A Lesson in Economics

[Bandit]

A Simple Lesson In Economics


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. 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, 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 divy 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.

[Bandit]

Is that the way the cookie crumbles?
Agree or disagree?

I would like to see the day that the rich sit down to dinner with four poor people, in public, let alone pay for their dinner. While I see their point, there is way more to it, making the example so out of touch

Just a discussion starter to raise some social attitudes from the top to the bottom . Have fun with it.

[One Half Full]

The metaphorical "tables" are not the same. The "rich" generally don't buy their things at the dollar store. There is a rich economy and a poor economy. So the tables are not the same, that is if you are talking about consumer goods.

The things that are unavoidable, are also often not the same, but of course a 400K house will be taxed more than a 50K house. A 50K car will be taxed more than a 5K car. That is perfectly honest because a rich person can chose to live in the 50K house if he wants to pay less taxes.

As far as income tax brackets, how is a rich person going to chose not to contribute any more (i.e., stop coming to the table)?

I hang out with rich people, and I don't make any money. We generally take care of the bill by each person buying what they consumed and then each person contributing a fair cut for a 15% tip (large groups sometimes have a table gratuity as well).

[HHM]

I do agree that the rhetoric about "tax cuts for the wealthy" is out of hand and misleading. And I have never really been a fan of a progressive tax system.

The argument that bugs me the most is the...
"Since the rich can afford to pay higher taxes, therefore they should". There is no underlying, valid, principal I can think of that justifies such a claim.

[pa308]

Somebody once said "I've never seen a poor man write a payroll check"

Business owners must take on risk of loss to run a business, and there must be reward for taking that risk or it would make no sense to assume the risk.

I dont believe that taxing the heck out of the rich businessman is fair, but I wouldnt mind seeing them tax the he%# out of Hollywood stars....I know that probably doesnt sound fair either though.

[One Half Full]

Business owners must take on risk of loss to run a business, and there must be reward for taking that risk or it would make no sense to assume the risk.

I'd like to insert here that anyone who manages money takes risks. By allowing the poor (and middle class) to invest as in 401K retirement and also "savings," real estate, frankly any sort of investment is passing the risk from "an organization" with legal experts and so on who might make better financial decisions than "joe six-pack." Example: My retirement was eliminated, and now the assumption is that I have the financial ability to manage my money for the future.

For the past 7 years or so, I have lost money and not made a profit on business risks (a mortgage, a car, picking a particular job etc). In general , my limited knowledge is up against the knowledge of a corporation (crooked mortgage bankers, auto dealership, etc) with the background and abilities to see trends, negotiate and so on. They are at a distinct advantage in this case, and by their manipulation, advance warning, and even business risks, they can easily have a great deal to do with whether I make a profit or not. Example, if their people did not do their job correctly and did not forsee the rising costs of paper or transportation, I end up paying the price by not getting a raise. They, on the other hand cut costs by hitting the worker or customer first in the pocketbook.

I would say that the worker takes just as many risks as the business, though it may be of a different type. The main reason I am going bankrupt is because of the company I work for.
They are not going bankrupt, I am.

[PaKettle]

I think the concept of the rich payiing higher taxes "because they can afford to" is a good idea. Maybe that's because I figure I'm never going to be rich. So call me a Marxist! (though I'm really not)

But okay, let's say I was going to be rich. Let's say I was going to be picked up off the street, "Trading Places" style, and I was going to suddenly be making $5million a year. (souI like this scenario, so far!)

I would expect to be in a higher "income tax bracket" and pay a couple million dollars in taxes. I think it would seem fair to me. I'd like to see the Super Rich, the billionaires have to pay even MORE taxes. And I'd like to see the lower class and especially the middle class pay less taxes. Why? It just seems fair.

...Because the middle class can least afford to pay more, and the upper class can most afford to pay more. Simple as that.



Another issue is that the wealthy often pay much less taxes than they are supposed to, because they pay high-priced CPA's and tax attorneys to use every trick in the book to get out of paying what they might otherwise have to pay.

That's my take on it.

Having said that, I would propose a system of progressive taxes like this, which I think would be much fairer given today's economy, based on the following incomes and tax percentages:

$000.00 - 20,000./year 0 taxes
$20,000 - 75,000./year flat 10% taxes
$75,000 - 200,000/year flat 15% taxes
$200,000- 400,000/year flat 20% taxes
$400,000- $1 million/year flat 33% taxes
$1million and up /year flat 40% taxes

I dunno. Just an idea... I know the math would have to be worked out a little better so that it always pays to "make more money", no negative incentives. But something like this.

Seems to me that this would give the majority of Americans a fair shake while shifting the burden to the richest folks, based on nothing other than the fact that "they can best afford it". Yet still giving them plenty of incentive to make a lot of money.

