Dinner, taxes, and economics

[DesertRider]

Thought you would enjoy this illustration of tax math that is attributed to a University of Georgia Economics Professor.

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Tax Cuts - A Simple Lesson in Economics
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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.

David R. Kamerschen, Ph.D
Distinguished Professor of Economics
536 Brooks Hall
University of Georgia

(By the way, I checked out the above – David R. Kamerschen is a real guy, does teach at the University of Georgia, and his title there really is “Distinguished Professor of Economics.” Here's his web page at the university web site: http://www.arches.uga.edu/~davidk/)

[DarrylRi]

That's a very clear explanation of how taxes are apportioned, but the idea that the wealthiest will up and leave is falacious. They make their money here, and they want to live here. They aren't going to offshore their lifestyles the way they are offshoring jobs. If they were going to do that, they'd already be living as kings in Mexico. The source of their wealth and power is here.

Furthermore, many of those wealthy are making far, far more than 10 times what the poorest working people are making, and this spread has been getting wider and wider since th 1980s. Proportional to what the wealthy earn, they are paying less than those in the middle class. In the comparison, the tenth guy is paying not quite 30 times as much as the poorest guy who is paying. But if you look at actual income in the US, upper management these days are making more like 50 times as much as the workers. (Eg, if you're a worker bee pulling in $50,000, your top management is likely to be making a salary and bonuses of $2.5M. Of course, that's chicken feed compared to the guys running the bigger businesses. Richard Grasso is fighting to keep the $190M that the NYSE paid him to run it.)

The bottom line, however, is that the income tax IS DESIGNED to be redistributive. If we didn't want that, we would have elected someone like Forbes, who is proposing a flat tax, or we would eliminate income tax altogether and install a strictly consumptive tax like the European VAT tax. These are real alternatives that would be "fair".

Nobody likes paying taxes. But what kind of society and what kind of cities do you want to have? What services do you want from the government?

Personally, I don't want taxes to be "fair". (I assure you, this point of view means that I personally would pay more taxes proportionally.) I want a society that is seen to offer something for participating. People who are participating in the society have something to lose if they don't follow the rules. They are not the people driving around without insurance, and without a drivers license, for example. They have too much else to lose by not going along.

For example, if you want decent roads, (an important priority to me, as a motorcyclist) then you pretty much need the government to build them. We are busy building roads in Afghanistan because we recognize that we will never turn that country into a participating member of the world community if there's no roads (or communications).

How would you like to have to pay one of a number of private companies to use each road you pass over? That would be the how the free market would do it. The price for using a particular stretch of road would be determined by whichever company was maintaining it. You'd get an itemized bill each month. If there was an error, you'd have to fight with whichever company made the billing error. And that's before we get into the privacy issues. (Privacy? What privacy? You're travelling on a public road!) And on the road you live on, how often would it get repaired, and to what level? How fast would the response be to fixing the road in the case of a flood or earthquake that makes it impassible? What would happen if it were only impassible to your house at the end of a cul-de-sac? After all, the road company could decide that it's cheaper not to repair it, since they will still get paid by all your neighbors. Or perhaps they would assess you for the repairs, or help to arrange financing so that you can pay for those repairs over a 15 or 30 year period with a 2nd on your house.

I'm just using roads as an example. Pick any of the usual governemnt services and you will find the same kinds of problems. Do you enjoy dealing with the free market in cell phone services? Apply that model to schools, water, electricity, sewer, public transport, and so on.

[guitarian]

And as long as those rich bastards are going to stay here, the Government should soak them for as much as possible?
BTW, why the lecture on why we pay taxes? Where exactly in DesertRider's post did he indicate that he was against taxation?

http://www.fairtax.org/


[QUOTE]Originally posted by DarrylRi
That's a very clear explanation of how taxes are apportioned, but the idea that the wealthiest will up and leave is falacious. They make their money here, and they want to live here. They aren't going to offshore their lifestyles the way they are offshoring jobs. If they were going to do that, they'd already be living as kings in Mexico. The source of their wealth and power is here.

[knary]

Originally posted by guitarian
BTW, why the lecture on why we pay taxes? Where exactly in DesertRider's post did he indicate that he was against taxation?

http://www.fairtax.org/

Because the clear message of DesertRider's post was wrapped up in these last few lines...
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.

