Suppose that every day, ten men go out for beer 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 drank in the bar every day and seemed quite happy with the arrangement, until on e 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 beer by $20. Drinks 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 drink for free. But what about the other six men – the paying customers?How could they divid e 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 drink his beer. So, the bar 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 drinks, so the nine sat down and had beers 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 anymore. In fact, they might start drinking overseas where t he atmosphere is somewhat friendlier.
Tax Carnival #34: Big Tax Dance…
With tonight being the championship game of the NCAA basketball tournament, the 34th Carnival of Taxes is the Big Tax Dance edition. Now I gotta admit upfront I’m not a basketball fan, so I’m going to keep my hoops’ analogies simple. That pre-game a…
A few interesting discrepancies here I’d like to clear up. First, it was interesting that the author used 10 different people when in reality, the United States has 13 tax brackets. He is lumping the top four into one. Second, it should be noted that while the “tenth” person represents 8% of the population. While it is difficult to determine from the Census’ data what percentage aggregate income the top 8% of the population made, the top 5% population made between 18.5% and 22.3% of all money made from 1985-2006 (this ratio is rising). Keep in mind that this includes only money that was reported during the census, and therefore, to the IRS. From what I understand, once you make “the big money” it becomes easier to hide that money from the IRS because you can afford the infrastructure to manage that money off shores. So really, guy 10 has a big question mark, or rather, a big “greater than” symbol as his income whereas everyone in the bottom nine has fairly well known and well documented values as theirs. Finally, this system assumes that none of the patrons receive money back from the bartender in the form of entitlement programs. For simplicity, I will compare the total received by lesser incomes in distress (in the form of total public assistance for FY 2006) to the bailout programs of FY 2008-09. Since the bailouts started in the late summer of last year, a comparison to one complete FY of public aid is roughly fair at least on a time-scale comparison. FY 06 saw $510 billion dollars go to “public assistance” programs whereas the total bill for bailouts -so far- has reached nearly $10 TRILLION dollars. That’s $10,000 BILLION dollars. Of course this comparison glosses over many important factors of economics, but I think it’s clear that it’s far more accurate than this ridiculous beer-drinking scenario. Anyone who questions my figures can refer to http://www.census.gov/compendia/statab/cats/income_expenditures_poverty_wealth.html . It’s all there for anyone to look up.
It’s really not that complicated to follow. First and foremost, if the top 5% population made between 18.5% and 22.3% of all money made from 1985-2006, then by the same IRS figures, they paid 60.14% of the TOTAL tax bill in 2006 (http://www.heritage.org/research/features/BudgetChartBook/-Progressive-Taxes-Interactive-Chart.aspx#).
Secondly, as far as the entitlements, they can be thought of in terms of the beer received. It just happens that the tenth person is grossly overpaying for the entitlements received ($59 for a single beer) while the bottom four are receiving the entitlements for free (whatever value you may ascribe to them). I don’t understand why the backwardness of the U.S. tax code is so difficult for certain individuals to comprehend. Our country is founded on the idea that you can go out and make your riches. Instead, today, those who achieve their share of monetary success, are penalized for it with a tax bill that will total ~49% of adjusted gross income between state and federal (55% if self-employed). Mind you, it is those that are making between 250K and 1MM that are affected the most because they cannot afford off-shore tax havens and complex tax avoidance schemes. The worst part is that we have a government vilifying those who have achieved some bit of success, and people are eating it up.
