Doas this explain Obamas tax plan?
Subject: Bar stool economics Suppose that every day, ten men go out for beer and the
bill for all ten comes to 0. 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 .
The sixth would pay .
The seventh would pay .
The eighth would pay .
The ninth would pay .
The tenth man (the richest) would pay .
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
. Drinks for the ten now cost just .
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 windfall so that everyone would get his
‘fair share?’ They realized that divided by six is .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 instead of (33%savings)
The seventh now paid instead of (28%savings) .
The eighth now paid instead of (25% savings).
The ninth now paid instead of (22% savings).
The tenth now paid instead of (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 ,’declared the sixth
man. He pointed to the tenth man,’ but he got !’
‘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 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, 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.
David R. Kamerschen, Ph.D.
Professor of Economics, University of Georgia
Tagged with: bar owner • bar stool • curve • drinks • economics • fair share • four men • six men • sixth man • subject bar • tenth man • windfall
Filed under: Your Community Center
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First, although there is indeed a Dr. David R. Karnerschen, Professor of Economics at the University of Georgia, he had nothing to do with this silly pseudo-economic fable (see link).
Second, this is not how the US tax system works, nor is it how Obama’s tax plan is intended to work. The US has a graduated income tax, which means that the more you make the more you pay, both in terms of actual dollars and as a percentage of income, at least up to a point (the tax cap is 35% for those making over about 350K). It only make sense that I would pay more in taxes than someone making less than I do. This is called a "progressive tax," because it spreads the tax burden out in such a way that those who get the most out of the system also put the most into it. This is opposed to the much-vaunted "flat tax," which is highly regressive, since it puts a disproportionate burden on the lower end of the income spectrum.
There are a number of fallacies with the little story presented here. For one thing, the idea that the poorest 40% (four out of ten) "drink for free" is absurd. Most of the poor in the US are working poor, not freeloaders. They pay income taxes and payroll taxes and sales taxes. Even though they may get all or most of what they pay in income taxes back when they file, in the meantime they still are making an interest-free loan to the government for anywhere from one to twelve months.
Another fallacy is that the wealthy are somehow being "attacked" or penalized for being wealthy. Nothing could be further from the truth. The rich are able to make their money in part because of the infrastructure in place in this country that aids them in doing business, or aids the companies they are invested in in doing business. This infrastructure — roads, bridges, canals, communication systems, banking systems, schools (to train the workers, and the managers), etc., not to mention the military to maintain security — is paid for, to one degree or another, by tax revenues. So even the poorest of the poor, assuming they buy groceries, or even beer and cigarettes, are helping to pay for this with their sales taxes.
As for Obama’s plan, it involves giving tax cuts to anyone making 200K or less per year, while slightly raising taxes on those who make more than 250K per year. The ones in between would see neither a tax cut nor an increase. Tax cuts for those on the lower end of the spectrum help to stimulate the economy, since they spend more on consumer goods than people at the higher end. Those lower-income people are still paying taxes, just not as much. On the other hand, those on the upper end are paying a little more, but since they pay a smaller percentage of their incomes on necessities, they can better afford it. And, as I already said, they benefit the most from the system anyway.
Look at it this way: take somebody who makes 50k per year and pays 20% in income taxes. That means he takes home 40K. Now imagine someone who makes a million a year and pays 40% in income taxes. He’s taking home 600K. So even though the second guy pays twice as much in income tax as the first guy, the guy making a million is still taking home twelve times what the guy making 50K had to start with. Wouldn’t you rather be the guy making a million, even if you’re paying 40% in taxes?
As for the rich "drinking elsewhere," most progressive countries have higher tax burdens for the rich than does the US. Of course if people want to live in some banana-republic tax haven that’s their business, but I don’t see rich people in the US flocking to such places, do you? I wonder why . . .
good stuff
An interesting read.