And there would be NO loopholes, by doing this we would virtually ELIMINATE THE IRS! Well, cut them back to about 10% of what they are now, anyway. How much taxes would THAT save?

[PaKettle]

From http://www.ft.com/cms/s/0/41470ec0-8...0779e2340.html :

Richest 2% hold half the world’s assets
By Chris Giles, Economics Editor in London

Published: December 5 2006 13:13 | Last updated: December 5 2006 13:13

Personal wealth is distributed so unevenly across the world that the richest two per cent of adults own more than 50 per cent of the world’s assets while the poorest half hold only 1 per cent of wealth.

A survey released on Tuesday shows that middle-income countries with high growth rates still have a long way to go before they have a hope of catching up with the levels of prosperity of the richest.

Adults with more than $2,200 of assets were in the top half of the global wealth league table, while those with more than $61,000 were in the top 10 per cent, according to the data from the World Institute fpr Development Economics Research of the United Nations University (UNU-Wider).

To belong to the top 1 per cent of the world’s wealthiest adults you would need more than $500,000, something that 37m adults have achieved.

So much of the world’s wealth is concentrated in few hands that if all the world’s wealth was distributed evenly, each person would have $20,500 of assets to use.

Almost 90 per cent of the world’s wealth is held in North America, Europe and high-income Asian and Pacific countries, such as Japan and Australia.

While North America has 6 per cent of the world’s adult population, it accounts for 34 per cent of household wealth.

The concentration of wealth in different countries varies considerably, with the top 10 per cent in the US holding 70 per cent of the country’s wealth, compared with 61 per cent in France, 56 per cent in the UK, 44 per cent in Germany and 39 per cent in Japan.

According to Anthony Shorrocks, the director of UNU-Wider, the number of wealthy individuals in a country depends on the size of the population, the average wealth and its inequality.

“China fails to feature strongly among the super-rich because average wealth is modest and wealth is evenly spread by international standards”, he said.

As countries grow richer, their population changes how it holds wealth, according to the report.

In developing countries, property, particularly land and farm assets are important, while cash savings tend to dominate in middle-income counties.

Only in certain advanced countries such as the US and the UK with developed financial sectors is there a strong appetite for holding equities and other more sophisticated financial assets.

Debt is also low in poor countries because financial institutions do not exist to allow people to borrow.

In contrast, the authors say “many people in high-income countries have negative net worth and, somewhat paradoxically, are among the poorest people in the world in terms of household wealth.”

Wealth is difficult to measure even in the most advanced countries, so the research was based on painstaking compilation of aggregate and survey data for the 38 countries of the world where it exists and statistical models for the rest of the world.

[Bandit]

The metaphorical "tables" are not the same. The "rich" generally don't buy their things at the dollar store. There is a rich economy and a poor economy. So the tables are not the same, that is if you are talking about consumer goods.

This was great. I never viewed it as two different tables before but it is true & it is also true in the graphs & all through history. I always saw the rich guy eating lobster & drinking merlot while the pour ones eat crackers with water at the same table.

But your two tables is great for the metaphor.

[Bandit]

And there would be NO loopholes, by doing this we would virtually ELIMINATE THE IRS! Well, cut them back to about 10% of what they are now, anyway. How much taxes would THAT save?

I love that one. I have seen it before in this & love ridding the IRS every time

I will never understand how people can be so greedy & how that small 1% or 2% can have half of the wealth while millions of people die just from having no food.

[Bandit]

Keep em coming as you think of some more. They are all good & well thought replies.

[HHM]

Another issue is that the wealthy often pay much less taxes than they are supposed to, because they pay high-priced CPA's and tax attorneys to use every trick in the book to get out of paying what they might otherwise have to pay.

That is more rhetoric than reality.

Look at it this way, if you don't own a house, you don't get the mortgage tax deduction, correct? Thus, are all homeowners using a "trick" because they own a house to the detriment of those who rent? A person who can deduct a capital loss on the sale of stock, doing so at the detriment of someone who does not own stock? If a person uses a generation skipping trust to pass assets to their grand-kids to avoid estate tax, is that really to the detrement of people who have nothing to pass on. These, so called, tricks exist for a reason (right or wrong), they are legal. You can disagree with some of the specifics, but that is an issue to take up with your congressman and senator, do not blame the rich for taking advantage of legal opportunities that are available to them.

You said you did not want negative incentive for creating wealth, well these things you call "tricks" are the positive incentive.

[Bandit]

Plus, once you make so much money you have to keep spending or keep investing or give to charity or the laws can work against you and your money.

Not so much tax laws that are incentives, but other laws do make the rich richer & the poor poorer. I am just too tired right now to get into it all but it is a good discussion. This is one of those things that can go around the table forever