Something Simple
Suppose that every day, ten men go out for dinner and 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 would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.
The ten men ate at 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." Meals for the ten now cost just $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 men - the paying customers? How could they
divide the $20 windfall so that everyone would get his 'fair share?' They
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 his 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 pay $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
drink 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
I!" "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 exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for the meal, so the nine sat down
and had dinner 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, ladies and gentlemen, 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 anymore. In fact, they might start
eating overseas where the atmosphere is somewhat friendlier.
Props to Brett Boothe for showing me this example. I figured I would post it since he has been absent trying to make it in the working world. Enjoy.
Blake
10 comments:
Our progressive tax structure is fair and is not the issue we should be debating. To demonstrate let's assume each individual pays $10 a piece. The first individual has income of $20, meaning his tax rate is 50%. The second has income of $30, meaning his tax rate is roughly 33%. The third individual has income of $40, meaning his tax rate is only 25%. You should be able to get where I am going with that.
Your arguement might be that the tax rates get higher as income goes up. True, it does get higher but your still paying the same amount as the lower guy on the income earned under the bracket. To demonstrate lets assume you are a single individual in 2009 earning $78,000. You will owe 10% on the first $8350 resulting in $835. Then you will pay 15% on the amount over $8350 and under $33,950 resulting in a tax of $3840. Finally you will pay a 25% tax on the amount over $33,950 and under $82,250 resulting in a tax of $11013. The total tax owed would then equal $15,688, if my math is correct. This should explain my point.
Lets quit complaining about our taxes at present, because I can promise you at the rate the government keeps spending we would gladly the current structure over what we will be faced with in years to come. Are there some issues in the tax code I would like to see changed? Yes of course, but as a whole I have no problem paying taxes and I realize the return on the investment I receive from tax dollars I pay are probably the largest return I will ever receive on any investment. Like all other businesses, the government should have to adjust to a down economy as well and become more efficient.
I love this blog and think there are some great minds participating in it, but we must began to focus on reality. Reality at this point is our economy is suffering, and the the growth of the deficit is unacceptable. My belief is the increased regulation on our banking system has decreased the velocity of money resulting in slow to no growth. The economy of this country depends on banks, and we must save them from regulation if we want any hope at all for a recovery. Please share your thoughts.
Drew cleek
That is one theory however try this out for size take the same situation now however the 10th man actually owns the restraunt and although he charges himself and all his friends $100 for the meal in reality it only costs $25 to make and now although its perceived he's paying $50 at the end of the day its still returned to him and it's men 5-9 that are paying the bill. The 10th man and men 1-4 are profiting from this daily arrangement....that ladies and gentlemen boys and girls politians and environmentalist is how business really works...its the top tier corparate percentile that are given land, huge tax breaks, crazy incentives, and even bailouts when the make horrihnle decisions...it's the small businesses who get nothing but taxed and regulated so big government can help that tenth man be comfortable and profitable no matter how many free meals he gives away...
Joe:
The message I am trying to get across is taxes are not the problem just the symptom; government spending is the problem. If we can make our government become more efficient the tax issues will take care of themselves.
Note I started my stance off with "Our progressive tax structure is fair." I for one have no problem at all with citizens using good "tax planning." Blake did bring up a good point with the following quote. "Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.” However, the same arguement could be made for the working lower class of America as they make up a critical role of our economy too.
I am in strong agreement with you on the middle class to upper middle class is the back bone of our economy. When these guys aren't spending, you can bet your money the economy will not grow.
The most important point you bring up is our economy is begging for "expansion, investment, and consumer spending." That brings me back to my main point I ended my arguement on. Our economy has to have banks lending in order to function. Banks create a money multiplier effect that can not be recreated by government spending, or just the wealthy spending. With the increased regulation on banks, it makes it increasingly difficult for banks (especially the community banks) to lend. We must get off the bank's back, because what happened with the economy was not their fault. When we allow them to function the way they are suppose to, the economy will start to grow again like we assume it is suppose to.
