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10/18/2008 11:49:35 PM · #1 |
Tax Lesson 101 - Let's put TAX CUTS in terms everyone can understand.
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 one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm go ing 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 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 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 inste ad 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 the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
Notice: No trees were harmed in the production of this message. A rather large number of electrons were somewhat inconvenienced, however.
Cheers!
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10/19/2008 12:21:55 AM · #2 |
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10/19/2008 12:32:07 AM · #3 |
| That's a great explanation and so true how people react. I love the people getting the free beer complaining about not getting their share of the cut instead of being thankful for the free beer. Ignorance is not alway bliss... |
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10/19/2008 07:48:10 AM · #4 |
this sounds mice, but it is an extreme over simplification of the tax code and the way we pay taxes. I found out Friday that I could contribute up to $15,000 a year in pre tax income to my 457b. If I did this, my $50K a year salary would be considered $35k, which is the amount I would be taxed on. My total tax % would be less than someone actually making $35K. Then, lets add in my mortgage interest deductions (I have two houses), my property and personal tax deductions, my business loss deductions, my numerous other deductions (37 pages of federal tax returns) and my 'net income' is vastly lower than people who make half of what I do. I can even deduct the amount I paid to a preparer to do my taxes for me. In the end, I pay much less, as a total percentage of gross income, than people making less than 1/2 of what I do. And all of it is legal. The more you make, the greater the probability that you have more deductions to offset your income. I made a good amount of money this year by selling stock I had. I didn't work for the money, my money worked for me. And it is a smarter way to be: the tax rate on long term capital gains is lower than on money you actually have to work for. The less money I actually earn, the less I have to pay taxes on.
Do I think this is fair? Not in the least. When I can make twice as much money as someone else and pay less taxes, both % and actual $, I stop complaining about how much taxes I pay and start complaining about how unfair our tax code is.
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10/19/2008 09:49:00 AM · #5 |
Exactly right, Dahkota. Which is why we need to go to a flat-rate tax system with no deductions. For anyone.
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10/19/2008 10:32:13 AM · #6 |
Originally posted by shamrock:
Exactly right, Dahkota. Which is why we need to go to a flat-rate tax system with no deductions. For anyone. |
And it must include all the money that people have in their off-shore accounts where they are not currently paying taxes. If it were a flat rate system and everyone paid that flat rate on every dollar they own, there would be no problems. |
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10/19/2008 10:41:34 AM · #7 |
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10/19/2008 11:06:50 AM · #8 |
Excellent explanation Billy. Frankly, based on all news reports we see, one party are ones that understand it easily and the other party will never be able to understand it.
edited to remove party names to keep it out of Rant, also making it so the other party won't even comprehend it's about them
Originally posted by shamrock:
Exactly right, Dahkota. Which is why we need to go to a flat-rate tax system with no deductions. For anyone. |
Being raised on a farm I can see why this won't be feasible. A farmer may make $300,000 by selling his crops, but his (or her) expenses may be $250,000. Is he still to be expected to pay $100,000 in taxes?
Message edited by author 2008-10-19 11:31:50. |
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10/19/2008 11:32:34 AM · #9 |
Originally posted by boyd2000:
Excellent explanation Billy. Frankly, based on all news reports we see, Republicans and Libertarians are ones that understand it easily and Democrats will never be able to understand it.
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I really don't understand this statement. Maybe if you explain it to me...
Originally posted by boyd2000:
Being raised on a farm I can see why this won't be feasible. A farmer may make $300,000 by selling his crops, but his (or her) expenses may be $250,000. Is he still to be expected to pay $100,000 in taxes? |
Its one thing to deduct valid business expenses and quite another to hide income in legal loopholes.
Here's a couple of examples: My husband and I are considering buying a boat. We have discovered that if the boat has a 'bedroom' and 'bathroom' the interest we pay on the loan is tax deductible as mortgage interest. It will only cost us a couple thousand extra to put in the type of toilet required but will save us thousands over the life of the loan in taxes.
Another: John makes $50K a year, rents an apartment, and spends everything he makes on living expenses. he files an EZ form and so is taxed at 25%. Mark doesn't work but he lives off of the $50K a year his trust fund generates. He rents an apartment and spends everything he gets. His tax rate is 15% on his only income, long term capital gains. he also doesn't pay medicare or social security taxes.
My husband and I can 'hide' up to $30K of our income in 457b accounts, reducing our taxable income significantly.
We can make improvements to our farm and deduct them as a business expense (which we did when we installed a deep water well and electricity).
