DescentBB

Don't know if this has been posted before. If it has, sorry bout that. I thought it was interesting so I am sharing with the rest of the class.

Tax Cuts - A Simple Lesson In Economics. This is how the cookie crumbles. Please read it carefully.

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 would pay $7.

The eighth $12.

The ninth $18.

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

So, 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 s hare'? 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 VERY 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 ones who get the most money back from a reduction are those who paid in the most.

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.

I wonder how the tenth man got all that money to start with.

Gooberman, what about all the 'tenth men' who worked for it? Does the analogy fail just because somewhere there's a 'tenth man' who inherited it or stole it or married a rich widow to get it?

When you have 350,000 dollars a year, what is 75,000 to you? Money to blow at the racetrack on Sunday? When you have 30,000, that 24 that you bring home has to stretch a much longer way. America made them rich, not themselves. They used the system to get the money, whatever way they did that's fine, but they should know that's how it works. It's how it HAS worked for a long time. Why shouldn't they be taxed more? Why should they get the break? They don't suffer financially. Their biggest worry is which Martini to get for 20 bucks a drink.

It's a farse that the first four pay nothing. As a member of the 'bottom forty percent' I do pay taxes.

Birds, the word you want is "farce", though it's not entirely appropriate. How much of the $100 do you suppose you pay? 3 or 4 cents? If the tax rate changes such that the last guy paid only $58.72 would you complain about the analogy? Does the roundoff really make that big of a difference? Ignore the roundoff errors and deal with the point.

Zuruck, what makes you think a person who makes $350,000 a year automatically must be wasting it and has no reason to get the $75,000 back while the guy who makes $30,000 a year has to stretch his money? I have friends who make a hell of a lot more than $350,000 who don't waste a penny of it, and I have friends who live on $564 a month (SSI) who waste a lot. I have rich friends who, if they had that extra $75,000, would create another charity program... and I have poor friends who, if they had that extra $36.50, would buy 2 packs of cigarettes, a few cups of coffee, and a GI Joe. Frankly, I don't think you have the slightest clue when you say the rich are wasteful and the poor stretch their money -- often, the rich got that way because they stretched their money so well, and the poor got that way because they were so wasteful.

Besides, what business do YOU have complaining that someone richer than you wastes their money? It's not your money to begin with. It shouldn't matter one bit whether or not their biggest worry is which $20 martini to order. But, to be fair, most of the people I know who are making 6 or 7 figures have much bigger worries than martinis -- such as how many new employees to hire, when to replace equipment, how much they can afford to donate to charity, etc. Your cartoon rendition of the rich doesn't do most of them justice.

I was thinking the very same thing Lothar. Although you articulated it better than I could.

One of my co-workers is a thrifty rich person. She immigrated from India 20 years ago with her husband, with barely a penny to their names. Today they own their own business and six houses. And darn if she isn't still working full time, and stretching every dollar so thin you could see through it. I'm always coming in to work to find her yelling about how she got some really nice shirts on sale for $2 a piece the evening before. Anyway, she's probably the richest person I know personally, and she's a total sweetheart. And certainly she works very hard for her money and isn't wasteful at all.

Returning to the topic at hand, the analogy was interesting, and I'd be curious to examine the overall mathematical situation to see how fair it is. I had wondered if the people whining about tax breaks for the rich were making a mathematical mistake similar to the one the men in the story made, but I hadn't investigated.

Nit picky as it may be, though, the mathematical procedure for determining each man's portion of the $80 is still baffling me. It clearly isn't an absolute (divide the $20 evenly) or linear (reduce all bills by 20%) scaling. Indeed, the rich man only saved $10, but my first stab at a fair breakdown--a linear scaling--would have had him saving $12, so to my eye it looks like he got slightly ripped off (before the break, he was paying 59% of the bill, after it he pays 61% of it). The restaurant owner's statement that he would "reduce each man's bill by roughly the same amount" is really quite cryptic and no help at all. Am I missing something obvious here? Or are those real world numbers, and the real world is just mathematically complicated, for good reasons that a naive mathematician like me wouldn't guess?

