax-cuts in terms everyone can understand…
Suppose that every day, ten men go out for dinner and the bill for all 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 like they do now with the present income tax structure.
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.
The tenth man (the richest) would pay $59 of the bill.
So that is what the ten men decide to do.
The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you all are such good customers I am going to reduce the cost of your daily meal by $20”. Dinner for the 10 men now costs just $80...
The group still wanted to pay the bill the same way that they paid their taxes so the first four men were unaffected. They would still eat for free. But what about the other six men -- the Paying customers? How could they divide the $20 windfall so that everybody would get his “Fair Share”?
They realized that $20 divided by six is $3.33. But they subtracted that from everybody’s share, then the fifth and sixth man would each end up being paid to eat their meal…
So, the restaurant owner suggested it would be fair to reduce each mans bill roughly the same amount; and proceeded to work out the amounts each man would pay.
The fifth, like the first four now paid nothing (100% savings).
The sixth man now paid $2 instead of $3 (33% savings)
The seventh man now paid $5 instead of $7 (28% savings)
The eight man now paid $9 instead of $12 (25% savings)
The ninth man now paid $14 instead of $18 (22% savings)
The tenth man now paid $49 instead of $59 (16% savings)
Each of the six was better off then before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings…
“I only got a dollar out of the $20,” 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 dollar, too. Its unfair that he got ten times more than me!?”
“That’s true”, shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploit’s the poor!”
The nine men surrounded the tenth man and beat him up…
The next night the Tenth man did not show up for dinner, so the Nine sat down and ate 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 for even half the bill!
And that Boys & Girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes 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 eating overseas where the atmosphere is somewhat friendlier…
David R. Kamerschen, PH.D
Professor of Economics
University of Georgia
Checked into this and found one article that claims Kamerschen did not author this but none of the articles disputed the theory or numbers used for this example…
29 comments:
Thanks Rightside--this is the most simple explanation I've ever seen. Hopefully the right people get it!
This is a great explanation! Unfortunately, it will fall on deaf ears
Yes on some deaf ears but it puts it in a great perspective for those, like many, were never taught economics in public school as they should have been.
Yeah, that analogy is pretty strained. What does it mean when the tenth guy stops eating dinner? (tax evasion?) Poor rich guy, right? His success in life was, after all, achieved in a vacuum right?
I take it that dinner is supposed to be the enjoyment of the benefits of government services- roads, protection of markets, law enforcement, etc. No? So since this analogy is supposed to capture the entire distribution of costs and benefits people get in our society I guess I need to ask: what are the meals they are eating? I take it that the tenth guy was eating surf and turf and the first guy (probably a disabled veteran suffering from PTSD, or a single mother working two jobs to support her kids) is getting a single french fry.
Simplistic analogies like this are the problem, not the solution, to better governing. Of course, taxes should be low. And our leaders should not waste our money, but I also happen to believe that our tax code is a reflection of our values.
We need roads, schools, law enforcement, and homeland security. So the question is who pays the most for it: people who can afford it? or people who can't? I'll pay more so that the poor vet with PTSD, or the single mother struggling to make ends meet, can get a leg up. Those are my values.
Those that have achieved success in large part because of the opportunities created by our great nation owe a debt to others struggling to find similar success.
Two Words...........
.....Fair Tax.
Brimur,
“What does it mean when the tenth guy stops eating dinner? (tax evasion?)”
Or maybe he decides to take his business elsewhere where it will be appreciated. Remember back when top tax rate was 70%+ for any income made? Kennedy even saw that too high and knew the economy could not grow under that strain. Simple economics…
“His success in life was, after all, achieved in a vacuum right?” No. But where would your “Victims” be if nobody invested their money in corporations, small business’s, or the likes and provide jobs to those who want to work? I gather you would rather have socialism were everybody gets their fare share from the government. Has not work yet even with it being tried many times. Russia…
“I take it that dinner is supposed to be the enjoyment of the benefits of government services- roads, protection of markets, law enforcement, etc.”
