Since it is tax season let's put tax cuts in terms everyone can understand.
Suppose that every day, ten men go out for beer and the bill forall 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…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 going to reduce the cost ofyour daily beer by $20. 'Drinks for the ten now cost just $80. The first four 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, thenthe 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 byroughly 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 ofthem 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 either (1) stop drinking or (2) start drinking overseas where the atmosphere is somewhat friendlier.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
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6 comments:
I don't necessarily dispute the mechanics of the system, but the presentation is fundamentally misleading.
Although the actors in the story are individuals, they actually represent decile groups, e.g. the richest man represents the top 10% of income earners. Consequently, the $59 that he pays does not represent an individual income tax rate of 59%, but rather the sum total amount that the top 10% of earners pays relative to everyone else. This amount could be 1% of their individual income or 100%; it's impossible to know since the data to do that math is missing from the story.
More realistically, the average tax rate of the top 10% of earners in 2006 was 19% according to IRS data. According to the 2007 tax rates, the top tax bracket - those earning over $350k - paid a maximum rate of 35%. Given the graduated nature of the tax brackets (e.g. the first $15k is taxed at 10%, $15k - $64k is taxed at 15%, ..., only that portion over $350k is taxed at 35%), you would have had to earn $6 million to reach the maximum 35%, by my back-of-the envelope calculations.
Wealth is a matter of perspective. Earning $250k/yr does not seem like much when you spend most of your time looking up the scale at those making millions. However, when you look down the scale and realize that you are sitting on top of 98% of the population, in my estimation, you are doing quite well.
There is a question as to whether those making the most benefit most from how tax dollars are used. I'm a little less certain about that, but my inclination is yes. While their life and liberties are equally protected by national defense, the amount of wealth protected per dollar spent on national defense is a pretty direct relationship. And while a wealthy individual may not drive on publicly-funded roads any more than a poor person does, the source of their income is directly tied to that infrastructure in terms of bringing customers to their door and delivering their products to their customers. I imagine there are numerous other examples of how the wealthy benefit more from publicly-funded infrastructure.
Oh, did I mention that Dr. Kamerschen didn't write that analogy?
You clearly miss the point. The point is about the major disproportions people pay and what a tax cut really does. A tax cut benefits the top the most becuase they pay the most, and benefits the poor the least because they pay the least.
How about Obama wanting to cut taxes for 95% of people, but what he doesnst say is that the 40% of people that don't pay taxes will get a welfare check in the mail. No matter how you carve it up, to raise taxes on someone and then send a check to someone not paying anything at all is just plain wrong.
And, those statistics are not clear. The top 1% of people pay about 40% of the nations taxes, and the top 10% pay 70% of the total taxes. Here is the exact source: http://www.taxfoundation.org/news/show/22652.html
I assume with the last paragraph, that you then favor a trickle up effect in essence. When you mention the infrastructure example, I here is what you are missing. It was the wealthy that paid for the highway, and also the wealthy who paid the salaries of the workers who built it. If the money isn't their from the top it doesn't get done, period. They also get more money to build that bridge when taxes are lower, its a proven fact. Back to the other point, thats a major problem with the government today. Unlike a private business, it has an unlimited amount of money to spend and does spend whatever it wants. BOTH Republicans and Democrats are to blame.
Lastly, who really cares who wrote the analogy, it gets the same point across regardless.
I didn’t miss the point at all. As I said in my opening remark, I don't dispute that the analogy may accurately describe the mechanics of the system.
But rather than emphasize the total dollar amount the wealthy pay, I prefer to look at the percent of their income they pay. The top 1% may pay 40% of all income taxes collected, but that doesn't mean that they paid 40% of their income in taxes – that relationship depends on how skewed the income distribution is. Again, in 2006, the top 1% paid an average of 23% of their adjusted gross income in income taxes. The fact that this amounts to 40% of the total taxes paid is a result of the fact that the top 1% earned more income than the bottom 50% combined ($1.8 trillion vs. $1.0 trillion).
http://www.taxfoundation.org/taxdata/show/23408.html
The notion that lowering taxes raises tax collections because it generates wealth and thereby increases the tax base (and vice versa) is debatable. This is almost certainly true when marginal tax rates were 90%+, but it's less clear whether that relationship holds at the current marginal rates. In other words, I may choose not to earn that extra $1 when I know that I only get to keep $0.10, but I will likely choose to earn that extra $1 if I know I get to keep $0.60 - $0.70.
Obama's tax plan is a whole other topic, which I'm not sure is completely defensible anyway.
Well, that number is probably due to loopholes, write-offs and charitable deuctions etc. Also, with the cap on social security that reduces it. But the base rate is different especially for self employed.
But if you look at Obama's plan, no these are the numbers he said in the primary, taxes for the top 1% will be much higher then 23%. Heres how it would be:
income=39%
Social Security=6-12%
Medicare=2.9%
State tax=0-8%
So really its a lot more, especially when he says he wants to get rid of loopholes.
As you said the tax revenue thing is debateable. One point I would like to add is that the tax cuts that have been in place have been worth it, going back to your example. Also, on that point, whether this is a result of this or not, the total amount of taxes amount paid by the top (now 40%) has increased since 2003, and in that time the top rate was cut from 39 to 35%.
The Social Security number is wrong. Obama is suggesting that it be raised by 2 - 4 percentage points, which is a rate that Graham proposed and McCain said he could support.
Well, in the primaries it was 28% and you have to wonder what numbers he will keep as he has been all over the board. Back to the point though, why raise it all? In this economy the last thing we need to do is raise the capital gains tax which can only cut growth we desperately need. Do you disagree with that?
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