David is not the author – see his site at http://davidk.myweb.uga.edu/
The thing about wealth is that regardless of who controls it or how it is “distributed” there will be someone who has more than you. It’s called a bell curve. Michael Jordan having “retired,” with $40 million in endorsements, makes $178,100 a day, working or not. However if Jordan saves 100% of his income for the next 450 years, he’ll still have less than Bill Gates has today. I make around 40k a year, in order to make 40 million dollars I would have to work for 1000 years. Im not mad about it either, I can buy food and shelter and entertainment and even put some back for retirement. I don’t think mike or bill owe me a dime, matter of fact I might owe bill a bit for that pirate copy of word I was using before I bought this computer. Much like a poster above me commented, the only people really getting the shaft are people that make between 250k-million. Those people are the one’s banging on the glass ceiling. But hey, if you make 250k and your biggest problem is how much you paid in taxes, you’ve got a good life. Oh and by the way, bill gates can’t touch how much money the walton boys (they inherited wal-mart) have combined.
Joe – Thanks for the link. I’ve updated the post accordingly.
fangor – The post is not about the specific amounts, it’s about illustrating our tax system in general. And I find this to be an excellent illustration.
But this assumes that people with excessive wealth are somehow entitled to it…
There is no such thing as “excessive” wealth. And anyone who earns or inherits their money through legal means IS entitled to keep it.
People who believe in wealth redistribution always do so under the premise that THEIR opinion of what constitutes “excessive” will be the operating guideline, and that somehow theft is fair under certain conditions.
Fangor, are you going to miss the point of the lesson here because of your need to bean-count the numbers?
Misguided and blissfully simplistic. Moronic.
Brian, you have access to a computer and the internet, so you must have excess wealth. A large part of the world has no internet access. These people need more. So, to equalize you to them, I will take everything you have that is more than what these poor people have and give it to them. One problem, that is *theft*. If I have no right to steal from you and give it to people that are even poorer than you, then you have no right to still from those that are more wealthy. Every government funded program that is a type of entitlement is also *theft*, even if a majority believes that some people have an “excess” of wealth.
By the way, how much employment does a poor person provide? Poor people give jobs to inefficient government bureaucrats when entitlements are give to poor people; however, that same amount of capital could provide even more jobs in the private sector, thus reducing the number of poor.
This article assumes that the rich guy pays the most, what would happen if the middle guys paid the most. This analogy would fail at proving the authors conclusive point if its base assumptions were any different.
Of course the analogy changes if you change the facts. But the middle guy does NOT pay the most under our tax system. The rich guy pays way more than “his fair share.”
What do you lot have against “pay what you can, take what you need” anyway? Beer analogy is a favourite of y’alls because it makes everything so simplistic and trivial. What if it was clean water to drink instead of beer? That is to say, something vital. Something everybody *needs* but not everybody can afford for whatever reason.
It’s the obscenely wealthy who don’t care about the million and a half children that starved to death today because almost none of them have ever experienced real hardship.
What I have against “pay what you can” is that it’s simply theft from the “rich” by our government. They already pay FAR MORE than their fair share, but someone else is deciding they should pay MORE. The rich aren’t the ones having children they can’t afford to feed. People should only have children if they can afford to raise them, and shouldn’t expect others to foot the bill for their family. “Need” is no longer what it once was in America. There are millions of people who feel entitled to steal from others just because the others have more. And that’s wrong.
http://www.heritage.org/research/features/BudgetChartBook/-Progressive-Taxes-Interactive-Chart.aspx
Click here for the facts. You decide whether they support or refute this article.
The amount of taxes being taken are fine, it’s how they’re spent and who gets tax breaks for what reasons that are the problem. Corporate tax breaks and subsidization are problems, for one. Secondly, we spend our taxes on bullshit like exorbitant military spending. If we had that $400 billion a year we spend fighting a “war on terror,” we could probably cut taxes all around and still have plenty of money for more useful government programs. We should be fighting for more efficient spending before we start complaining about who pays what taxes, since no matter who pays what, we’re still going to waste it all. When kids can get decent educations and are allowed better opportunities will there be less poor people, and even less of those poor people giving birth to kids they can’t take care of. Smart, albeit poor people don’t give birth to kids they can’t afford quite as often as dumb poor people.
FYI, your “share” is whatever you can afford to pay and still lead a comfortable life. Properly spent taxes will always come back to you somehow.