And where did the government get the revenue or ability to provide these services? Was it from your people eating “Fries” and being held down investing their money and at what rate? The top taxpayers pay a much larger share of the taxes and it is a proven fact that raising tax rates results in less investment and thus less jobs like the one I have and probably the one you have if you work.
“I take it that the tenth guy was eating surf and turf and the first guy (probably a disabled veteran suffering from PTSD, or a single mother working two jobs to support her kids) is getting a single french fry.” I do not see anywhere in that example where it implies that the meals are different in any way. I do see that you jump on the “Victim” wagon and right away that it is not fair somehow even though there is nothing saying that the meals are different per person. Have you ever been to an event where somebody picks up the tab without making it public to be seen? Have you ever asked the wait staff for the bill and taken care of it without making a scene because you enjoy the people, feel you can afford it, and want to do something for somebody else without being recognized? I do not know your political party choice but you seem to be a liberal in your comments. Or is that “Progressive”? A new book titled “Who really Cares” has some interesting facts and comments that sound like they would apply to you.
“The cornerstone of liberal economic thought is "income redistribution," that is big government taking assets from the affluent through taxation and giving said assets to the less well off through entitlements like subsidized health care, housing, educational scholarships and the like. The left is also big on imposed "economic justice," things like guaranteed wages and lifetime job security.”
You also said: “We need roads, schools, law enforcement, and homeland security. So the question is who pays the most for it: people who can afford it? or people who can't?”
How did those who “Can Pay” get to where they could and how did “people who can’t” get to where they are? So the one who decided he\she was going to stay in school, work hard, save instead of spend, wait until they can afford a baby, work towards a future, should and must pay more for they have more? What about the person who dropped out of school, drinks, smokes, does not apply themselves, waits on govt checks, spends all disposable cash, does not save or go that extra effort to improve them selves or their job skills, has babies when they can’t take care of them, or invests in the economy? They should pay nothing? They should be given their “Fare Share” because without them America would not be great? Where would America be if these people got off their asses and were more productive and not living the “Entitlement” life?
“Those that have achieved success in large part because of the opportunities created by our great nation owe a debt to others struggling to find similar success.”
Look at the tax code and look at who pays the majority of the taxes needed for your “Great Nation”. Without the top taxpayer, and the majority who do pay the vast majority of income tax, and this includes the middle income person, your “Great Nation” would not exist. Without the lower four in the example posted, who pay no income taxes at all but yet get that meal for free, where then is your nation?
Virginia Democratic Governor Tim Kaine wants to spend the states surplus on removing more of the lower income taxpayers from paying income tax all together. Now this will help those trying to improve themselves but what will it do to the ones who remain sitting on the couch eating Doritos and waiting on that Govt check each month? Will it help those who refuse to help themselves by improving themselves? Or will it ensure that the Dorito-eaters will be sure to vote for the Democratic Governor for he “Feels their pain”…
I saw that article the other day and I find one part very interesting. "But, as the tax returns of multi-millionaires Dick Cheney and Al Gore prove, the media image is false. The vice president gives millions to charity, Mr. Gore very little."
They love to claim "Victim" and say that the Govt needs to take more away from the Rich and pass it onto the poor. But yet those yelling the most are actually doing less themselves.
http://www.jewishworldreview.com/cols/oreilly_archives.asp
Rightside: Your whole political argument is based on a lie. You think that those four people are sapping our economy of its vitality because you assume they are always the same four people. But the fact is that those four people change, those four people are the four people who at any given time have fallen on bad luck - like unemployment, or a health care crisis, or some other catastrophe. I know that those four people change because I USED TO BE ONE, I was raised in a dirt poor family, and if it weren't for food stamps, free college (in Georgia) and other such "socialist" government welfare, I wouldn't have had the opportunity to become the productive member of society I am today. And yeah, I feel awful for professionals that make 6 figures that pay a higher income tax rate. Just awful. As I said, I'm happy to pay more, to help those four get into a position to grow our economy even more.
