Interestring scenario of how tax cuts really work

[andy158]

Found this in one of our local Sunday papers. How tax cuts really work.

http://www.intershow.com/pmr/Companies/VERDON/docs/Our%20tax%20system.pdf

[justbroke]

I have tried and tried and tried to explain this to my friends who still make < $50K a year. I love this simple explanation from the Professor.

[tobee43]

i had to copy it and show it just in case people can't connect to the link! it's really perfect and worth the read. thanks so much!!



"How Capitalism and the American tax system works



Since it was recently tax season … Let's put tax cuts in terms everyone can understand. Suppose that every
day, ten men go out for beers 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 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 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 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. For those who understand, no explanation is needed. For those who do not understand, no
explanation is possible."


David R. Kamerschen, Ph.D., Professor of Economics
University of Georgia

[disconapper]

Nice!

[banca rotta]

"they might start drinking overseas where the atmosphere is
somewhat friendlier."


For those that cherish the current tax system and have no jobs or are under employed this line sums it up.

[GWBcasualty]

It's very cute and quite accurate.

What he left out was the scenario in which the Bar owner after applying the $20 discount discovers that he cannot pay all his bills and, either goes back to collect $100, or... well closes the bar and there is no beer for anyone.

[justbroke]

What he left out was the scenario in which the Bar owner after applying the $20 discount discovers that he cannot pay all his bills and, either goes back to collect $100, or... well closes the bar and there is no beer for anyone.

Well, you bring up a good point. The "real" problem is not the inability to pay bills, but the loss of the largest customer. The key to the discount was that they came in regularly and always spent $100, so that was a guarnateeed $100. THe bartender would have calculated that the regular $100 was worth reducing to $80 since that still gave him a profit and guaranteed the revenue.

But, when the 10th person, who is shouldering 59% of the burden, leaves... he does so after the reduction in cost. Since no one now wants to pay... you have no more revenue. Even if the other 4 stayed, they can't afford it without the 10th person. It's not the discount that is hurting, it's that the 10th person left.

I have friends that always cry about taxes, but don't even pay 1/10th of what I pay a year... they keep saying "the rich" this... but I'm well compensated and I'm tired of the complaining. I have seriously looked at moving to Mexico or The Bahamas. Maybe start stocking up on some Ameros.

[GWBcasualty]

Only the ignorant has a problem with anyone that is richly compensated. And only the ignorant is peddled that notion in order to avoid the real issue.

There is nothing wrong in offering a discount (read tax break), but there also should be nothing wrong in taking it back when things don't work.

I am talking about corporations and the wealthiest elite. People making $250k/year to $1-2 mil/year are NOT rich... are well compensated.

Rich? That is a different ballgame.

[justbroke]

I think a comedian once said, that there's a difference between "rich" and "wealthy". Michael Jordan is rich. The guy that signs his paychecks... is wealthy. Yes, it's a different perspective, but the government draws the line at around $120K AGI for married couples. That's when just about EVERY tax credit goes away, or begins to phase out. Yet, somehow, the well-compensated are the ones that get all the "breaks".

I think this is why the well compensated and "rich" are better at using their money more effectively. For example, buying a home and using the interest payments as a tax deduction! They just have to find better ways to avoid paying taxes.

[daylate]

This is just more rich bs. Tax rates today are about as low as they have been in a long long time and yet people making 300k and above are pleading poverty and saying if the tax rates were reduced the economy would recover. I say b*llsh*t-the problem with our economy is we spend too much and we don't raise enough tax revenue. Lowering taxes will only exacerbate the problems we currently have. Give me my old job back where I made well into 6 figures-I'd gladly pay the tax bill. And for those who don't want to pay because they have to settle for a stripped down Mercedes I say "Shame on you". Want to fix social security? Just raise the limit so everybody pays the same percentage. Maybe we can have a fund raiser for those making 500k who would now pay the same percent of income as the guy making 50k. True they would pay an extra 27k or so than they do now, but they also would still have an extra 400k or so (before fed & st txes) than the guy making 50. If the rich don't pay more, then who is going to rebuild our crumbling infrastructure? pay for the police and firemen? Our schools? Not everyone can make top dollar. Somebody has to be on the top and somebody has to be on the bottom-that is the way our system works. With thinking as espoused in the original post, the American decline will happen faster than it is currently progressing. And if the rich guys want to move to a low tax country.Let them go. I'm not sure many of them would trade our lifestyle for those of other countries.

[msm859]

Only the ignorant has a problem with anyone that is richly compensated. And only the ignorant is peddled that notion in order to avoid the real issue.

There is nothing wrong in offering a discount (read tax break), but there also should be nothing wrong in taking it back when things don't work.

I am talking about corporations and the wealthiest elite. People making $250k/year to $1-2 mil/year are NOT rich... are well compensated.

Rich? That is a different ballgame.

Well I would say there is nothing wrong with a tax break IF there is money to do so. The Bush tax cuts are a primary cause of our problem today. Obama extending them is a primary cause of our problem today and tomorrow.
Rich is a relative term. 250k in LA is definitely not rich -- other places it may well be.
I am not sure what the entire hidden agenda behind this beer story is.
I say we should let all of the Bush tax cuts expire. I don't care to leave my children and grandchildren a bankrupt country.
As to the complaints that the rich pay most of the taxes they should - they get most of the benefits. In the beer story everyone only gets 1 beer from the "investment". In real life the rich get airports, real property, a stable environment to prosper etc. The poor don't fly anywhere, they don't worry about terrorists, protecting property our global empire -- they worry about basic food, clothing and shelter.
So this simplistic story I suggest is designed for simple minds.