My only point here is that the information posted by the OP is not as accurate as it looks, nor are taxes as easily defined as presented. I know for a fact that my son's father paid as much federal tax as I did and he made half as much money as my husband and I did. And we aren't rich or in a high tax bracket, we just know how to take advantage of the system. People out there making significantly more who have tax accountants working for them are even better at it. |
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10/19/2008 11:41:23 AM · #10 |
What if we modify the OP's story. The four men who paid nothing... What if we used the word family, rather than "man"? As another poster pointed out how she could shield most of her income via the rules, the first four families not only shield *all* of their income, they'll actually be paid via a refund. So not only can the rich and middle class have preferable treatment, the poor can also have theirs. Like another poster, I used to favor a flat tax. No longer. I favor a *NO* tax. The personal income tax only provides a small portion of this countries operating costs. Most taxes the American people pay they don't even know about. Do you think *ANY* company or corp *REALLY* pays any income or any other tax???? NO. These taxes are passed on to their customers. There are other tugs on your income that you don't realize. Inflation. It reduces the value of your money, even as it sits in your bank or other account. There are federal excise taxes. Most of us have no idea what part of the purchase price of a particular item consists of excise taxes. They're not listed on the receipt. There are many other examples too numerous to cover here. So my desire with respect to taxes has evolved from Flat Tax, to No tax. What better way to remove the load of over 60,000 pages of tax code from the back of the average person. Simply eliminate the personal income tax and raise the corp rate by enough to cover the shortfall. They'll scream and hollar to start with but it'll be paid by the same people paying it now. YOU. And as an extra incentive for those who wish to keep building government and raising taxes... What better way to do this than a tax no one knows about. You can raise it any time you want because the average Joe will never know about it! And even better on the personal taxpayers side.... No more IRS being used as a carrot or stick against them. When you work hard and make overtime, no confiscation of over half your income per hour. When you decide if you can afford a house, it's no longer a tax decision, it's a money decision. And more importantly the NO tax solution is more like the way our founding fathers lived. Until 1913 most people did not exist as far as taxes were concerned. And the average person never paid any federal taxes until WWII. So hey! Let's march on Washington, DC this spring and demand NO Personal Income Taxes. heheheheheheheheheh
Message edited by author 2008-10-19 11:43:07. |
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10/19/2008 12:01:50 PM · #11 |
I would think the person in favor of a progressive tax system could modify the story so it seems obvious that a progressive system would be the obvious choice.
What if we made it 100 friends getting beer? 10 friends split one beer, 9 friends split one beer, etc. until we have one person getting a beer to himself. Blah blah blah. I'm going to really present it, but I would say the story, as presented, leads to a logical conclusion. But the analogy is tricky. What exactly does the beer represent? It can't be income because we don't have a system where one guy makes a beer's worth of income and pays nothing while another pays $59. (short from the loopholes mentioned above).
Message edited by author 2008-10-19 12:02:00. |
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10/19/2008 12:35:15 PM · #12 |
I'll says one thing... Here at DPC we will even argue over a fictional representation of a tax system.
The story neatly ignores tax breaks available to all americans. Most employers offer 401K or equivelant to sheild money, and if they don't there are IRAs to be had. Yest the poorest of the poor do not have any extra money to put away, but then again, the story completely ignores earned income credit.
Lastly for the farmers, the farm would be treated like any other business. Look at the income of almost any buisness. Grocery stores often operate at a 2 - 3 percent margin. If taxed on receipts, they would not have enough income to cover the taxes.
As for corporations not "really" paying any taxes. The same can be said of us, under fir3bird's reasoning. The corporation passes taxes along, when they can. The market decides the prices of goods and if you raise the price of your goods beyond that of your competior's, you wind up not selling product and can go out of buisiness. But, we as employees do much the same. Our taxes go up, prices go up, and the next thing you know, we are demanding more money in our paycheck.
The whole thing is a delicate balance, and when it gets out of whack we wind up with inflation, stagflation, recession, or depression.
Sadly, the world is chock-a-block full of simple, easy to understand, 25 words or less, wrong solutions to complex problems.
No tax, flat tax, whatever will not of in and of itself solve the economic problems of civilization. Were it so, it would have been done long ago, and someone would have gotten all the credit.
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10/19/2008 01:18:17 PM · #13 |
| Very flawed analogy. It assumes they all had 1 beer when it would be more like the first guy died of thirst, the second guy stole one, the third guy had one but had to take out a loan at 30% from the 10th guy. 4-6th had a beer each but paid the whole bill. 7-9th promised to pay next time but never do, and support the whole idea because the think one day they will be guy 10. Guy 10 has 20 beers and tells the rest how much fun they had because he showed up to drink thier beer. |
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10/19/2008 02:15:56 PM · #14 |
The best line in the whole email is this one:
For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
I gotta remember that one... |
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