Subj: U of Georgia explains the tax system in 3 minutes
Suppose that every day, ten men go out for beer 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 now also 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.
David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia
Well, I was having a day at the time, and really felt like ranting. This was my opportunity. As I haven't posted in a while, I figured I would share my response to the joke. No, it's not funny, but I think it makes some good points about the necessity of our tax system being progressive. Comments are, of course, welcome.
Well, that's cute and all, but it hardly explains the whole system. It's a bit more complex than that. Let's not forget that the tax code has to accomplish many things all at once, not the least of which is providing the services that all of us need. First and foremost, it must leave tax payers enough to live on, and considering how steep the income and total worth curves are, it can't be done without each person playing their part.
For example, in this (very simple minded) scenario set up in the original e-mail, if the tenth man decided to "opt out", there would be no roads for him to even travel on to find another bar, no police to protect him from all the drunk drivers out there drinking free beer, and no regulators to make sure the airplane he charters out of the country meets at least the minimum of safety requirements. (And on regulations, if you trust that corporations running on the profit motive will self regulate and not cut corners, then I refer you to work and safety conditions in 1900, or many products coming out of China and other countries.)
And even if they do make it out of the country, they will have to deal with much higher taxes (and better services) in much of Europe, or spend more money on graft, corruption, and private security in the third world. Good luck there.
In reality, incomes and net worth at the highest levels have risen so much that the tax code just hasn't kept up. There is a real need for several more tax brackets. By way of example, I point to the following two articles:
http://news.oxerjen.com/the-400-richest-americans-are-now-richer-than-the-bottom-50-percent-combined/
http://curiouscapitalist.blogs.time.com/2009/04/15/the-400-richest-americans-and-their-terrible-tax-burden/
The short version of these links shows the following: The 400 wealthiest Americans are worth more than the bottom 50% of us. While the over all percentage of taxes paid by this group has gone up slightly over the last 20 years, the percentage of income tax paid has gone down. (This group's wealth has risen so sharply that even with the lower percentage, they end up paying more actual cash.)
BTW: as of 2007, the median net worth of households in the U.S. is $120,300. (for those of you that have not taken stats in a while, that simply means that you line up each house hold's worth, from lowest to highest, and pick the middle one.) If we take the mean, or add up all the net worths and divide by the number of households, it jumps up to $556,300. The uber-rich really skew the numbers.
http://www.investingblog.org/archives/707/average-and-median-net-worth-data/
And what about you? Are you rich? Well, the median household income for the US (2009) was $49,777. Congratulations, if you made more than that (all members combined in your house) then you are in the richer half of the nation.
http://en.wikipedia.org/wiki/Median_household_income
Okay, so maybe the top half doesn't make you rich. Does your household bring in $65K? You're in the top third. $100k? Top 17%. How about $250k? Now you're in the top 1.5% of US households. Consider yourself lucky. You were probably born into a white, middle class to upper middle class home, had good schools, and plenty of well off friends to network with.
http://www.mybudget360.com/how-much-does-the-average-american-make-breaking-down-the-us-household-income-numbers/
The top federal tax bracket (2010) in the US is 35%. That kicks in at $373,650, both for joint filing and single earners, effecting about 1% of us.
http://www.moneybluebook.com/2010-federal-income-tax-brackets-irs-tax-rates/
I don't begrudge the uber-rich, or even the moderately well off their money. They earned it, absolutely. But we are all in this together, and the only way the system will work is if we all kick in what we can, when we can.
There is plenty of room for argument about our tax code, and it's more than time for us to have a national debate on this. But this is a complex subject, with many people more interested in protecting their own vast fortunes by twisting facts and manipulating emotions. The only way to come to a reasonable consensus is to be honest about the facts, figures, and desired outcomes.
It certainly doesn't help to spread simple metaphors that any collage professor, or even high school teacher, that I ever had would laugh out of the class room.
For example, in this (very simple minded) scenario set up in the original e-mail, if the tenth man decided to "opt out", there would be no roads for him to even travel on to find another bar, no police to protect him from all the drunk drivers out there drinking free beer, and no regulators to make sure the airplane he charters out of the country meets at least the minimum of safety requirements. (And on regulations, if you trust that corporations running on the profit motive will self regulate and not cut corners, then I refer you to work and safety conditions in 1900, or many products coming out of China and other countries.)
And even if they do make it out of the country, they will have to deal with much higher taxes (and better services) in much of Europe, or spend more money on graft, corruption, and private security in the third world. Good luck there.
In reality, incomes and net worth at the highest levels have risen so much that the tax code just hasn't kept up. There is a real need for several more tax brackets. By way of example, I point to the following two articles:
http://news.oxerjen.com/the-400-richest-americans-are-now-richer-than-the-bottom-50-percent-combined/
http://curiouscapitalist.blogs.time.com/2009/04/15/the-400-richest-americans-and-their-terrible-tax-burden/
The short version of these links shows the following: The 400 wealthiest Americans are worth more than the bottom 50% of us. While the over all percentage of taxes paid by this group has gone up slightly over the last 20 years, the percentage of income tax paid has gone down. (This group's wealth has risen so sharply that even with the lower percentage, they end up paying more actual cash.)
BTW: as of 2007, the median net worth of households in the U.S. is $120,300. (for those of you that have not taken stats in a while, that simply means that you line up each house hold's worth, from lowest to highest, and pick the middle one.) If we take the mean, or add up all the net worths and divide by the number of households, it jumps up to $556,300. The uber-rich really skew the numbers.
http://www.investingblog.org/archives/707/average-and-median-net-worth-data/
And what about you? Are you rich? Well, the median household income for the US (2009) was $49,777. Congratulations, if you made more than that (all members combined in your house) then you are in the richer half of the nation.
http://en.wikipedia.org/wiki/Median_household_income
Okay, so maybe the top half doesn't make you rich. Does your household bring in $65K? You're in the top third. $100k? Top 17%. How about $250k? Now you're in the top 1.5% of US households. Consider yourself lucky. You were probably born into a white, middle class to upper middle class home, had good schools, and plenty of well off friends to network with.
http://www.mybudget360.com/how-much-does-the-average-american-make-breaking-down-the-us-household-income-numbers/
The top federal tax bracket (2010) in the US is 35%. That kicks in at $373,650, both for joint filing and single earners, effecting about 1% of us.
http://www.moneybluebook.com/2010-federal-income-tax-brackets-irs-tax-rates/
I don't begrudge the uber-rich, or even the moderately well off their money. They earned it, absolutely. But we are all in this together, and the only way the system will work is if we all kick in what we can, when we can.
There is plenty of room for argument about our tax code, and it's more than time for us to have a national debate on this. But this is a complex subject, with many people more interested in protecting their own vast fortunes by twisting facts and manipulating emotions. The only way to come to a reasonable consensus is to be honest about the facts, figures, and desired outcomes.
It certainly doesn't help to spread simple metaphors that any collage professor, or even high school teacher, that I ever had would laugh out of the class room.
