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Thread: One econ prof's explanation of tax cuts.

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    Default One econ prof's explanation of tax cuts.

    Someone posted this on another mb I read



    Let's put tax cuts in terms everyone can understand.

    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
    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

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    Default Re: One econ prof's explanation of tax cuts.

    ^^^ I had seen this before, and it portrays our tax system somewhat accurately.

    However, what it doesn't portray accurately is the effect of capital gains tax, tax free or tax priveleged high ticket investments etc. which are available to the 10th man, and to some degree to the 9th man. Thus while the 10th man is supposed to pay a published 'tax rate' of $59, in reality he only pays $20 after all of the fine print calculations are completed. In reality, the tax rates of the 5th, 6th and 7th man must be raised in order to make up for this !

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    Default Re: One econ prof's explanation of tax cuts.

    ......and then at the end of the night the 9th & 10th men drive home in one of their many cars (hiring a high priced attorney to get them out of their DUI if needed) to one of their million dollar homes while the first 4 take the bus home to their studio apartments.

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    Default Re: One econ prof's explanation of tax cuts.

    Quote Originally Posted by Richard_Head View Post
    ......and then at the end of the night the 9th & 10th men drive home in one of their many cars (hiring a high priced attorney to get them out of their DUI if needed) to one of their million dollar homes while the first 4 take the bus home to their studio apartments.
    Yeah, but (and as one author has pointed out, there is always a "Yeah, but..." component to oh so many concepts). In this case, someone on the other mb where I first read this brought up the first four men will be eligible for the "Drinking Income Credit," whereby they will be paid to drink beer.

    Due to the tax-advantaged investments of the 9th and 10th men, plus the "Drinking Income Credit" for the first four men, the fifth, sixth, seventh and eighth men will all have to pony up more cash for the evening of beer drinking. This then "squeezes" the fifth through eighth men, financially, from the economic classes both above and below them.
    Last edited by PhaedrusZ; 04-16-2007 at 12:55 PM. Reason: typos

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    Default Re: One econ prof's explanation of tax cuts.

    ^^^ absolutely true (the drinking income credit analogy). Also absolutely true about the 'middle class' drinkers actually having to pay the highest percentage of the bar bill.

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    Default Re: One econ prof's explanation of tax cuts.

    Quote Originally Posted by Richard_Head View Post
    ......and then at the end of the night the 9th & 10th men drive home in one of their many cars (hiring a high priced attorney to get them out of their DUI if needed) to one of their million dollar homes while the first 4 take the bus home to their studio apartments.
    They didn't steal their cars. They bought them. Creating jobs all the way from the guy in the iron ore mine to the towel man at the car wash.
    Same for their million dollar homes which you apparentlyly begrudge them.

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    Default Re: One econ prof's explanation of tax cuts.

    Quote Originally Posted by Eric Stoner View Post
    They didn't steal their cars. They bought them. Creating jobs all the way from the guy in the iron ore mine to the towel man at the car wash.
    Same for their million dollar homes which you apparentlyly begrudge them.
    I wouldn't say that I begrudge them, at least no more so than you begrudge those first four guys. I just don't have a problem with those who have the most paying the most, I mean how much is enough anyways?

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    Default Re: One econ prof's explanation of tax cuts.

    Quote Originally Posted by Richard_Head View Post
    I wouldn't say that I begrudge them, at least no more so than you begrudge those first four guys. I just don't have a problem with those who have the most paying the most, I mean how much is enough anyways?
    I certainly do NOT begrudge the first four. Nor do I have a problem with the rich paying more which they do btw. I also support the inheritance tax.

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