And these last few lines make little to no sense, but sure do sound good.

[DarrylRi]

I did not say to soak the rich for as much as possible. And I certainly didn't call them (which is me, btw) bastards, so please do not invest an emotional charge in my words that I did not put there.

How much to soak the rich is a value judgement. But I do believe in some form of redistribution.

If I were king, however, all of the diners would pay to eat, though those at the bottom would pay pennies.

I have other ideas that seem to be rather unpopular right now, too.

[DesertRider]

Originally posted by DarrylRi
That's a very clear explanation of how taxes are apportioned, but the idea that the wealthiest will up and leave is falacious... Furthermore, many of those wealthy are making far, far more than 10 times what the poorest working people are making... Nobody likes paying taxes. But what kind of society and what kind of cities do you want to have?

Uuuh, Darryl, I hate be the one to point this out, but this is just an allegory, a little fable to illustrate something. Aesop in his fables was not implying that animals can talk, he was using talking animals as a device to get a point across.

And as with all fables, it has a single point to make. It is not a general treatise on government and fiscal policy, it's illustrating the single point that because we have a steeply progressive tax system, any tax cut that is proportionately distributed will return the same percentage to everyone, which inherently means more dollars returned to those who paid more dollars in the first place. That's all it says, and that's all it's about. A simple fable with a single point which it gets across very well -- that's all. It's not about roads, billing errors, or all the other stuff you're trying to hang on it.

Re the wealthiest and their portion: I don't think he was saying Bill Gates makes 10x what poor people do. As the numbers clearly imply, he was talking about the top 10% (1 out of 10), not the top 0.0001%.

[DarrylRi]

I hate be the one to point this out, but this is just an allegory, a little fable to illustrate something.

I understand that the tale can't cover all aspects of government fiscal policy. But the basic story line has the rich guy leaving everyone else holding the bag. That simply won't happen. The rich are still in the game.

And I do believe that the top 10% (or whatever value you want to put there) do owe society more than the poor do. Anything even vaguely socialist is very unpopular right now, but when the top few percent have all the assets, there will be no middle class, just rich and poor. That's what a third world country looks like.

[DesertRider]

Originally posted by DarrylRi
But the basic story line has the rich guy leaving everyone else holding the bag. That simply won't happen. The rich are still in the game.

Man, that is not at all how I read that. Remember that any fable is illustrative of one point only, the rest is all storytelling, not intended to be taken as prescriptive. I mean, in the story the poor people beat up the rich guy, but I don't think it's intended to imply that poor people go around beating up rich people -- that's just the story of the fable, not the moral.

And I do believe that the top 10% (or whatever value you want to put there) do owe society more than the poor do.

And what the story illustrates (based on factual numbers) is that the better-off do pay more than the rest -- far more, in fact. I think your statement is pretty much in line with what the fable illustrates.

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The whole point of it was to show what demagoguery it is to try to make hay of the fact that the better-off get back far more (in dollars, not percentage) than the poor in tax cuts. Of course they do, because they pay far more, and therefore any equitable reduction is of greater benefit to those who pay more.

[DesertRider]

Originally posted by DarrylRi
The bottom line, however, is that the income tax IS DESIGNED to be redistributive.

No. Our tax system is designed to be progressive, which is not at all the same thing as redistributive. "Progressive" means that the more you make, the higher the proportion you pay in taxes -- not just more dollars, but a higher proportion.

"Redistributive" implies that it takes money from some to make others wealthier. I'm quite OK with a progressive tax system; but you'd get a huge fight if you want to take from some purely to enrichen others. (Not that it doesn't happen in the quirks of our tax and expenditure system, but that is not the explicit intent.)

A progressive tax system is quite compatible with democratic capitalism. Forced redistribution of income is akin to communism, and you're right, it's not hugely popular, having had 70 years of attempt and failure not long ago. Unlike you, I've had the educational "benefit" of having been born, grown up, and lived in a Communist country for a good part of my life. Anyone who believes it actually works is a fool, denying reality in favor of a disproven ideal.

[DarrylRi]

Originally posted by DesertRider
No. Our tax system is designed to be progressive, which is not at all the same thing as redistributive. "Progressive" means that the more you make, the higher the proportion you pay in taxes -- not just more dollars, but a higher proportion. Agreed. That's what I meant to say, and did so poorly. I have no interest in trying out communism, or even the type of totalitarian governments that claimed they were doing communism.

