How Tax Cuts Work - Good Explanation

[Sadanand Murthy]

You've heard the cry in the past "It's just a tax cut for the rich!", and it is accepted as fact. But what does that really mean?

The following explanation may help.

Suppose that every day, 10 men go out for dinner. The bill for all 10 comes to $100. They decided to pay their bill the way we pay our taxes, and it went like this:

The first four men (the poorest) paid nothing.

The fifth paid $1.

The sixth $3.

The seventh $7.

The eighth $12.

The ninth $18.

The tenth man (the richest) paid $59.

All 10 were quite happy with the arrangement, until one day, the owner said: "Since you are all such good customers, I'm going to reduce the cost of your daily meal by $20." So now dinner for the 10 only cost $80.

The group still wanted to pay their bill the way we pay our taxes.

The first four men were unaffected. They would still eat for free. But how should the other six, the paying customers, divvy up the $20 windfall so that everyone would get his "fair share"?

They realised that $20 divided by six is $3.33. But if they subtracted that from everybody's share then the fifth and sixth men would each end up being paid to eat. The restaurateur suggested reducing each man's bill by roughly the same percentage, thus:

The fifth man, like the first four, now paid nothing (100% saving).

The sixth paid $2 instead of $3 (33% saving).

The seventh paid $5 instead of $7 (28% saving).

The eighth paid $9 instead of $12 (25% saving).

The ninth paid $14 instead of $18 (22% saving).

The tenth paid $49 instead of $59 (16% saving).

Each of the six was better off, and the first four continued to eat for free, but 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!" "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. The nine sat down and ate without him, but when they came to pay the bill, they discovered that they didn't have enough money between all of them for even half of it.

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.

With thanks to David R. Kamerschen, Professor of Economics,
University of Georgia.

[Mapraputa Is]

This thread was sentenced to spend a day in our local prison, and now is released on bail. If you plan to reply, please maintain academic discourse and pretend to be disinterested. If this thread will get political, it is almost guaranteed to be executed.

[Manish Hatwalne]

Too Good!!!

Such a beautiful post, why should it ever get deleteted? After so many years I have fwded a mail to so many ppl.

- Manish

[Helen Thomas]

Originally posted by Sadanand Murthy:
Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

With thanks to David R. Kamerschen, Professor of Economics,
University of Georgia.

But the rich have to eat too. Where else would they go ? The rich man can excercise his free choice to go to a restaurant where he doesn't have to pay as much. Those who eat for free and those where tax cuts doesn't really affect their bottom line , really should have nothing to say on the tax cuts. Bill Gates pays the same Social Security tax as someone earning $75,000.
[ July 16, 2004: Message edited by: Helen Thomas ]

[Jeroen Wenting]

Originally posted by Helen Thomas:


But the rich have to eat too. Where else would they go ? The rich man can excercise his free choice to go to a restaurant where he doesn't have to pay as much. Those who eat for free and those where tax cuts doesn't really affect their bottom line , really should have nothing to say on the tax cuts. Bill Gates pays the same Social Security tax as someone earning $75,000.

Bill Gates pays the same percentage, not the same amount...
Yet when he looses his job he gets the same amount (after an initial period) as everyone else.
That's the system as it works here, USA is probably similar.

As it is here:
Social security taxes are a percentage of gross income.
Social security payouts are for the first year (there are plans to reduce that to 6 months) a percentage of gross income with a minimum and maximum amount (the minimum being the minimum social security payment).
After a period depending on how long you held employment before going on social security but no more than a year, the payouts are reduced to the minimum amount which is independent of prior income.

If you have any money of your own (life savings, life insurance, stock, house ownership, etc. etc.) left after that year you get nothing at all until you have used all that money first (and don't think to spend it all quickly, there are strict rules how long it must last based on spending per month).

Thus you can work your a**e off all your life and save up for retirement but if you loose your job 2 years before you retire you will have nothing left of all that and still get social minimum retirement money...

Thank you "social" economic policy.
[ July 16, 2004: Message edited by: Jeroen Wenting ]

[frank davis]

Originally posted by Mapraputa Is:
This thread was sentenced to spend a day in our local prison, and now is released on bail. If you plan to reply, please maintain academic discourse and pretend to be disinterested. If this thread will get political, it is almost guaranteed to be executed.

I missed the reasons why this humble, simple post was thrown in jail
[ July 16, 2004: Message edited by: herb slocomb ]

[Max Habibi]

It was jaywalking, then resisted arrest.

[Jim Yingst]

Probably because historically, people like to argue about taxes, and we're tired of refereeing mudslinging fights. So instead we now tend to stomp them out early and often.

[Mark Fletcher]

Originally posted by Max Habibi:
It was jaywalking, then resisted arrest.

Do posts get conjugal rights?

[Max Habibi]

Originally posted by Mark Fletcher:


Do posts get conjugal rights?

Only with The Jab.