Drakona,
I think the resturaunt owners reduction represents a tax cut 'across the board' a la republican tax cuts as opposed to a targeted tax cut which is liberal speak for redistribution of wealth.

Rather than take the $20 he was going to reduce the bill by and divide it up among all the diners only those that paid for the meal would get the refund and it's relative to the amount they paid.

As far as the math I don't know I haven't tried to figure it out.

I'm pretty sure Zuruck either lives at home..or
heh

B-

Drakona,

I think the story was intended more as a general explanation of how the author views the way taxes work. The author did some hand waving and included the numbers just to make it easier to follow along. The message I took away from it was that we as a country need to stop whining about tax breaks for the rich. They, after all, pay most of the taxes.

In this instance, I think you will find that the point is more important than the details. The geek in me however, applauds your efforts

Yeah, I was just curious, since the revised scheme didn't strike me as particularly fair, at least mathematically speaking. I know tax decisions are made more for economic and social reasons than in an attempt at fairness--and there I'm really out of my depth. But as I didn't see any obvious mathematical scheme there, I was curious what the numbers were really based on.

Mostly I was just curious how much of the story was based on data, and how much was representative fiction to make a point. Google tells me that the story comes from a much-forwarded email, some versions of which reference a Dr. David R. Kamerschen of the University of Georgia as the author. Unfortunately, his homepage at the university states emphatically that he didn't write it. That makes the whole thing suspect...

On the other hand, the mathematical point in the story is a valid one--in a tax cut across the board, people paying absolutely more receive absolutely more money back, even if their cut is proportionally smaller. To say that such a system unfairly favors the rich (the point argued against in the story) is a pretty lopsided view of the situation, to say the least, and it strikes me as a pretty stupid mathematical mistake. I was sort of hoping that nobody reputable was making that mistake, but alas, a brief look over old news and opinion articles seems to indicate that's exactly what people said. Hum.

As all of the critical posts in this thread so far have been snipes about what rich people are like, or about the exact figures in the email, and haven't touched the core argument, I'm left wondering if there *is* a good response, or if it's all rhetoric and sniping. Would some of the smarter "no tax cuts for the rich" people around here care to enlighten me?

While we're waiting for an intelligent answer to Drakona's question (and that might be a loooonnnggg wait) here's some interesting reading on an alternative method.

or is a single male with no kids that gets absolutely raped by taxes. i pay in heavy and got absolutely no tax break except 55 cents per week. hooray!!

Using your own logic against you:

When you're a single male, you don't have any real expenses -- no kids, no wife, no dependents. You can limit your spending to almost nothing. Why shouldn't you be taxed more? You don't suffer financially. You're probably just going to blow your paycheck on pr0n or cigarettes or something selfish anyway. Meanwhile a guy with a wife and/or kids is going to stretch every dollar he gets... single males should be the highest tax bracket, regardless of what they make.

You see how easy it is to make generalizations and pretend you don't deserve the money you earn, or that you'll just waste it?

Well, I'd like to see where the author came up with his figures. All the data I can find dates back to 2001 (though the actual numbers probably won't have changed much since then), but I went through an entire directory of IRS data and the only data I could find was broken down into different percentages. Here's the IRS data for 2001 returns (the IRS data is in Excel format -- if you're really interested here it is straight from the horse's mouth; the webpage I linked to has the same data).

Just to get some context, Here are the tax brackets for the returns we just filed in April. These are the result of a compromise, because the orignial Bush plan had fewer brackets, and the minimums and maximums were shifted lower, which would have effectively put much more of the country into a higher tax bracket.

Now, the numbers that the author of this email uses don't match up with the numbers from this IRS data. He might have access to data I just can't find, or maybe he simplified things. But here's what I come up with, according to the IRS Excel spreadsheet's data:

100 people go out to dinner. If they pay the check of $887,882 (which is exactly 1000 times less than the amount the Federal government collected in 2001 returns) the same way Americans pay taxes, here's how it goes:
- 1 person (representing the top 1% of America) pays $300,898, which is 33.89%, or roughly one-third, of the bill
- 5 people (including the previous person, representing the richest 5% of America) pay $472,823, which is 53.25%, or roughly half, of the bill
- 10 people (including the previous five, representing the richest 10% of America) pay $576,163, which is 64.89%, or a little less than two-thirds, of the bill

Take a break here and look at the figures. 10% of the population is paying 65% of the bill.