Spoken like a true liberal, Wesley. Yes, if I can “afford” more and still be “comfortable” in your opinion, then the government deserves to take as much money away from me as it can.
We have never spent MORE on education, and children (rich and poor) have never had MORE opportunities.
What the hell are you talking about In actual fact there is no law that says you have to pay your taxes. Just ask an IRS agent to show it to you. In fact the tax law is against your own cosntitution. Actualy don’t belive anything I say just find out yourself. I did
WELL IF I THOUGHT ECONOMICS WORKED THE WAY OBAMA SEEMS TO, I would decide for the rest of the family that the best way for us to survive these financially trying times would be to borrow $100,000 which essentially puts a lien on each of our futures. But we’ve got to do it NOW, without discussion, because we’re broke and there’s no time to lose. Besides, it’s not quite as bad as it sounds! In the end, they’ll thank me, but for now, they’re just too stupid to understand just how much this is going to help them!!!
/sarc
Not really funny for long.
Ms. Coenen provides a good cautionary tale about overtaxation. The simplification is there to make a point. Yet one must still try to address the missing parts that do not provide the reader with the whole picture.
The most important point is that we assume in this story that the 10 men have no relation with each other except in the bar. This would include where they earn their income from. Therefore it is definitely wrong for the other men to beat up the benevolent 10th man and find themselves unable to pay the bill the next night. In reality, the 10th man probably got his wealth from the other nine men and would therefore not make it too outrageous of a fact that he is paying for over half the bill to compensate his friends/laborers!
And overtaxation is not even a problem America should be worried about right now. Nobody like tax hikes and it will always elicit opposition. But the fact is America’s rich earn the most in the world and aren’t even taxed nearly as much as their European counterparts.
In the story the other men have no right to grouse, but in reality we have every right to grouse at this situation. Presumably, in the story the first four men would have no right to choose which bar to go to because they aren’t paying. But would that be the case in reality? Because the rich foot the bill we should be wary of taxing them away? One must ask from where and whom did their wealth come from.
Secondly, tax evasion does not come JUST from overtaxation. It comes from among many reasons the chance of detection and punishment. If it is easy to evade and not be punished, why be the fool to pay even $1 more than your other rich friends? Moral hazard kicks in and even if tax is low, $1 in my pocket will always be $1 in someone else’s. That is why Obama’s approach of raising taxes along with stricter global enforcement is a step in the right direction to discourage this sort of behavior.
LIE: “In reality, the 10th man probably got his wealth from the other nine men ….”
The wealthy do not get their income from the poor. The wealthy create jobs which the less wealthy are free to take or not take. They are offered wages which they can accept or not accept. At any time, those who are working jobs created by the wealthy are free to go create their own jobs for themselves. Laborers are not slaves. They are people who are being compensated for their work, but are free to go elsewhere for better jobs and earnings. They should remember that when the wealthy go away, so do the jobs they depend on.
I see, what you say is true. But what about my other points?
Freedom of movement is again a simplified illusion. The chance of the four men to go elsewhere, even to another city, much less another country is limited because they simply do not have the resources. If movement was really free of cost, there would be no poverty in this world equilibrium will be easily reached.
Secondly, I forgot to mention the idea of consumers as well as laborers. Consumers enrich the wealthy and sometimes us consumers have no chance to take our business elsewhere because of governmental regulations or unfair business practices. And how could we cost effectively rectify this imbalance? Make our own corporation? Lobby? We are already miles behind the current corporations who have an inexhaustible war chest.
Also, please, the rich don’t get their wealth from the poor? Then how do you explain the credit card charges situation? These programs are made specifically to prey on the poor. It doesn’t matter whether the banks can collect on the debts, but as long as they have something owed to them, it boosts their bottom line on paper and the CEO can get a fat paycheck for a few years before he moves on to another country. Along the way the poor and the shareholders are hurt.