The truth is that your vision of America is anti-capitalist. It's oligarchical crap. A certain amount of government support actually insures competition and assures broader productivity. What you cutely brand "income re-distribution" is the cost of living in the land of opportunity. We don't give people blank checks (It was a Democratic president, not Reagan that battled for and passed welfare reform). We expect people to deliver on their debt and it's what I am doing.
So Let me get this straight......"dirt poor" people in Georgia get to go to college for free? You didn't have to do anything (Like have the grades, or apply for grants) to pay for it? Just being dirt poor gets you in there huh? and since you go in under the dirt poor program I assume that graduation in automatic too.? Does the Dirt Poor program also automatically grant job placement and guaranteed salaries?
Of course not! People who use the support systems in place to better themselves have the drive and moral fiber to do what it takes to make this country great and make it better.
The problem is the other people, who like a parasite just suck the strength out of our country for no gain and we reward them for doing it.
Actually if you look back on this Blog and talk to people around the country you will find that most people don't have a problem with "hand up" programs. It is the "hand out" that makes the fur fly. In the example Rightside reprinted of the 4 freeloaders you might have been one of the 4, but the other 3 just kept waiting on the dole check.
What we need is comprehensive tax reform that takes the incentive to remain POOR away. No more tax credit incentives, no more "tax time bonus" for having children you cannot support, no more waiting for a check so you can go have a shopping spree. What we need is a sytem that encourages saving and investment, encourages personal responsibility and good decision making, and puts the tax burdon on the people (not Class) that are spending money.
What we need is the Fair Tax.
Consumption based tax systems have been proven to super charge the economies in countries that have gone to them. Imagine the additional resources (revenue) we would reap by tapping into the spending that occurs here on all levels and by visitors as well. Rich people who spend extravagant ammounts of money would pay for that ability. Likewise someone who buys a widescreen TV or other things will also contribute to the economy. And those people who choose to save and invest for the future can do so with out fear of the tax code. And lastly......the tax system would be a tool to support our economy, not a tool to support political ambitions by lobbyists and politicians.
Flat tax...
Russia went to it a while back and I believe it was about 13% of what ever you make. The Treasury never had so much money coming into it ever before...
Yeah. Incentive to be poor? That's laughable. Whatever convoluted crap you can come up with to justify a morally-vacant policy outlook won't amount to any real ideas because it bears no relationship with reality.
So keep talking up the bullshit flat tax. It will NEVER happen because our current system has empowered far too many like me and we've infiltrated positions of power and will refuse to pull that ladder up behind us.
Merry Christmas!
Brimur,
So how much is enough?
Where should the taxrate be if it is to low now?
Should we raise the top rate some more so the money is spread across the population more fairly?
And how bout we make it mandatory that the rich give more to the poor in "Donations" to keep the humble?
Don't believe this "Bubba" guy is the cold hearted rich guy you think he is but I could be wrong. I read it as many who have been on the dirt-poor level, which many of us have been poor, and have pulled themselves up and made things better for themselves, do want to help others do the same. Look at the example of Dick Cheney giving more the Al Gore who claims to be the "Caring" one...
Might be wrong but I see you reading this as all wrong as to what Bubba stands for and believes...
That or you are just out there spewing the "Progressive" view and do not have a clue how this works...
Brimur.
Prehaps I gave your ability to utilize higher thought too much allowance. Please understand that the Fair Tax is not a "Flat Tax". Please educate yourself before you open your mouth and insert your foot again.
Yup. Too many people have gotten to used to the dole and way too many have gotten used to living off the backs of others by supporting a tax code that can be tweeked any which way to buy the votes of this group or that.
Should you take the time to educate yourself (sorry this time at your expense) you will see that the Fair Tax, as written in it's original form, is a great tool to use to both raise revenue for the Govm't and to allow those "empowered" people to pull themselves up with the full power of all their economic resources, with no fear of making too much or becoming ineligible for tax credits they have learned to use as a crutch.
Go buy the book. Then read it. Then understand how much better we can be as a country and as a people with out our current abused, overbearing tax system.
Rightside: NO, I am not suggesting any new taxes. This thread was about cutting the taxes of rich folks, not new taxes.
