Income Tax Reminder

[Wuptdo]

This is a fun "taxing" read:


A Lesson in Economics:


Tax cuts - How they really work. Sometimes Politicians can exclaim; "It's just a tax cut for the rich!", and it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, we hope the following will help.

Tax Cuts - A Simple Lesson In Economics

This is how the cookie crumbles. Please read it carefully

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, 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 ones who get the most money back
from a reduction are those who paid in the most. 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.



I wonder if I can get this in the Cary News or the News&Distruber?

Wuptdo B-)

[Mark]

Cute. Several very obvious flaws though, which I feel I should point out to anyone who missed them.

First, the tenth man always has to show up for dinner. His not doing so is illegal, it doesn't matter if he doesn't like paying.

Second, the story conveniently leaves out that taxes buy services, not just dinners. And it is the presence of those services that allows any of them, but the tenth man most acutely, to have any wealth at all.

Third, there is at least one other way to look at the issue that resolves the conflict between assessing the tax issue in terms of real dollar savings and as a percentage savings. That is, don't think about in terms of savings at all, both percentage terms and real terms are somewhat unsatisfactory. Better then to consider each person's percentage share that they actually pay, not save. So I'm concerned not what each bracket's individual rate is, say 38%, but rather what percentage of the total tax revenue receipts do people that pay 38% comprise.

For example, if the men fall into categories A, B, C, D, and E... the A men contributing 0% of the total tax bill, for example, the B men contributing 5%, and so, then if there is a cut the way to measure its justness is to calculate whether the B men now contribute more or less than 5% of the total tax burden. If they do contribute more, that means the rich, those that can afford to do so, are contributing less than they were while commanding the same set of services. The poor are then having to pay more for the service they do get, and, if we're cutting taxes that means we're probably cutting spending and - this should come as news to no one - program cuts disproportionately effect the most underserved in this country. They are the only group where tax cuts and spending cuts might actually be a life or death issue.

Remember that we're talking about lives when your wealthy friends try to stiff you at dinner.

[dhyatt]

[snip]

Third, there is at least one other way to look at the issue that resolves the conflict between assessing the tax issue in terms of real dollar savings and as a percentage savings. That is, don't think about in terms of savings at all, both percentage terms and real terms are somewhat unsatisfactory. Better then to consider each person's percentage share that they actually pay, not save. So I'm concerned not what each bracket's individual rate is, say 38%, but rather what percentage of the total tax revenue receipts do people that pay 38% comprise.

[snip]

The most recent data on your question can be found here: Excel spreadsheet -IRS data 1986-2001 (http://www.irs.ustreas.gov/pub/irs-soi/01in01ts.xls)

It clearly shows that the majority of wage earners pay more in taxes (as a percentage of total tax revenues) than they earn in wages (as a percentage of total wages). It's not a pretty picture because we are fast approaching the point where income (and thusly tax) stratification will result in a majority of voters determining how the tax revenue from a relative minority of voters is spent. In effect, this could, and probably will , lead to ever increasing class warfare and eventual serious economic depression. It's happened before.

[Cathy]

The most recent data on your question can be found here: Excel spreadsheet -IRS data 1986-2001 (http://www.irs.ustreas.gov/pub/irs-soi/01in01ts.xls)

It clearly shows that the majority of wage earners pay more in taxes (as a percentage of total tax revenues) than they earn in wages (as a percentage of total wages). It's not a pretty picture because we are fast approaching the point where income (and thusly tax) stratification will result in a majority of voters determining how the tax revenue from a relative minority of voters is spent. In effect, this could, and probably will , lead to ever increasing class warfare and eventual serious economic depression. It's happened before.

Don't expect Mark-E!-Marx to get this, Don.
For one, he doesn't want to.
Secondly, the ideology he subscribes to has no relation to the idea of fairness that your argument or Wup's is trying to present,
and thirdly, since his Mommy and Daddy have probably been subsidizing his lifestyle up to this point in his life, he may be working hard to make certain that a "Big Brother" government picks up the tab when Mom & Dad can't do it any more.

