Wednesday, January 30, 2008

Taxes and Politics

The following is from an email I got recently, and it (I assume) is quoted from David R. Kamerschen, Ph.D. Professor of Economics University of Georgia. It's a great anecdote that highlights how conflict is created from the process of change....

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 wo uld 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 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 me n - 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 instead of $7 (28% savings). The eighth now pa id $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, ladies and gentlemen, 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.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible

1 comment:

Grant Fox said...

A counterpoint, from the WSJ (

March 5, 2008, 12:08 pm
Incomes for Super Rich Grow Faster Than Their Taxes

A new report by the IRS on America’s top 400 income-tax payers shows that the super-wealthy are gaining a larger share of the income pie, but are paying a lower share of taxes.

The report, obtained by my Journal colleague Tom Herman, profiles the so-called Fortunate 400 (as measured by adjusted gross income or AGI). The last time the IRS released such a report, it sparked a heated war of words between the right and left over inequality.

This time, the data are even more provocative.

In 2005, you needed at least $100.3 million in AGI to make the list — more than triple the amount needed in 1995. This is roughly in keeping with the increases in the Forbes 400 list, where the wealth needed to make the 400 has more than tripled since 1992 to $1.3 billion. Of course, this doesn’t necessarily mean that the same rich people are getting richer, since the income list tends to be fluid. It just means that the fortunes being made today are much greater than those of the past.

What’s most striking however is the income and tax shares. The IRS report shows that the Fortunate 400 now control 1.15% of the nation’s income — twice the share they controlled in 1995. Over the same period, however, the average income tax paid by this same group has fallen from 30% to 18%. That’s due mainly to the Bush tax cuts.

Many argue that the super-rich pay a disproportionately high share of taxes. And that’s true to a degree, according to the report. The Fortunate 400 paid 1.67% of the nation’s total income tax bill, even though they account for 1.15% of the income.

Yet the the growth in incomes by the super-rich has far surpassed their growth in their income taxes paid, since their tax rates have fallen. Their share of total income has more than doubled since 1995; yet their share of taxes has only gone up less than 50%. Whether this is good or bad will be up to partisan pundits and economists to fight over. But one thing is certain: The report will likely provide new ammunition for both sides of the wealth wars.