Bubba: I understand exactly how the "Fair Tax" works. It is a flat tax in the sense that the rate remains FLAT regardless of the individual's annual income.
I am totally open to discussions about lower taxes, but a flat tax, a fair tax, or any such regressive structural reforms are total non-starters.
Brimur,
Actually if you look at the original post it shows what happens when you cut the taxes of all people across the board as we did with the Bush taxcuts. Bush cut the taxes of everybody and in fact eliminated many from the lower tier from having to pay any income tax at all. The ten men example shows that yes the 10th (Top Man) gets the greatest amount cut but he is also the one paying the most and $59, or 59% of the total tax bill. Everybody got a taxcut in % of what they pay and the same is true in the Bush taxcut. The problem is that people think the top guy should have to pay more, when he actually already is, for they want to pay less.
The example shows that if we continue to make the top tiers pay the majority of the taxes they will get to a point where they will invest their money elsewhere, overseas, where the return is better. When John F. Kennedy, a Democrat, was in office the top tier was paying more then 70% of their new income to taxes so why invest and risk your money for the opportunity to pay the Govt 70%+ of your gains?
Ronald Reagan knocked that down to 28% taxrate and the investments went thru the roof and the economy grew at an incredible rate. The DOW stock market was at 800 when he did that, it is now over 12,000+...
The key is don't tax the rich more, lift the lower people up with better economic education and incentives to invest their money. 70%+ of the population is now invested in the market somehow...
Actually, even AS A PERCENTAGE the Bush tax cuts disproportionately benefitted the rich. If your spin had any moral grounding the cuts would have, at the least, been an across-the-board percentage cut.
Besides the number one thing you guys fail to understand (even if you don't give a crap for the working poor) is that tax cuts AREN'T FREE. They have to be financed by cutting spending or raising other taxes. It's typical of your credit card mentality that your crowd's discussion of tax cuts is always removed from any discussion of how to pay for it. Your party is the party that removed PAYGo. And your party's endless denial of the costs of revenue reforms has lead to a debt that is locking us into a future where a larger and larger share of our budget will be committed to servicing interest on the debt. And this all leads to.... YOU GUESSED IT. Tax Increases. But this time without options or room to make rational priorities.
This is why you cannot be trusted with the people's money.
Brimur.
Please research a little before you get your other foot stuck in your mouth.
The Fair Tax and income are not linked in any way. The Fair tax is a national embedded sales tax that is based works off of consumption, not income. Although the embedded rate is fixed at rate into products, the overall tax rate per capita is not flat by any means, unless all people were to consume at the same rate on the exact same items. And with the prebate system worked into the fairtax some items actually have no tax at all.
Please read the book, before you start talking about things you have no understanding of.
"The FairTax Book" by Neal Boortz & John Linder; published by ReganBooks.
Brimur,
The Bush tax cuts were Percentage cuts!!! All tax groups went down 5% each and thus eliminated some from paying income tax at all!!!
By reducing the income tax burden on ALL taxpayers this freed up money to be invested in the market and surprise the market is now over 12,000+ and growing. More then 70% of the workers are invested in the market and understand that the Social Security system, which was developed by your party (I take), and the Democratic party which refused to allow President Bush to try to correct, the people understand that the Social Security system is BROKEN and your people will not allow it to be fixed...
"Tax-cuts are not Free" you said...
All three times taxcuts were enacted they INCREASED the amount of revenue coming into the Federal treasury for more people invested their money, the economy got stronger, and this resulted in more tax revenue coming into the treasury. DEMOCRATIC President Kennedy understood this and it worked. Republican Presidents Reagan and Bush both understood this and both times the revenue coming into the treasury INCREASED.
"This is why you cannot be trusted with the people's money" You would rather trust your party with the money who will do nothing but give it to a bunch of slobs who don't do shit but vote for them there Democrats because they send me a check for doing Dick?
Gee I don't know...let me check................
Yup! There it is......
right on page 421 of the Fruitcake Liberal guide to tax and spend.