[Oklahoma Mike]

I think one good reason for its being rlegated to prison could be plagarism. Claiming work as your own is one form, but attributing work to some one falsely is also plagerism
http://www.arches.uga.edu/~davidk/
Apparently Dr. Kamerschen doesn't like being associated with this story

[Jason Menard]

"Oklahoma Mike",

Welcome to JavaRanch. We'd appreciate it if you could edit your display name in order to comply with our naming policy. Basically this calls for a name that could plausibly be your own real name. Check out the above link for more details. Thanks in advance, and we look forward to seeing you around the 'Ranch.
[ August 26, 2004: Message edited by: Jason Menard ]

[Joe King]

Perhaps one way to have sensible, non aggressive, debates about contentious issues like this is to encourage quotation. Instead of someone just saying "Progressive tax is best" and then someone else replying "No you idiot, flat tax is the way" (I seem to remember Jeroen and myself having a similarly heated..er.. debate ), people should write a concise and neutral statement backed up by figures and quotations (from similarly neutral and respected sources). A lot of the problems with arguments in fora conversation is when they become little more than slanging matches, instead of informed opinions.

Of course I've completely failed to back this opinion up with any quoted material or facts of any kind

[Frank Silbermann]

I think a fundamental disagreement is over the purpose of taxation itself. The original American view (based on 17th century English and Scottish liberal philosophy) is that any taxation smells of slavery, but that ideological purity in the pursuit of freedom is impractical. Unfortunately, no society can be utterly devoid of collectivism -- there would be no security for freedom and private property without a collective national defense, a collective criminal justice system, and a collective scheme for the enforcement of contracts. So government was viewed as a necessary evil, and likewise the taxes used to support government. But to minimize the evil we should minimize the scope of government, preferring private institutions whenever possible. Under this view, taxes are collected from everyone, but no more than people can afford to pay, and ideally it should be far less than people can afford to pay. When we followed this approach, people tended to be honest in paying the taxes they owed, and politics was peaceful (in most elections, not that much was ever at stake).

The democratic socialist view (based on post-French Revolution leftist thought) is that we should put as much of society as we can under the government's supervision and control, and that the more the government takes from the rich, the better. This is because reducing the wealth of the rich is considered a worthy objective in its own right, and the government can always find _some_ positive use for the money.

Americans tend not to be very theoretical. Most of us tend to be guided by intuition and ad-hoc pragmatism -- so neither political party is ideologically consistent. But subconsciously, Americans tend to be influenced by one of the two above views moreso than the other -- and from that comes each person's emotional response to the idea of tax cuts.

[Stan James]

Originally posted by Sadanand Murthy:

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.

I kept quiet the first time around on this thread, but have to jump in now and say, um, no. I can just see Bill Gates saying taxes are too high and he's just going to stop making money now. He and Warren Buffet and Donald Trump will get minimium wage jobs and share an apartment just so they won't have to pay taxes? I don't worry about taxing the wealthy to the point they give up.

[Frank Silbermann]

Originally posted by Stan James:


I kept quiet the first time around on this thread, but have to jump in now and say, um, no. I can just see Bill Gates saying taxes are too high and he's just going to stop making money now. He and Warren Buffet and Donald Trump will get minimium wage jobs and share an apartment just so they won't have to pay taxes? I don't worry about taxing the wealthy to the point they give up.

They might change their citizenship and move their home offices overseas -- say, to the Bahamas. That was once unthinkable, but the deprecations of American patriotism that the Left has engaged in since the 1960s have made this more of an option.

Or, they might just consolidate what they have in trust funds and retire.

[Warren Dew]

Stan James:

I kept quiet the first time around on this thread, but have to jump in now and say, um, no. I can just see Bill Gates saying taxes are too high and he's just going to stop making money now. He and Warren Buffet and Donald Trump will get minimium wage jobs and share an apartment just so they won't have to pay taxes?

Bill Gates has already given up the top job at Microsoft.

One has to be careful about people like Warren Buffett - and George Soros, to take another similar example. They aren't actually taxed at very high rates. By keeping their personal wealth in holding companies, they avoid personal income taxes almost entirely, and the corporate tax rules are so full of loopholes that I bet their companies don't pay much even at the lower, flat, corporate tax rates. The weird thing about how the U.S. tax system is set up is that it's regressive at the highest levels - Billionaires like Buffett and Soros pay much lower effective rates than everyday "rich" people who make six figures instead of nine or ten figures.

Frank Silbermann:

They might change their citizenship and move their home offices overseas -- say, to the Bahamas. That was once unthinkable, but the deprecations of American patriotism that the Left has engaged in since the 1960s have made this more of an option.

Some people feel that patriotism is as much about ensuring that America lives up to its ideals as it is about supporting what the government decides to do. Naturally, people may differ on what America's ideals are - personally, I think both major parties are currently a little too willing to give short shrift to free speech and due process - but I don't think any one group has a monopoly on patriotism.

[Joe King]

Originally posted by Frank Silbermann:

They might change their citizenship and move their home offices overseas -- say, to the Bahamas. That was once unthinkable, but the deprecations of American patriotism that the Left has engaged in since the 1960s have made this more of an option.

Isn't a part of "American patriotism" being patriotic to the "American Dream" of anyone being able to make buckets of money? By doing their best to make lots of money, the rich people relocating to the Bahamas could well be seen to be being patriotic to this Dream.

[Frank Silbermann]

Originally posted by Joe King:


Isn't a part of "American patriotism" being patriotic to the "American Dream" of anyone being able to make buckets of money? By doing their best to make lots of money, the rich people relocating to the Bahamas could well be seen to be being patriotic to this Dream.

No, I've never heard a patriotic American describe "the American Dream" that way. Usually it refers to a working man's dream of becoming a moderately prosperous respectable property owner, the king of his small castle.

[Homer Phillips]

What a crock, oh wait, that's not a crock, it's freedom of the press.