I am not necessarily anti-rich but a lot of the rich did not get their wealth from their own two hands. They did not create a truly ingenious product for the market, they just knew how to manipulate financial systems.
Finally I would like to reiterate. America provides the service of a developed nation at a bargain. From roads to courts to the human capital to the spending power, people and companies are flocking to America to have a piece of the pie. So why are we afraid that the rich will run elsewhere? Where else can they run to amass such wealth?
This whole thing is a bit pointless because it doesn’t take into effect the total tax that people pay.
The income tax amounts to a relatively small portion of the national budget, where as import, excise taxes, duties, fees and licenses applied to businesses, all combine to account for the bulk of our national budget (not counting the debt we are inuring at an alarming rate of course).
It would be interesting to see where those ten men lay when those figures are taken into account. I would guess that the middle patrons are paying quite a bit more than in this scenario, though Im not sure where the rich and poor would stand. There are a lot of incentives being given out to both at the moment, relating to these “unseen” taxes/fees/etc.
That would take a lot of research to get the real tally though, which would cost some government agency a few million bucks in wasted time to compile, no doubt. Of course now that I’ve said it, someone will probably do it… and get damn good government wage and benefits to do it. (part of the problem, of course..wasted time/space/manpower)
Teh point that all people who want to punish the Rich for being rich is that if the Rich don’t make money then NO ONE DOES. Yes this is the trickle down theory. or Supply Side economics. It works. Don’t Punish the Rich for being Rich. They will rebel and you will get nothing!!!!
There seems to be a widespread belief that the rich don’t deserve to keep what is theirs. It is theirs whether given to them by family/friends, earned by their work efforts, or otherwised “lucked” into by winning the lottery or getting some other unexpected windfall.
I’m a firm believer that if you got it legally, you should be entitled to keep it. We shouldn’t be taking away your wealth just because you have more than some.
What if you “non-rich” people were treated the same way you seem to think rich people should be treated? Take away as much as possible, claiming it’s “their fair share” or “they can afford it.”???? What if you only made $15,000 per year…. but over half of that was taken from you because there are others who only make $5,000 per year and they think you can “afford it”???? Now that action doesn’t seem quite so fair anymore, does it?
Well done.
With any tax cut those who pay the most taxes will save the most money. The math is pretty simple. Even if you reduce taxes a small percent for the highest taxpayers and a give larger percentage cut to those paying less taxes, those paying the most are going to save more money in raw dollars.
http://www.davehitt.com/feb01/democrats.html
Here’s what I think:
I’m not sure if this article is an attack on progressive tax rates or taxes in general, but I’m going to treat it as an attack on the progressive structure.
The richest will always, I repeat, ALWAYS generate the majority of the tax revenue. Even if the U.S. had a flat rate for all incomes, I imagine this will still be true.
However, let’s just say the gov’t takes 50% of your income. If you make $40,000 a year, you’re left with $20,000, $1,000,000 and you’re left with $500,000.
Now, the gov’t sees that the 40k is having trouble paying for his house, car, food, whatever, so they decide to free up 10k for him by reducing his taxes to 25%.
Unfortunately, when they do this, they can’t pay for things the citizens enjoy, whether it’s Freedom, Medicare, SS, or the Interstate. So they have to make it up somehow. They look, and they see that guy making a nice million, and they raise his tax rate from 50% to 51%. Now there is no difference in revenue.
Let’s see how this has affected the citizens taxed.
The guy making 40k has 50% more cash after taxes (20k to 30k), which, I believe, will greatly improve his standard of living. The guy making a mil has 2% less cash (500,000k to 490,000k), but I cannot make myself think that his standard of living has diminished at all.
I believe that both citizens are entitled to keep what they earned, but I also believe that a well funded government is a strong and productive government. Yes, it does seem that the government is penalizing the wealthy for being successful, but there is no way the 10k lost by the wealthy man will be missed more than the average man will embrace it.
