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Tuesday, August 09, 2005

Tax Cuts - A Simple Lesson in Economics (Dolla Dolla Bills Ya'LL)

This is AWESOME. I wish all people understood this.

Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. 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 $7.
The eighth $12.
The ninth $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men ate dinner in the restaurant 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 meal by $20."

So, now dinner for the ten only cost $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 eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his 'fair share'?

The six men 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 eat their meal.

So, the restaurant 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 paid $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 eat 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 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, so the nine sat down and ate 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 at the table anymore. There are lots of good restaurants in Europe and the Caribbean

By: David R. Kamerschen, Ph.D
Distinguished Professor of Economics
536 Brooks Hall
University of Georgia

11 Other Freaks Said:

At 7:38 PM, Blogger Ni-Chan said...

This was a very thought provoking post! I have to say that I am not sure how to respond. The professor makes a very good point, although it is simplified. The problem I find with his statement is not in theory, but rather in practice. The tax burden in the country falls on the middle class primarily (why else would greg and I have to pay an alternative minimum tax? Why did we net less after a promotion because our tax bracket went up...hmmm...seems unfair). The very wealthy in this country are VERY good at finding ways to reduce the tax they pay if not eliminate it all together. If the wealthy actually paid taxes (and I am talking extreme wealth here) it might eliminate some of the burden on those of us who are considered wealthy by tax standards, but are actually nowhere near it. As an example, Greg and I paid over 12k for daycare last year. We found out that because of our income we were eligible for only a 300 deduction. THREE HUNDRED WHEN WE PAID 12,000!!! What the heck kinda shiznit is that!!

Ok, I have said my piece. Rock on sister! Keep posting these thought provoking articles.

At 8:19 PM, Blogger Bstermyster said...

Sounds like you need to find more deductions, and maybe a new CPA. If you want to disclose your Annual Salary, Bonuses, Severence any other form of MONEY you received etc. then maybe I can give you a more difinitive answer.

But to the point that "the wealthy find ways to get out of paying taxes... and sometimes eliminate it all together" ,My response is this - since I am married to a CPA and that I work for one of the top ten CPA/Management consulting firms in the US (see Plante & Moran to the right), and I work with about 1300 licensed CPAs, I can tell you this without a doubt, there is not one single wealthy person that does not pay their share of taxes. They pay it on their annual income, they pay it on any inheritance they receive, they pay capital gains taxes, then when they die they pay taxes again, etc. The wealthy do get hit the hardest.

If you can afford to pay 12,000$ in day care and still handle all your expenses and have money left over to travel, go to movies, shop leisurely, go to dinner, etc. you are better off than most, and to some would be considered wealthy because we can afford things they cannot.

At 2:37 PM, Blogger Chrissy said...

That was extremely interesting. I have to say, you have really changed my point of view. I did have such a lack of understanding; however, it all makes sense, great post!

At 8:11 PM, Blogger Shorty M said...

I cannot resist responding to the blanket statement heard over and over in this country...the wealthy find ways not to pay tax. I've done a lot of high wealth individual's tax returns, and believe me, they pay their fair share of taxes.
For those that don't know the IRS website explains AMT (Alternative Minimum Tax) as follows:

The tax law gives preferential treatment to some kinds of income and allows special deductions and credits for some kinds of expenses. Taxpayers who benefit from these provisions of the law may have to pay an additional tax called the alternative minimum tax. It is a separate tax computation that, in effect, eliminates many deductions and credits and creates a tax liability for an individual who would otherwise pay little or no tax.

For 2003, the exemption amounts for figuring the AMT have increased. The amount depends on your filing status. You may have to pay AMT if your taxable income for regular tax purposes, combined with certain adjustment and tax preference items, is more than the exemption amounts below:

$58,000 if you are married filing a joint return or a qualified widow(er),
$40,250 if you are single or head of household, or
$29,000 if you are married filing a separate return.
The adjustments and tax preference items include such things as: standard or certain itemized deductions, taxable state and local tax refunds, accelerated depreciation of certain property, intangible drilling costs, certain tax exempt interest and the difference between AMT and regular tax gain or loss on the sale of property, treatment of incentive stock options and depletion allowances.

There is no way out of paying taxes...if you pay a lot you've made a lot. It is our duty as an American citizen.

Sarah also raises a good point - Not only do the wealthy pay their fair share of "normal" taxes, but they have to pay the nonsensical "death tax" even with proper tax planning and a good attorney involved with estate planning. Everyone in this country has the right to minimize their tax liability...that's why you should heed advice and plan ahead from your favorite CPA and attorney friends.

At 8:25 PM, Blogger Chrissy said...

by the way (off subject) your hair looks great Sarah and so do you!

At 8:57 PM, Anonymous Rosemary said...

From Rosemary

The professor who gave us the "simple lesson in economics" couldn't have made it any easier to understand than what he did. Thanks for the posting. I also thought yours and Shorty M's response to Nicole was A-one .

At 10:12 PM, Blogger Bstermyster said...

Why thanks CUZ!

At 7:57 AM, Blogger Mattyc said...

I LOVE reading about taxes first thing in the morning! :)

ps - the site is back up... :)

At 8:31 AM, Blogger Bstermyster said...

Matt: - LOL - Seeing as I married an accountant, my brother and I work for the same accounting firm, and most of our friends are accountants - it's pretty much our favorite thing to talk about...well maybe not favorite but it takes up the majority of our time. LOL.

I will check out your site now

At 3:58 PM, Blogger Bstermyster said...

I don't want to beat a dead horse but the following is one of the Early Bird Tax Payer tips directly from the P&M website:

Avoid alternative minimum taxes – While some taxpayers may attempt to “cheat the system,” the government has found a way to keep deductions down to a minimum. Accelerating deductions can set off alternative minimum taxes (AMT). If a taxpayer’s miscellaneous itemized deductions are too high, if he/she has a large state income tax or if he/she exercised incentive stock options, the larger AMT may be due instead of normal income taxes.


At 6:15 PM, Blogger Shorty M said...

Sarah needs to audition for Napoleon's position becuase that's pretty much the best imitation I've read.


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