If he can put forward a statement like this and be serious,

First, the tenth man always has to show up for dinner. His not doing so is illegal, it doesn't matter if he doesn't like paying.

it is a clear indication of how shallow his wishful thinking is.
He doesn't even grasp the fact that it may not be a matter of "the rich" illegally refusing to share. He misses the obvious conclusion that there will be fewer people who have the incentive to become "the rich" AT ALL.
Why would they put themselves out for nothing, when they can put their hand out to "Big Brother" for their needs, along with everyone else who is "economically challenged"?

Cathy
_________________
*******The outlandish assertion catalog*********
"First, the tenth man always has to show up for dinner. His not doing so is illegal, it doesn't matter if he doesn't like paying."

[Wuptdo]

Mark,

Dude, this wasn't meet to be deconstructed and analyzed; it is satire. However, in satire, there is always truth. Many a great author would of been either black listed or burned at the stake (depending on century). Satire is written in such a way that the common person can understand and for some relate.

Be that as it may, this little piece is the best describtion of U.S. tax policy I have ever seen and the closest to the truth. I have two possible solutions: A) all those in the first five groups are sterlized (both sexes) thus taking low performers out of the gene pool (replace with hard working immigrants) or, B) Flat tax rate across the board for all.

We few weeks ago in the N&D it was mentioned, that due to "Tax Hike" Mike's soak the super-rich tax policy, that about 800 moved out of state. In 2003, this cost the State about 30 million in lost revenue. Another interesting point, why does Sen. Edwards have 20 plus "trust-funds?"

We have one of the worst income rate structures in the world.

Don - good points!

Wuptdo B-)

[Mark]

Great stats Don, good find and thanks for posting them.

A couple of things to note. I'll simply point out that fully 50 percent of the humans beings in this country can command only 14% of all the income.

The most important thing to notice about those numbers is that, while the share of the tax burden born by the top 10% increased some 10% over the period given, their rate actually decreased. Which means, obviously, that if the rate were held constant, or were to go higher, that the top 10% would pay an even greater share of taxes than they do now.

But what accounted for their increasing share of the burden if the rate was decreasing? Simply that there are more of them and they're paying taxes on ever larger amounts. That's not some system design, the intent of which is to punish people who are doing well financially, it's merely the recognition that there are more people paying that have more money. Why wouldn't, or shouldn't, that situation lead to a condition where that group shares a greater tax burden than it once did?

I wonder though how income and tax stratification is increasing if the rich are supposedly being hit for some much. The answer lies in the fact that we're talking about rates, which are percentages, and missing the fact that, at the end of the day, the most wealthy are still taking home more than they used to... at an increasing rate. I know, I know, I said we didn't need to use real dollar value. But, my example in my previous post assumed that rates were adjusted while everything else remained equal. If rates for the wealthy go down, and there is no increase in the number of wealthy or the level of their wealth, they will in fact pay less of share, while retaining the same share of income. To resolve out the effect of additions to the numbers of wealthy and level of wealth we need to consider again the individual, that, despite the fact that they are being taxed highly, and support a larger share of tax than they do income, that they're still making ever more money, and stratification is increasing.

Sounds like we're not redistributing enough to ward off those undesirable effects then. :)

[Mark]

Cathy,

Curious that you choose fairness as a doctrine to defend a more regressive tax system. The logical exteme of such a system is flat tax, which clearly is the most immoral system of taxation yet devised. For it has absolutely no relation to the level of income shares people have and how much share of the tax burden they have to shoulder. Further, it "charges" people the same rate for services that they enjoy at wildly different rates. Much more is spent in the U.S. on corporate welfare and business promotion than is spent on, say, health costs. The former effects to the largest degree wealthy individuals while the latter is truly a society-wide benefit, helping most those that are most in need. If poor people contribute the same percentage of their income as do the rich, then states would be obliged to spend the same percentage of its expenditures on the poor as they do the rich. That will never, never, happen in a quasi-capitalist society like the U.S.

So, if you think it's fair that the wealthiest people can increase their wealth geometrically by plundering the value of the labor and tax revenue of those less fortunate then they, then you indeed have a unique view of fair.

