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Wade Joseph

How Tax cuts work

81 posts in this topic

I wanted to share this with those of you "from rio linda" or maybe those of you "home schooled".

Understanding the Tax System This is a VERY simple way to understand the tax laws. 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.

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 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 divvy up the $20 windfall so that everyone would get his "fairshare?" 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 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 paid nothing,

the sixth pitched in $2,

the seventh paid $5,

the eighth paid $9,

the ninth paid $12,

leaving the tenth Man with a of $52 instead of his earlier $59.

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. "But he got $7!" "Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!" "That's true!" shouted the seventh man. "Why should he get $7 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 he 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're $52 short! And that, boys and girls, journalists and college instructors, is how the 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.

This was written by ;

T. Davies

Professor of Accounting & Chair,

Division of Accounting and Business Law

The University of South Dakota

School of Business

414 E. Clark Street

Vermillion, SD 57069

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I've seen that before...it has been a while...but at the time, the numbers were pretty accurate and representative of the amounts paid per income decile.

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Interestingly enough if you took this analogy one step further and allocated the $100 the same way wealth is distributed it would go something like this(and using the dinner bill):

The first four men(the poorest)would have $0.20 (or 5 cents each. They would each get to keep their 5 cents)

The next two would have $3.80 (or $1.90 each. Together they would not have enough to cover their portion of the bill. They would be about 20 cents short (Hey, maybe the poor guys could give them their $0.20, they didn't pay anything anyways.) Seperately the fifth guy would be able to cover his bill and have 90 cents left for some Tic Tacs. The sixth guy would be $1.10 short)

The seventh and eighth would have $11.30 (or $5.65 each not enough to cover their share of the bill)

The ninth would have $13.40 (wouldn't have enough to cover his end of the bill either)

The tenth(the richest man) would have $71.00 (he would cover his bill and have $12 left)

I think this is probably a good illustration of how the middle is getting the shaft (not the poor and not the wealthy).

As a side note, that was not written by T. Davies. Snopes reports that the essay is anonymous.

[Note from admin: Edited. Please read forum policy before posting again. Thank you.]

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Quote:
is a VERY simple way to understand the tax laws.

I fully agree with this sentence at least, except I'd put the emphasis on "simple" & not "very". smile

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"...The ten men ate dinner in the restaurant every day..."

In the great USA the rich man would never be caught eating with the poor.

The first four men--the poorest-- get food stamps.

The fifth would buy the cheapest groceries possible.

The sixth would buy some decent groceries.

The seventh would eat fast food.

The eighth would eat in a decent restaurant.

The ninth would eat in a nice steakhouse.

The tenth man--the richest--would go down to the places he owns, namely the grocery store, the fast food place, the restaurant, and the steakhouse, to grab his money and head over to Japan for some Kobe beef.

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I had an economics professor who had a simple solution to taxation. He thought we should tax the H... out of the poor to give them an incentive to get rich!

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I totally agree with being careful to not overtax the rich. BUT, they do indeed need to be taxed at a higher rate for the simple fact that they utilize more resources that the average working Joe.

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The model is too simplistic in the real US tax rules the first four guys would actually draw out money (get paid) to come and eat each day. Then the middle would be much larger. The rest is pretty accurate.

Also when you start to factor in the discount and rename it economic stimulus or tax rebate then the first four would get paid in the same portion as the last guy was saving and again the guys in the middle would actually end up with zero off his bill or even paying in just a bit more to fund the savings or earnings for the rest. Sometimes its not the best to be in the larger pool.

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I totally agree with being careful to not overtax the rich. BUT, they do indeed need to be taxed at a higher rate for the simple fact that they utilize more resources that the average working Joe.

actually the rich folks tend to use less public resources than the poor.. no need to go on social security, use resources like MinnCare, subsidies for food, transportation, that sort of thing... so they need to be taxed at a lower rate if it's a question of relative usage of public resources.