[DarrylRi]

Originally posted by DesertRider
Man, that is not at all how I read that. Remember that any fable is illustrative of one point only, the rest is all storytelling, not intended to be taken as prescriptive. I mean, in the story the poor people beat up the rich guy, but I don't think it's intended to imply that poor people go around beating up rich people -- that's just the story of the fable, not the moral. Well, usually the point of the fable is illustrated by how the fable turns out. This one says the rich are going to take their ball and leave.
The whole point of it was to show what demagoguery it is to try to make hay of the fact that the better-off get back far more (in dollars, not percentage) than the poor in tax cuts. Of course they do, because they pay far more, and therefore any equitable reduction is of greater benefit to those who pay more. Funny, we seem to be in violent agreement here. I agree also that it's demagoguery, a crude attempt to falsely manipulate statistics.

But that's not why I'm totally opposed to the tax cuts.

I think it's incredibly irresponsible to provide some of the biggest tax breaks in our country's history, when we're accumulating a huge national deficit that, if you believe the CBO, will likely only get worse into the indefinite future. I guess I'm just naive in thinking that we have to tax if we want to spend.

The same thing has been happening in my state of California for nearly 30 years. First we've driven our schools from the top to the bottom rankings in the country. The state's credit rating is just above junk status. Now we've finally just passed two initiatives to unload our bad debts onto our descendants. The credit agencies, however, don't seem to be too impressed with this, so far.

I live in the credit card state; we are the credit card nation.

[DesertRider]

Originally posted by DarrylRi
I think it's incredibly irresponsible to provide some of the biggest tax breaks in our country's history, when we're accumulating a huge national deficit...

Aha, well, now that's a horse of a different wheelbase. Whether tax cuts lead to unacceptable deficits is irrespective of who got the cuts, so it has nothing to do with the "the rich got bigger cuts" demagoguery.

[oldcarkook]

One of you has a very bright employment future in our political system, while the other has made a great point and sensible argument.

I think some may view it differently if the sales tax on a new RT was 50% on top of the cost of the bike, while the sales tax on a new 650 was only 5% on top of the cost of the bike.

:dunno

Since we are on the subject of death and taxes...

I'm curious who pays what in taxes for the privilege of motorcycle ownership?

For example, here in the great Commonwealth of Massachusetts, we get to pay all of the following taxes:

1) 5% sales tax on the day you purchase the bike

2) Every year, we have to pay a "parking tax", no matter whether you rent or own, live in a city or in the country. It's called an "excise tax" and that fee goes like this:
Year one (which is year in which you buy the bike) you pay 2.5% of the MSRP
Year two - 2.5% of the MSRP
Year three - 2.5% of 80% of the MSRP
Year Four - 2.5% of 60% of the MSRP
Year Five - 2.5% of 40% of the MSRP
Year Six and all following years until the end of time - 2.5% of 20% of the MSRP

So what's this boil down to? Do the math:
$18,000 BMW RT
Year one: 5% sales tax: $900
............2.5% excise tax: $450 (that's $1350 in year one taxes - no registration fee, no title fee, no insurance fee, no road taxes - just sales and excise taxes.)
Year two: 2.5% excise tax: $450.00
Year three: 2.5% excise tax: $360.00
Year four: 2.5% excise tax: $270.00
Year five: 2.5% excise tax: $180.00
Years six thru infinity and beyond excise tax: $90.00

So as to keep this in perspective, this is not ten men having lunch, this is me, my life, my wallet whether I'm rich or poor, this is real: After 10 years of ownership, I have paid the Commonwealth of Massachusetts a staggering $2,970.00 in taxes on my motorcycle. JUST my motorcycle.

The same goes for my truck, my car, all of the property in my business (yes - this tax is also applied to desks, computers, furniture, artwork, etc in my business)

Any of you wonder why we threw the tea in the Harbor to begin with?

