Sunday, August 12, 2007

The Rich Get Richer . . .

I am so sick of hearing people (liberals actually, but I guess they're people too...) denying that allowing a tax cut to expire is the same as raising taxes. Come on people, when something that is done or not done causes taxes to go up, then that is a raise in taxes. It's math.

I also have a distaste for people (again, liberals) complaining about the majority of tax breaks going to the more wealthy among us. Doesn't this just make sense since the wealthy shoulder a higher tax burden in the first place?

Anyway, here is a little analogy to help the economically illiterate undestand what is going on when when we're talking about tax breaks.

H/T No Pasaran!

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:

1. The first four men (the poorest) would pay nothing.
2. The fifth would pay $1.
3. The sixth would pay $3.
4. The seventh would pay $7.
5. The eighth would pay $12.
6. The ninth would pay $18.
7. The tenth man (the richest) would pay $59.

So, thats what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. Since you are all such good customers, he said, Im going 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 everybodys 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 mans bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
1. The fifth man, like the first four, now paid nothing (100% savings).
2. The sixth now paid $2 instead of $3 (33%savings).
3. The seventh now pay $5 instead of $7 (28%savings).
4. The eighth now paid $9 instead of $12 (25% savings).
5. The ninth now paid $14 instead of $18 (22% savings).
6. 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. Its unfair that he got TEN times more than I! Thats 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!

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.


Hlebfan said...

Or worse! People will be discouraged from seeking higher income, risky investments, or entrepreneurship because if they do manage to attain wealth, they feel that it will be taken from them by someone (government) who had no part in the initial risk and investment.

Anonymous said...

wow!! i never thunk of that before.