- 25 people (including the previous ten, representing the richest 25% of America) pay $736,053, which is 82.89%, about four-fifths, of the bill
- 50 people (half the population, including the previous twenty-five) pay $852,642, or 96.03% of the bill.

That means that the lower half of the country is, in total, paying less than 4% of the taxes that keep the government running. If a truly "fair" tax cut is administered across the board, then half the country should only see a 4% deduction in their taxes (directly proportional to the amount of taxes they pay), whereas the richest one percent should see their taxes reduced by a third.

According to the IRS data, those with 17.53% of the country's wealth pay 33.89% of the taxes that keep the country running, at an average tax rate of 27.50%. Under a completely "fair" system, their new tax rate would be 18.33%. Under the system that was in effect in 2001, those with any more than $292,913 in taxable income were in the highest tax bracket. A completely "fair" tax cut would allow someone with a $292,913 income to pay $53,690.95 in taxes instead of $80,551.08. That looks like a big difference, right? After all that's $30,000! The problem is that we're working with such big numbers that any difference is going to be huge.

If we used the same percentages (18.33% versus 27.50%) on the taxable income of $56,085 (the cutoff for the top 25%), a person would save $5,142.99. Unfortunately this number is heavily inflated, because we're using the percentages for huge incomes on a relatively small income. That's not in keeping with the "fair" example.

Unfortunately the only data I have is cumulative (the top 50% includes the top 25% which includes the top 10% etc), so I'm unable to illustrate with numbers how the amount you should save comes out to much less.

So were you feeling angry that you only got to save an average of $1600 last year instead of $5000? That's why. You have to be careful to use the correct numbers. You can see where the figures get distorted, and in the distortions live the politicians.

Now I gotta go eat some lunch.

Lothar, I don't think you get it. I don't mind being taxed the way I am, I know I don't have any dependents, I know it's easier for me. I know that is WHY I AM TAXED. If you have more money, it's going to be taxed adequately. Share the wealth, we all have to. Why shouldn't they?

Hehe, I don't fall into any tax bracket

Zuruck wrote:or is a single male with no kids that gets absolutely raped by taxes. i pay in heavy and got absolutely no tax break except 55 cents per week. hooray!!

Zuruck wrote:Lothar, I don't think you get it. I don't mind being taxed the way I am, I know I don't have any dependents, I know it's easier for me. I know that is WHY I AM TAXED. If you have more money, it's going to be taxed adequately. Share the wealth, we all have to. Why shouldn't they?

You whine about it then you say you're ok with it?

I understand where you're coming from -- you think the rich should be taxed more heavily because you think that's "fair" (though I question your definition of fairness.) You think, because they have more money, they're more likely to waste it so they should have to pay disproportionately more in taxes. You don't mind being taxed -- but you think guys who make a lot more than you should be taxed a much higher percentage. I understand, I just don't agree.

Share the wealth -- we all have to. The rich do, the poor do, everyone does. I'm not saying they shouldn't. What I'm saying is, your argument that they should have to share *disproportionately more* doesn't make sense. A person who makes more than you should have to pay more taxes than you -- I think we all agree on that. But where we disagree is on how *much* more they should pay. Should they pay a higher percentage, and if so, how much higher? And if taxes are lowered, should the rich be given a cut proportional to what they pay? How much we decide they should pay -- and how we justify that -- is where the disagreement lies.

Let's go back to your original post. I've color-coded it so you can see what my responses cover:

When you have 350,000 dollars a year, what is 75,000 to you? Money to blow at the racetrack on Sunday? When you have 30,000, that 24 that you bring home has to stretch a much longer way. America made them rich, not themselves. They used the system to get the money, whatever way they did that's fine, but they should know that's how it works. It's how it HAS worked for a long time. Why shouldn't they be taxed more? Why should they get the break? They don't suffer financially. Their biggest worry is which Martini to get for 20 bucks a drink.