[tobee43]

i know there are two tax sides to every story.

i know two....both making over 250k. one thinks they clearly see taxes must be increased to pay for these continuing government expenses and don't mind an increase.

the other claiming he can't make his 30k in child support and 10k alimony monthly and if the increase comes, he can't afford a can of beans to eat. (while really how can anyone feel badly for someone that allowed an atty to have you sign a document committing you to 40k monthly until you almost die). however, the point here is i frankly believe it's all somewhat relative in many ways.

however, i do know one think for certain, those making 150k or less, are the ones that hold up this country...and frankly, we personally are at the bottom line of that pyramid and my shoulders are beginning to give way.

[daylate]

Tobee- my major gripe is with those who want to lower the top rate (which only applies to those over 373k in taxable income) to 25%. Lets say someone had 500k in taxable income that would cost the government 12,700. I'm sure that saved 12.7 would be invested to start a great new business employing 500 people at high wages. Right. If anything the Bush cuts should have expired and the top guys would have paid 4% more on the 127 or a whopping 5k. Collectively that 4% increase would have helped our situation. If tax cuts work so well, why is the economy so effed right now? Well. in my opinion it is not because of our tax rate. It is because of many factors. Globalization is right up there at the top of the list. We all enjoy our better made foreign cars and imported electronics produced by people making far less than Americans. This situation is not going to get better, matter of fact it is only going to get worse. As other countries get a taste of the "good life" they will want more money so the cost of our imports will go up but will for a long time still be cheaper than American made goods. Not to mention the impact other countries that are developing will have on the cost of oil, food and other commodities. Solutions? I don't know but I do know(believe) that lowering taxes for people making over 373k is not the answer. It will take a very concerted effort by both sides to cut spending, raise revenue, continue support systems such as SS and medicare and provide an adequate defense for our country. Sacrifices will have to be made by all. I agree that so far the majority of the burden has fallen on the poor and middle class. Isn't is time for some of it to fall on those who make a ton of money?

[tobee43]

Tobee- my major gripe is with those who want to lower the top rate (which only applies to those over K in taxable income) to 25%. Lets say someone had 200k in taxable income that would cost the government 12,700. I'm sure that saved 12.7 would be invested to start a great new business employing 500 people at high wages. Right. If anything the Bush cuts should have expired and the top guys would have paid 4% more on the 127 or a whopping K. Collectively that 4% increase would have helped our situation. If tax cuts work so well, why is the economy so offed right now? Well. in my opinion it is not because of our tax rate. It is because of many factors. Globalization is right up there at the top of the list. We all enjoy our better made foreign cars and imported electronics produced by people making far less than Americans. This situation is not going to get better, matter of fact it is only going to get worse. As other countries get a taste of the "good life" they will want more money so the cost of our imports will go up but will for a long time still be cheaper than American made goods. Not to mention the impact other countries that are developing will have on the cost of oil, food and other commodities. Solutions? I don't know but I do know(believe) that lowering taxes for people making over K is not the answer. It will take a very concerted effort by both sides to cut spending, raise revenue, continue support systems such as SS and Medicare and provide an adequate defense for our country. Sacrifices will have to be made by all. I agree that so far the majority of the burden has fallen on the poor and middle class. Isn't is time for some of it to fall on those who make a ton of money?

it's funny...but really not. i guess what we are both saying, is, of course there is no simple answer.

but, what really gets me, is those that have gotten rich using our blood, sweat and tears and then we get taxed to where we can't afford to live. additionally, we need to consider our rising gas cost..(they are saying here we will be hitting $5 shortly), food cost, tax burdens and, why... shoot; we are the BEST country in the world? aren't we? so what does this really say about us.

i am beginning to change my out look in general with my basic philosophy on life..which was i have always said you can really tell the health of a country by the way they take care of their poor and elderly. now...i'm beginning to what to include the now poor "middle class"...or what's left of it.

[houston7]

At least msm and daylate know bull$hit when they see it. Do you people understand how the rich get where they are? Here's a hint, it ain't from "paying 59% of a daily bar tab". For those of you that think this story has any correlation to real life I have some oceanfront property in Nebraska I would like to discuss with you. The rich get rich through inheritance, or through exploitation. If these rich people were so altruistic they wouldn't have been shipping jobs overseas for the last 30+ years, and sitting on trillions in cash while millions of people are unemployed. In the real world, the rich person would figure out a way to have everyone else pay the tab while they drank for free. Or is nobody paying attention to the links that were on this very forum showing the tax breaks/bailouts/refunds that these people are getting.

I know that some people here will defend these rich Aholes stating that it's their money and their choice. Fine. Then let's have these rich folks tell the truth instead of bull$hitting us. These are the same folks that tuck tail and run to other countries to produce their goods due to excessive regulation. Yet when questioned about the specifics of these regulations they, and their supporters get very quiet. Additionally, I find it strange that they are able to lobby congress for all kinds of loopholes to maximize profits, but are unable to nut up and repeal these excessive regulations they say are causing them to ship jobs overseas. I smell a rat. A giant, trillion dollar rat.