Just a short thought: You should probably be more concerned with government overspending and failed Keynesian economic policies that have pushed the the economy into a situation where taxes need to be RAISED or a VAT implemented.
Your topic is stale.
The example that Blake give is very useful for looking at taxes in a simplistic way. However it does not take into account the miss allocated resources (the taxes paid by the rich) that could be used for production. Greater production drives down prices, lower prices enables more people to afford more goods, which in turn increases everyones standard of living and real wage rate. Next savings and investment are spurred and the cycle repeats. That is how an economy grows.
"High taxes can be imposed only if the general public is in agreement with the purposes for which the funds collected will be used. In this connection, it is worth noting that the higher the general burden of taxes, the more difficult it becomes to deceive public opinion as to the fact that the taxes cannot be borne by the more affluent minority of the population alone. Even taxes levied on property owners and the more affluent affect the entire economy. Their indirect effects on the less well-to-do are often felt more intensely than would be those from direct proportional taxation."
-Ludwig von Mises
Crawford, you have a one-track mind and rely too heavily on ideological paradigms, and consequently you are missing the point. I typically agree with lower taxes, but there is a larger picture to be considered beyond the models one learns in Macro 101. The budget is a wreck. You can blame Bush's wars for that as well as the joint bill advocated by both Obama and McCain and of course "stimulus plans" that are, uh, not very stimulating.
The fact is, this deficit and economy is unsustainable without tax rates going up. Do I, as an individual like that? No, but as a citizen I support such an adjustment.
Americans live an incredibly opulent lifestyle (if you could see the conditions in the country I currently live in, you would understand this statement) and cannot agree on anything while they all scream "me, me, me..what about my poor, pathetic needs." This is a reason why the United States is struggling to recover and why its citizens refuse to accept a tax-raise.
In short, leave the models about a stale issue at home and start addressing the real problem at hand.
Yes, I agree with you. The United States budget is a wreck, but there are two sides to the budget equation. Income and Outgo. If we decrease the outgo then there is no need to raise the income. We should be addressing the real issues. Our government has breached its contract, the constitution. We are constantly funding programs that are not constitutional. People constantly complain about the new health care bill, aka government run healthcare, aka socialized healthcare but what about public education, aka socialized education? If you are against one, shouldn't you be against the other?
Then there are the bankers stealing our money via inflation and using it for their own greed. The government allows this because it is in their interest to have a bank that can give an unlimited amount of money to the government for unpopular political programs such as war social security, medicare/medicaid and farm subsidies. Also these bankers are the ones that create the massive business cycles. Should we address these issues?
Not to mention other unconstitutional agencies - FDA, USDA, DOE, DOT, DOI, CIA, FBI, SEC, ect... If we examine all of these with an open mind i think we can find a trillion dollars to cut.
Crawford, you bring up a solid point and it is hard for me to directly argue against the alternative that you have proposed. Unfortunately, it is almost impracticable to implement such reform especially in this environment (with any luck, someone like Thatcher will successfully challenge the current administration).
Consider taxes as a tuning nob that you don't want to turn unless you absolutely have to. Sadly, I'd say that it needs to be turned up. The fact is, institutional reform takes time and costs even more money and don't forget the human cost as people scream and hide even more money in their sofa-cushions.
Honestly, I'm not exactly sold on institutional reform or the brandishing of the word "unconstitutional." You may be right to a degree, but I'm going to stick to smaller-scale operations.
In regards to bankers, inflation, and your general rant about them, I have to agree with you and just want to add that I'm really annoyed with the government's tendency to add a few zeros here and there on transactions as well as the excessive amount of green floating around. Makes you wonder what the real, not nominal value of a lot of things really is. This is one point where I definitely agree with you on the government overstepping its bounds.
You should know, Crawford, I find this stimulating and useful. I would just like to request that you tone down the rhetoric some. Maybe I won't be so sarcastic in return.
I do not mean to appear condescending or annoyed in my rebuttals; the way I wright I hope displays my passion and enjoyment of subject matter and stimulating conversation.
You do not appear condescending at all. One cannot underestimate the value of two differing opinions or perspectives.
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