[DarrylRi]

Originally posted by DesertRider
Aha, well, now that's a horse of a different wheelbase. Whether tax cuts lead to unacceptable deficits is irrespective of who got the cuts, so it has nothing to do with the "the rich got bigger cuts" demagoguery. It's not that the rich got bigger tax cuts, it's that the tax cuts the rich (and corporations) got are causing the majority of the tax cut-induced part of the deficit. The $160 that the average household got back, which is a couple hundred million total, is a drop in the ocean compared to the half a trillion Bush is pushing us into the red this year. The overall tax cuts make up a significant fraction of that. From my perspective, we have no business whatsoever giving a huge tax break when we're spending $1B/day in Iraq.

[DesertRider]

Originally posted by DarrylRi
The $160 that the average household got back, which is a couple hundred million total

Tsk, tsk, tsk. You should know by now that I have little tolerance for numbers pulled out of thin air. Show me the source and the data behind that number.

Frankly I don't think you will, because the average reduction is considerably larger. My family is very typical -- middle class, two children, a mortgage, etc. -- and the additional $500 per child tax credit alone amounted to $1000. And that's not counting the rate reductions and elimination of the "marriage penalty" that were part of the Bush tax package as well. The extra money was not insignificant, and it was quite welcome, thank you very much. :D

I do think it's undeniable that the amount of extra income available to the people and to business has had a lot to do with helping pull the economy out of the recession that Bush inherited from the Clinton administration. (Data: The National Bureau of Economic Research, which is the ruling body on this stuff, originally estimated that the recession started in March 2001, before any Bush initiatives had taken effect or even been formally proposed. But recently they've moved it back to late 2000, even before Bush took office. The story was widely reported in January; see the Washington Post 1/22 edition, Business section, as an example. So yes, it's official: The recession we experienced was brought about under the Clinton administration, not Bush.)

[DesertRider]

One other thought on deficits: They have to be kept in perspective and, because of long-term inflation, they particularly cannot be compared by dollar armount. Comparisons are meaningful only in terms of percentage of GDP.

The projected 2005 deficit is less than 6% of GDP. That's higher than recent deficits, but we've had much higher deficits. Under Truman we had deficits exceeding 7% of GDP, under FDR they often exceeded 20% of GDP (!) and once topped 30% of GDP (!!!). FDR ran up a HUGE national debt as well, far larger than anything in the 50 years since.

Of course that was under wartime and recession, and it's long been largely agreed that when simultaneously fighting war and recession, you do what you have to do and worry about the deficits later. We are now fighting a war and have been fighting a recession -- thankfully they are much smaller than the war and recession in the days of FDR, but the principle is still the same.

And in any case, the most interesting thing is what happened to FDR's huge deficts and national debt. Though they were much larger than anything today, by the mid-1950s the deficits had long disappeared and even the national debt had been retired. It's amazing what a growing economy can do, which is why Bush, like every President in time of recession before him, has made reviving the economy the top priority, even incurring deficits to do it. That is *exactly* the right thing to do. One might quibble about the details of it, but in principle it's exactly what should be done in such times.

Bear in mind, too, that CBO numbers are <i>forecasts</i>, not actual numbers, and the forecasts discount possible economic growth. That's why in 1995 the CBO forecast deficits for as far as the eye could see, yet by 1999 the deficit had disappeared. Long-range economic forecasts, like long-term weather forecasts, are extremely uncertain, and while interesting to consider, you should not ever, ever, confuse them with fact or certainty.

[jgr451]

[i]Originally posted by Oldcarkook

Any of you wonder why we threw the tea in the Harbor to begin with?

That is a tax on wealth(possessions).

I was wondering when the Tea party was going to be on again...

You actually voted for those taxes??Why??

[oldcarkook]

Originally posted by jgr451
That is a tax on wealth(possessions).

I was wondering when the Tea party was going to be on again...

You actually voted for those taxes??Why??

Say what? I didn't vote for any personal property or excise tax! NFW!!

But since we are on the subject, we also have a 5% state sales tax on everything, and extremely high property taxes, and, a 5% income tax (10% on unearned) .

You were wondering why they call this place Tax-a-chussetts? Remember, this is where John Kerry lives (rather comfortably in his $12MM Beacon Hill home) I might add. I'm sure John will straighten all of this US deficit out by using the formula that has worked well here in Massachusetts. Our newest tax form only has two lines on it!
Line 1> How much did you make last year?
Line 2> Send it in.

[jgr451]

You have my deepest sympathy.

Not that I live in a tax free zone,but it doesn't seem as bad as the situation you describe.