I always laugh when I'm accused of living off of my parents. First, people invariably assume I'm of the age that it would be appropriate to do so. Second, they assume that my parents could afford, or would even desire, to do so. And finally, I'm accused of it often... it's an easy, terribly unoriginal, attempt to deflect debate whenever the conservative mind is challenged and struggling to justify its position. I work for a local non-profit; I work very hard and I don't make very much. I have a wonderful partner who does cancer research who makes more than do I, but still far less than you'd expect. She is paid by the government because she works for it, and that is the only contact with "Big Brother" I have or want other than the fee I send him April 15th like everyone else. There is no tab to pick up, we live comfortably and happily on what we earn and I see no reason that it will ever be otherwise. Let me suggest that you forever more leave such accusations and pettiness out of your discourse.

How does the statement, "First, the tenth man always has to show up for dinner. His not doing so is illegal, it doesn't matter if he doesn't like paying." at all indicate shallowness or wishful thinking. It was simply a way to say that people must pay taxes, they don't really have a choice. See, in the little story, the men's paying for dinner was supposed to be analogous to their paying taxes. Just because one is saddled with a larger burden doesn't mean he can just not show up.


He misses the obvious conclusion that there will be fewer people who have the incentive to become "the rich" AT ALL.
Why would they put themselves out for nothing, when they can put their hand out to "Big Brother" for their needs, along with everyone else who is "economically challenged"?

I've been over this before in response to something Don had written. In a pure socialist society where there is something very close to or at a level of total income equality, I grant that the incentive for people to acheive higher educational, professional or skilled standards are greatly lowered. That is, unless people of motivated by community and benevolence, which completely rules out the viability of a pure socialist state emerging from any exsisting one like the U.S. I have always maintained that as long as there is a tiered tax structure people will retain incentive for those things I've just mentioned.

I would suggest that there be approximately 8 to 12 tax brackets ranging from zero, or very close thereto, to 90, or very close thereto. I wouldn't mind that much if the top rate was 100%, effectively putting a maximum wage in place.

Why would that system retain incentive. Simply, people in the U.S. are, lamentably, very concerned with a) having money, and b) having more than at least some people they know. People want to have money to do the things they want to do, and there's nothing wrong with that. So what if it's increasingly hard to make the extra buck because the tax rate is higher. Is it not like that now too, at what point do the barriers become sufficiently high to dissuade advance? If that's the only way that you can make the buck, then you're still going to do it - especially if things like providing for your family, seeing your children succeed, and living happily are important to you. I reject the notion that people would be content to live on handouts, at a lower economic scale. Why? Because you wouldn't, I wouldn't, and I bet most of the people you know wouldn't.

Such a system seems to me like it would produce a more normal distribution of wealth than the one now. A large and robust middle class, defined by the ability to afford everything it needs and satisfy most of it wants while not venturing into the realm of luxurious leisure and excess. Some may have it, and that would be regrettable, but overall, an improvement, a definite improvement.

[Cathy]

Mark(x) said:

And finally, I'm accused of it often... it's an easy, terribly unoriginal, attempt to deflect debate whenever the conservative mind is challenged and struggling to justify its position.

I'm not struggling, you've just convinced me....
Convinced me that no amount of discussion will change your mind. You will just have to figure it out as life deals it to you.
(BTW_I am conservative about some things, liberal about others. Typical of libertarians.) But I am absolutely ANTI-socialist!
To say that a flat tax is immoral is subjective. It would depend on how far removed that idea is from what you think is fair, which you have already stated. How about no income tax, and replace it with a "progressive" sales tax? The basic needs are not taxed (food, some clothing, primary residence), the small luxuries taxed some, the obvious luxury items, like second homes and pleasure yachts, jewelry, furs and such taxed very highly. That way, those with lots of extra discretionary funds would pay for their excessive spending. Or a modified version of this on a flat tax? But I know, that does not fit with your stated ideal of taxing the income of the wealthy until they take home no more than the lower middle income group. Oh, well......

Cathy

[Wuptdo]

Hiya Folks,

Saw this yesterday. A good read about our taxes and the IRS! Enjoy!


http://moneycentral.msn.com/content/Taxes/P82372.asp?Printer


Wow, didn't realize how big this was, so I deleted the actual story, but left the link. Take a few minutes.

Question for CP members: Due to changes in this year's tax code, how many of you joined the "AMT" Club? 8-O

Wuptdo B-)