"tis better to tax the people and take their capital into our maze of waste and spending, than it would be to allow free enterprise to invest in itself and create jobs for the working poor. Remember the underlying strategy of the Liberal Left: Maintain the Poor, they create next elections voters; Give them a dollar they remain a loyal democrat, give them a JOB they will eventually become republican."
God, I'd rather believe you guys have just run out of arguments rather than you actually believe this stuff. First, the FAIR tax is flat BECAUSE it is income neutral. It does not apply to income groups differently. Not that hard to understand if you spent at least an hour in an econ class or even 4th grade math.
Rightside: No, the actuall effective rate change of the tax cuts did disproportionately benefit the rich. Check it out yourself - http://www.taxpolicycenter.org/publications/template.cfm?PubID=9907
As for the idea that tax cuts create enough revenue to make the world similar to Candyland is a bunch of crap. First, it is obvious that they have contributed the lion's share of the deficit problems. (http://www.cbpp.org/9-27-06tax.htm) Second, they HAVE not had strong revenue effects. (http://www.cbpp.org/3-8-06tax.htm)
Bubba: come up with some productive discussion and I'll respond. Or maybe I should call you a Nazi and we can go ahead and close this at its foregone conclusion.
Brimur........
thank you for confirming my suspicions......
Keep trying and you will get into the 5th grade. Once again, I urge you to read and research before you dispell what you don't understand.
Nazi huh? Well I guess that since you cannot argue my point, which you clearly do not understand you are taking a page from your Liberal strategy guide and trying to label those you fear, to discredit them by association.......have you called CNN yet? should I move my truck to make room for them to camp in my yard?
Bubba: I was NOT calling you a Nazi. I was showing you how name-calling was unproductive.
Brimur,
Some of the facts of the Reagan Tax cuts during the 1980’s provided by the CATO institute…
**Real economic growth averaged 3.2 percent during the Reagan years versus 2.8 percent during the Ford-Carter years and 2.1 percent during the Bush-Clinton years.
**Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years.
**Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency.
**The Kennedy income tax rate cuts of 30 percent that were enacted in 1964 generated several years of 5 percent annual real growth.
**Median Household Incomes. Real median household income rose by $4,000 in the Reagan years--from $37,868 in 1981 to $42,049 in 1989, as shown in Figure 2. This improvement was a stark reversal of the income trends in the late 1970s and the 1990s: median family income was unchanged in the eight pre-Reagan years, and incomes have fallen by $1,438 in the anti-supply-side 1990s, following the 1990 and 1993 tax hikes. [14] Most of the declines in take-home pay occurred on George Bush's watch. Under Bill Clinton's tenure, there has been zero income growth in median household income.
**Interest Rates. In 1980 the interest rate on a 30-year mortgage was 15 percent; this rate rose to its all-time peak of 18.9 percent in 1981. The prime rate steadily fell over the subsequent six years to a low of 8.2 percent in 1987 as the inflationary expectation component of interest rates fell sharply. The prime rate hit its 20-year low in 1993 at 6.0 percent. The Treasury Bill rate also fell dramatically in the 1980s--from 14 percent in 1981 to 7 percent in 1988. In the 1990s, interest rates have continued to migrate gradually downward
**Income Tax Receipts. Even income tax revenues grew substantially in the 1980s. In 1981 income tax receipts totaled $347 billion; in 1989 they totaled $549 billion, a 58 percent increase. In fact, income tax collections grew only slightly slower in the 1980s than in the 1990s despite income tax rate reductions in the Reagan years and increases in the Bush-Clinton years. Real income tax revenues rose by 16.3 percent from 1982 to 1989 after the top income tax rate had been reduced from 70 percent to 50 percent in 1983, and then to 28 percent in 1986. According to the latest (August 1996) Congressional Budget Office (CBO) forecast, real income tax revenues will have grown by 17.9 percent from 1990 to 1997, following the raising of the top income tax rate from 28 percent to 31 percent in 1990 and then to 39.6 percent in 1993. [19] On a purely static basis, the 1990 tax increase raised $380 billion less in income tax revenues from 1991 to 1995 than had been predicted
**Fable 12: The Rich Saw Their Tax Bills Go Down in the 1980s While Everyone Else Paid More
Contrary to popular rhetoric, the wealthiest Americans did not pay less taxes; rather, they paid more taxes after the income tax rate cuts in 1981. In constant dollars, the richest 10 percent of Americans paid $177 billion in federal income taxes in 1980 but paid $237 billion in 1988. The remaining 90 percent of households paid $5 billion less in income taxes over this period. [52] They earned more and they paid more. In fact, Federal Reserve Board member Lawrence Lindsey has shown that taxes paid by the wealthy were substantially higher than they would have been if the top tax rate had remained at 70 percent.[53] Figure 14 shows that the share of total income taxes paid by the wealthiest 1 percent of all Americans actually rose from 18 percent in 1981 to 25 percent in 1990. The wealthiest 5 percent of Americans saw their tax share rise from 35 to 44 percent. So the rise in the deficit was clearly not a result of "tax cuts for the rich."