*I understand that the percentages I used do no accurately reflect the tax brackets, but I used the numbers for ease of computation.
I’m not okay with the idea that we should punish “the rich” more because it “hurts them less.”
“The Rich” have always paid far more than their fair share of taxes, and people want them to keep paying more and more. Where does it stop? Heck, I think you should just take away $970,000 from the rich guy. Who is he to complain? He’s no worse off than the other guy in your example. In fact, I think he should be happy he’s “doing his part” by giving up all but $30,000 of his income.
First, the common conception that the rich are all heartless bastards is a bunch of baloney. Many rich people give crap loads to charity.
This is awesome, we conservatives generally are all over charity. The difference is giving to charity is voluntary whereas taxation is not.
Second, even if rich people didn’t give to charity that would be within their rights. This may or may not make them dicks, but this is irrelevant. Charity is supposed to be a gift, and gifts are freely given.
And third, even if you’re cool with the way the 10 men split the bill, the reaction to the refund is both ridiculous and typical of the left’s reaction to tax cuts today.
To summarize: a turd who keeps excessive money, whatever that means, may be a turd, but he’s a turd within his rights and it’s not the governments business to force him to give. And if you have a graduated tax system or whatever, then it more than makes sense to have graduated refunds.
Always remember that it’s money moving that matters on the macro scale. If you take a billion dollars and spread it over a million people, you get a million happy people for a little while, but then the money’s spent and they’re back to normal. Whereas if you take a billion dollars and open a business, you’ve created a permanent (if you succeed) improvement for the number of people you higher. The people may change, but that number of people are now employed. And the profits can open more stores or factories or whatever.
If you give a man a fish…
This model might be how it would work in a world absent of human greed, but our isn’t, and accordingly, you forgot the bit where the 10th man hides 60% of his share every night with a Swiss dude sitting at another table…
Additionally, given the amount of public money that goes into private works, a truly accurate model would also mention that the 10th man probably owns part of the bar, i.e., he recoups much of the money- regardless of who paid it.
It’s false and skewed.
If it were more accurate then it would look more like this.
3 men don’t get beer, they don’t even get to sit at the bar, they get water and are told to be grateful for it.
1 man gets half a beer to keep him happy.
3 men pay for the wealthiest man to drink 8 beers, and they pay for it on credit.
2 complain that they can only afford 1 beer each.
1 guy sells 5 beers back, drinks one and dumps the other two down the drain.
He pays nothing for it and gets another free beer for sitting at this bar instead of going next door.
He then takes his free beer and all the money he made off the 5 beers…
… and goes Next Door.
I agree with tracy, What kind of drink or how many guys is not the point. All you need to do is look at California to see how Bar Stool Economics works, It’s happening right now folks. If you keep cutting the heads off and gutting the Goose to steel the golden eggs you lose all future production of those needed golden eggs. If you’ve got two legs,arms, hands and a head free of booze and drugs Get off your donkey and be a part of the American Solution, GIVE don’t TAKE! Your heart and soul will feel better.
Have you HUGGED a small business owner today? Maybe you should!
O’Henery said – “I believe that both citizens are entitled to keep what they earned, but I also believe that a well funded government is a strong and productive government.”
All I have seen is more Gov. means less freedom, and less liberty. As far as productive government… are you making a joke?
Greed is not the big problem its laziness and envy.
And You are not poor if you are fat. Your lazy, but down the phone, Xbox controller, chips and get a JOB.
Bottom line is, none of the money belongs to the federales. Taxes should only be used to fund the legitimate purposes of government, and everybody should pay at the same rate. Anything else is blatant discrimination (besides being the 2nd plank of the Communist Manifesto).
So what would people think, just as an idea, if there was a national salary cap (ignoring the fact that people would find ways around it) of about 1.5 Mil. So no one could earn more than that. What would be the pros and cons of such a system?