Understanding American taxes

[BigDookie6]

Democrats exclaim; "It's just a tax cut for the rich!", and it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, I hope the following will help.

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. 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 $7.

The eighth $12.

The ninth $18.

The tenth man (the richest) would pay $59.

So, that's what they decided 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 are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20."

So, now dinner for the ten only cost $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 eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'?

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being 'PAID' to eat their meal.

So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33% savings).

The seventh now paid $5 instead of $7 (28% savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than 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. It's 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 $2? 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 exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't 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 of the bill!

And that, boys and 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 may not show up at the table anymore. There are lots of good restaurants in Europe and the Caribbean.

Thanks David R. Kamerschen, Ph.D., Distinguished Professor of Economics, U of Georgia

[August1991]

Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.

Kamerschein's web site

Cute story but I think the numbers are a little off. The interesting point is whether the tenth guy will or can leave.

Here's the Urban Legends take.

[BigDookie6]

Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it.

Kamerschein's web site

Cute story but I think the numbers are a little off. The interesting point is whether the tenth guy will or can leave.

Here's the Urban Legends take.

It was just an example (idea) of how the system works August... Nobody was trying to be precise.

[cgarrett]

very cute story.... lets look closer into the lives of our characters, shall we?

so the eight poorest men ask the two richest men. how did you become so rich? and the 2 richest men said, well, we made that money off of you... using american resources and labor to produce the products that we sold to you at a profit.

the poorest man said, i use a small amount of the countries infrastructure, how much do you use? and the richest men said that they owned huge industries that relied on huge amounts of the countries infrastructure for roads, water and energy.

and the poorest man said, i voted for one party that didn't win, who did the richest men vote for? and the richest men said, it doesn't matter who you vote for because i can afford to donate vast sums of money to all parties to ensure that my interests are protected and that you have a tough time competing with me for anything. and they also said that if anyone tried to take this power away from them that they would take the fortunes that their country had provided them and leave!

and the restaurant owner told the men... you know you owe me for five years worth of your food because i have been giving you deals and you have been borrowing the money from the rich men! you owe them a great deal of interest!

and the poorest men went home with full bellies to shacks with dirt floors and in the morning received a telegram instructing them to show up at the local military office to be shipped overseas for battle. and they wondered about what it meant to be a citizen of a country that offered them little and asked for their lives in return.

and the richest men went home with full belies to their mansions... and slept soundly.

[I miss Reagan]

Wow these rich individuals own whole industries? Where is this? I guess as one of those poor men I'm glad that the rich men are able to hire me. Because hey I've never been hired by a poor guy. I'm glad that they pay more than their share for my health care that I wouldn't be able to afford otherwise. And as a poor guy I've never been forced to go to war... and neither have my poor cousins in the US. I don't feel exploited or entitled to their wealth. In fact I'm pretty happy because I know that if I work hard I can some day make a little money too. It's called incentive.

[cgarrett]

good job reagan... you worship those guys!

they pay a good share of your healthcare because you voted to have a better share in this countries wealth (i'm assuming you live in alberta as you said)... thats not happening out of the goodness of their heart!

we canadians have been lucky this last 60 years, but there could very well be a military draft in the next term of office for our american friends.

anyways, find yourself lucky to live in a province that still has mandatory overtime pay! because the b.c. liberals have dispensed with it... and those good hearted rich guys aren't paying overtime now.

[August1991]

how did you become so rich? and the 2 richest men said, well, we made that money off of you.

Do you really believe that garret?

Do you believe that life is a pie of fixed size and the 2 rich guys basically stole the pie from the others?

Well, tell me, how is that we are much richer now than, say, 100 years ago? Where did this extra income come from? Who did we steal it from? Who did we make it off?

Maybe, garret, we created it. It wasn't there before and we took it from no one.

[BigDookie6]

Nothing to debate about here people! It's just how it works in most countries, and has always been like this! I'd rather it be like it is now than everyone having the same income. Some of the rich really did work hard for their money, and are entitled to the "perks"! I guarantee you that if any one of us became an instant multi-millionaire tomorrow, we'd be lobbying somebody for some sort of special interest!

[cgarrett]

actually, i agree with you dookie that those who work harder to promote our economy are entitled to extra!

the question is... to what extent? the extreme right seem to be of the view that there is no limit to the "perks" that should be granted to the movers and shakers of the economy. in fact, they advertise that they should be unregulated in anyway by democracy itself! globalization itself is an attempt to participate in the wealth building aspects of an economy without having to be responsible for the costs involved in maintaining it.

and august, the pie is not fixed and i've never implied this... i simply imply that the efforts to grow wealth are those of every participant. our democracies have already taken steps to ensure that everyone enjoys the fruits of those efforts. but again, it seems to be human nature that if you "own" something then you resist any restriction on your profit from it. we already do not allow wealth to be removed from our economy without a steep penalty. and trade barriers prevent participation in an economy without benefit of those who are also making an effort from the non-ownership position. again, globalization seeks to remove these barriers.

[August1991]

i simply imply that the efforts to grow wealth are those of every participant. our democracies have already taken steps to ensure that everyone enjoys the fruits of those efforts.

But our efforts are obviously different - and they are rewarded differently. It is not democracy that ensures the fruits are enjoyed, it is free markets that do that.

The rewards are not given because that is fair. The rewards are given because otherwise the effort wouldn't exist.

but again, it seems to be human nature that if you "own" something then you resist any restriction on your profit from it.

If you find a well-paying job, should you be restricted from accepting it? (ie. profiting from something you own - your own talents?)

we already do not allow wealth to be removed from our economy without a steep penalty.

I'm sorry, I don't know what you mean.

and trade barriers prevent participation in an economy without benefit of those who are also making an effort from the non-ownership position.

We all own ourselves and some of us choose to lend voluntarily our talents and efforts in return for compensation.

If I understand your point, you feel that some people don't get the compensation you think they should get. (IOW, salaries are too low.) Is that your point?

[cgarrett]

It is not democracy that ensures the fruits are enjoyed, it is free markets that do that.

first of all, what do you mean exactly by "free market"? capitalism ensures that wealth is created... not that they are distributed in any meaningful way. take the simple example of the minimum wage... if it doesn't exist, then it doesn't get paid.

The rewards are not given because that is fair.  The rewards are given because otherwise the effort wouldn't exist.

ok... so who owns those efforts? i know that your going to call me communist again... but this is what the debate is all about isn't it? if every man owned his own efforts then life would be much different. our current hierarchy relies on ownership of capital to stay at the top.

If you find a well-paying job, should you be restricted from accepting it?  (ie. profiting from something you own - your own talents?)

again, if i can use my capital to create/buy a business and then go sit on the beach for the rest of my life... i'd do it! but my effort is zero... and the rewards!

we already do not allow wealth to be removed from our economy without a steep penalty.

I'm sorry, I don't know what you mean.

i don't have the exact figure handy, what is it? 50% off the top? unless of course you have friends (see the case against the seagrams family moving close to a billion dollars out of canada tax free).

and trade barriers prevent participation in an economy without benefit of those who are also making an effort from the non-ownership position.

We all own ourselves and some of us choose to lend voluntarily our talents and efforts in return for compensation.

this seems to be the focus of this kind of argument. is "ourselves" the only thing we own? living within national borders? whats the point of democracy if we have no right to control anything but ourselves? in the most extreme case, i'm not taking a bullet for country if all i own i myself!

If I understand your point, you feel that some people don't get the compensation you think they should get.  (IOW, salaries are too low.)  Is that your point?

this is part of the debate, definitely. when jobs get shipped overseas the compensation sinks to zero for people restricted by borders.