TAXES EXPLAINED BY EXAMPLE

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Bar Stool Economics

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.

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 customer s, 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 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 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

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

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  • With Sen. John McCain proposing $92.4 billion in new spending and Sen. Barack Obama proposing $293 billion in new spending, according to conservative per-year estimates from the National Taxpayers Union Foundation, the candidates must find a way to pay for their promises. After all, government money doesn’t just appear; it comes from the taxpayers.
  • The two candidates have starkly different plans for four major areas of the tax code – income, capital gains, corporate and estate taxes. Obama proposes lowering income taxes for lower- and middle-class earners, but raising taxes on people making more than $250,000 a year. He also proposes raising the corporate and capital gains tax rates. McCain supports lowering taxes generally across the board.
  • The Heritage Foundation estimated McCain’s tax plan would have more positive impact on jobs and economic growth than Obama’s. The foundation’s Center for Data Analysis (CDA) predicted an annual average of 2.13 million new jobs under McCain’s plan – compared to 970,000 million new jobs each year under Obama.
  • The CDA estimated McCain’s plan would encourage $283.7 billion in average annual GDP growth through 2018 – compared to a $101.7 billion annual average under Obama’s plan.
  • The two candidates have starkly different plans for four major areas of the tax code – income, capital gains, corporate and estate taxes. Obama proposes lowering income taxes for lower- and middle-class earners, but raising taxes on people making more than $250,000 a year.
  • He has also proposed raising the corporate and capital gains tax rates, but has shifted his positions. Obama wants to “eliminate all capital gains taxes on small and start-up businesses,” but has proposed raising capital gains taxes on individuals.
  • Obama’s plan would mean raising the capital gains tax on about half of American households – those who have money in the stock market – from the current rate of 15 percent to 20 percent. He has previously supported raising the rate to 28 percent. He says he’ll use the expected increased revenue to pay for middle-class tax relief.
  • Characterizing tax cuts as a “cost” to the government, as reporters have done time and again, is evidence of a distorted view of the government’s role as money manager. “It’s a lie,” National Taxpayers Union president Duane Parde said of the characterization. “It’s another example of the media being in the tank for big government.”   “Even taxes that all or most people would regard as legitimate are still monies that initially belonged to people that as democratic citizens they chose one way or another to allow the government to have in order to carry out the business of the state,” George Mason University economist Dr. Donald Boudreaux said. “The idea of talking about tax cuts as a cost to government very sneakily changes the presumption. The presumption is that, well, it’s the government’s money, it initially belongs to the government and by the government letting you keep more of what you earn … that’s a cost to the government.”  He compared the government cutting taxes to a thief who decides to steal less. “An analogy would be if a thief, say who was stealing $30,000 annually on average, decided to cut back on his thievery. You could say – and people would know what you’d mean – well, if the thief now steals only $20,000 annually you say well it costs the thief $10,000 to stop thieving. But most of us would regard that as an abuse of terms because it would presume that somehow the thief has a right to that money.” CNNMoney.com reported June 11 that the difference between McCain and Obama for the wealthiest taxpayers is a nearly $1-million spread. McCain’s plan would mean an average $269,364 savings for taxpayers with incomes greater than $2.9 million. Obama’s plan would raise the same taxpayer’s bill by $701,885. In fact McCain’s plan would result in lower taxes for all taxpayers, according to analysis from the liberal Tax Policy Center, while Obama’s would raise taxes on Americans making more than $227,000 and lower taxes on other incomes.

    “Taken as a whole,” Fund concluded, “Obama’s high tax agenda would suck the lifeblood out of our economy. One wonders if he sincerely believes in his program.”  “Obama wants to raise taxes and when you raise taxes you hurt the economy, you take money out of individual pockets, you increase the size of government and you have less individual freedom and liberty,” Parde said. Dan Mitchell, a senior fellow at the Cato Institute, predicted Obama’s tax policies would make the United States more like France.  “[A] country like France that says, ‘Oh the top 5 percent, we can rape and pillage them to finance all our spending,’ what happens?” Mitchell asked. “The money, the investment, the jobs, the capital wind up going to other countries with better tax policies such as, say, Switzerland or Ireland. Well, if Sen. Obama wants to make America more like France, unavoidably that is going to mean French-style economic stagnation: higher unemployment, lower growth and lower living standards.”  He said “class warfare tax policy” meant to affect the very wealthy would end up hurting average Americans.  “You drive productive activity to other jurisdictions, you wind up convincing the investors and the entrepreneurs that America isn’t a good place to do business, and we’ll wind up being less competitive and we’ll wind up having lower incomes,” he said

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