In the white text, you make the assumption that a person who's making a lot of money doesn't have any legitimate financial worries or legitimate uses for the money, so they'll just waste it, while a person making very little will stretch every dollar they have. But as both Drakona and I mentioned, we both know people who are rich who have legitimate financial worries and legitimate uses for the money and don't waste it, and we both know people who are poor who waste their money on GI-joes and cigarettes. So all of the white text is based on the incorrect assumption that the rich are wasteful and the poor are not. (I say "incorrect" and not "I disagree" because it's an assumption about a fact -- how people spend their money can be factually determined.)

In the yellow text you make the assumption that those people are only rich because America made them that way, and you imply that their hard work doesn't count. You use this argument to support your position that they don't deserve their money, and therefore, that it's fair to take proportionately more from them. I agree with you that the system made them wealthy -- but I don't agree that this means they're less deserving of their wealth than a poor person. Drakona's coworker is a perfect example of a rich person who is entirely deserving of every penny she has, while my GI-Joe buying friend is a perfect example of a poor person who isn't even deserving of the few pennies he gets. So the yellow text is based on an assumption that I disagree with, namely, that the rich don't deserve their money because the system made them rich. (Here I say "I disagree" because it's a philosophical assumption -- whether or not people deserve money is a philosophical question.)

In the green text you make the assumption that somebody here is arguing the rich shouldn't be taxed more than the poor. I don't think anyone here has made that argument (though Will linked to a website that leans that direction.) I think the rich *should* be taxed more than the poor. I just don't think that, when taxes are cut, the rich should be left out or get only a tiny amount back. If a rich person pays 100 times as much as you do in taxes and your taxes get cut by 50%, his should at least get cut by 20% or so. You should get at least as big a tax cut as he does percentage-wise, and maybe even a bigger one -- but he should at least get some of it back. So I don't think the green text is even relevant to the discussion.

That leaves the unhighlighted text: "It's how it HAS worked for a long time" as the only piece of your first post that isn't based on a questionable assumption. *shrug*

Going back to the restaurant analogy, and assume the original numbers are correct ($59 for the richest guy, $18 for the second, $12 for the third, $7 for the fourth, $3 for the fifth, $1 for the sixth, and $0 for the other 4), I'd like you to answer this: if the bill is cut by $20, how do you think the final payment should come out? Do you think the guy who used to pay $3 has any right to complain if he only saves a dollar and the richest guy saves ten? Who do you think should get the cuts, how big do you think they should be, and why?

When it comes down to it, like I said before, we're not going to differ in terms of thinking the rich should pay more -- we're only going to differ in terms of thinking *how much* more they should pay, and our justification for why.

How much is the tax rate on income in the US anyway? A surgeon like my dad, for instance, has 58% tax rate, then from the 42% that is left he has to pay his assistants and the use of equipment and infrastructure... There isn't much left then.

However, health care is free, education is free, the streets are safe and those kind of things..

Once you got your money after the taxes took their share, when you buy something there is a 21% tax rate on everything as well, so again we are milked by the government.

On one hand this seems insane, on the other hand it's a fair system. We take a lot more for granted, but it has to be paid for in some way.

Top Wop, I wasn't whining, I was illustrating what I get hit for. I don't mind for a second, I'm able to drive in a nice car on a road where I don't have to worry about IEDs. I can stop at Borders on the way home, buy some porn, then go to Taco Bell, get some grub. Then go home and smoke a bong, I'll glady pay taxes to do that.

Tricord wrote:How much is the tax rate on income in the US anyway?

It varies, but 24-27% I think is a common frame to be in. I, for example, end up keeping around 70% of my pay, after income tax, Social Security, Medicare, and all the other miscellaneous taxes we have to pay into get taken out.

People complain about taxes, and how we should get all these programs for free but don't want to pay for it. Europeans tend to pay lots more in taxes, but that money goes to then pay back to the taxpayers in the form of health care, education, and so forth. You guys pay more taxes but pay less for other things, while we pay less in taxes, but have to pay our own way for nearly everything (and whine the whole time while doing it ).