Brimur,
Just seems to me that when the government wants to take more oof our money to make things right we are in trouble. Let the government run on what they have and they still overspend. Put them on an allowance and make them cut the waste spending. Leave the money in our hands and we will not and do not let the poor suffer. Look at the charitable giving and who is doing it. Look at the tax return info for charitable giving by Dick Cheney as compared to Al Gore and that will tell you a story...
Didn't see links for your info, but some interesting stuff nonetheless. The two most interesting things from my first glance: 1) You're left defending Reagan's fiscal policies rather than the Bush tax cuts we've been discussing, 2) the so-called "fable" that the rich saw cuts while everyone else paid more was not rebuffed by the facts CATO listed because those facts only looked at the income tax and not the effect income tax cuts had on other taxes. It's funny how Republicans look only at INCOME taxes and not other taxes or even all FEDERAL taxes. Fiscal policy decisions have an effect beyond the dreaded income tax.
Oh, and your little post-script is cute but as I said, it was the Republicans that removed the PayGO rules which force tough waste-cutting decisions. But I guess all that matters is that you talk a good game.
Brimur,
Sorry. I forgot I had to answer to you on this one instead of it being a mutual debate. The info can be found at: http://www.cato.org/pubs/pas/pa-261.html and it describes the effects of the Reagan taxcuts for that is what I did a search under but the results are pretty much the same as the DEMOCRATIC President Kennedy taxcut and the Republican President Bush 43 taxcuts...
As far as Republicans only looking at Income taxes which are the other taxes you refer to? Are they the consumption taxes or the sin taxes that keep the poor down? Pack of Ciggs are now over $5 in NYC and I am sure that is a large part of a minimum wage worker at $5.15 an hour. Still waiting for somebody to show me somebody working at $5.15 and what their job skills are... Or maybe the high tax on cellphones are not fair to the poor. Have you ever seen somebody who has squat but yet they have a cell phone, ciggs, jewelry, tattoos, and the likes but yet claim poverty? These are not just the poor but look at all the waste on this junk that middle income people waste their money on and carry $10,000 debt on their credit cards. Here is another good one. Know of any young couple who are now in debt for $5 to $7,000 in credit card debt because they put their honeymoon on the card!!!
I work with one now who cries evryday that the rich need to pay more and it is so hard for him and the wife to afford what they need(?). Kicker, they just had another kid also... Also awhile back I worked with a girl in early 20's and her & husband will be paying off honeymoon on the CC for years...
One other thing. Several times you have attacked "Republicans" in your comments and I have passed on that. I am a Conservative Republican and the Conservative comes first. Sounds like Bubba is probably a Libertarian the way he quotes Boortz...
If you want to take the discussion towards Republican\Democrat comparrisons so be it, but it won't be pretty for the Party of the Jack-Ass...
I am a Liberpublican.
Could be Republitarian......
Brimur,
When you log on to check this post for additions there may not be additional comments for it has not been displayed for sometime now when you log onto Rightside.
Posts have moved on and only stay displayed for about a week or so.
Log onto http://rightsideva.blogspot.com
for new posts and some have been pretty good...
Rightside
Post a Comment