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I totally agree with being careful to not overtax the rich. BUT, they do indeed need to be taxed at a higher rate for the simple fact that they utilize more resources that the average working Joe.

How do the rich use more resources?? Is it providing jobs to the Average Jo? Maybe, they drive more? Eat more?

I don't understand.

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This is way over my head. I see the arguments to to protect the the rich and some makes sence. The problem is there is to answers to a question that may work and the answer I choose is shut down these loop holes where the wealthy can hide there money. Keep the em from shuttleing there money off to off shore accounts or off shore investmants like oil.

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Drive through a more affluent neighborhood/city. The roads are better, there is a lower citizen to police officer ratio, the schools are better funded with more educational resources and smaller class sizes. More public works personell. More/better public perks (libraries, parks, etc.)

You are right, the wealthy are providing jobs to the average Joe. But average Joe is also helping them become wealthy. It is a two way street. If they didn't have a well educated/trained work force they wouldn't profit from their business as much. If there wasn't as much competition for jobs (i.e. a certian amount of unemployment) wages would go up and cut into profits.

If you tax an individual that makes $2 million a year 30%, that person has $1.4 million. They are still pretty wealthy. If you tax some one making $20K a year 30% that person has $14K, not really someone that would be considered doing well economically.

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Quote:
Drive through a more affluent neighborhood/city. The roads are better, there is a lower citizen to police officer ratio, the schools are better funded with more educational resources and smaller class sizes. More public works personell. More/better public perks (libraries, parks, etc.

Casey, don't these people all pay for these things, though, by paying the city of Eden Paire or Edina much higher property taxes based on the value of their homes? If you are paying what they are paying, you'd demand the same.

Didn't I hear somewhere that the richest 5% in the US pay out more real dollars in taxes than the remaining 95% combined. Or was I just dreaming that I was in that 5%. smile

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Come drive down my nice "better" streets, but then check out my property tax and school levy payments... then tell me again why our roads are better? Is that money coming from anywhere else, or from the less affluent neighborhoods?... nope, and I am still paying off my assessment for those new roads, thank you very much smile I wish some of these so-called rich people I keep hearing about would come and help me out.... ow wait, according to many here, I guess I am rich! ..tongue firmly planted in cheek, cause I ain't rich, but I am not hurting either - maybe because I watch my $$ and my personal spending, unlike many, who I in turn must support, I guess...

heh, And I have done taxes for some relatives who are not "rich" like me, and let me tell you, they pay nada for taxes. Add in a couple kids and it gets even "better"... deep sigh... I see October property tax time coming up fast...

Sorry, I am just an one-who-thinks-I-am-silly, but just tired of seeing the word "rich" bantered around so much, along with the disdain for rich people. My rich boss I hope has enough money to keep me employed... and BTW my rich boss hasn't collected an income for the past year, as he is investing it into the company to search for future projects to keep us in the company employed, a small company.

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Quote:
Sorry, I am just an one-who-thinks-I-am-silly, but just tired of seeing the word "rich" bantered around so much, along with the disdain for rich people. My rich boss I hope has enough money to keep me employed... and BTW my rich boss hasn't collected an income for the past year, as he is investing it into the company to search for future projects to keep us in the company employed, a small company.

Couldn't agree more. I handle payroll for many "rich" small business owners that do the same thing yours does. I've also seen what the owners who do take substantial salaries pay to the government. To me, there is no doubt they pay their fair share in real dollars.

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What really get me, and maybe this should be a different topic all together, but I get a raise and it bumps me into the next tax bracket. Now for the next year (or until my next raise) I am actually making less than I was before. I was better off with out the raise!?!?!?

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You should only be taxed on the higher level on that income above the next tax bracket line.

That may not make sense.

Let's say you make $30,000 a year...the next tax bracket up is at $33,000.

You get a $5,000 raise to go to $35,000 per year in income.

You are not taxed at the new rate on all your income...only the $2,000 above the next bracket is taxed at the higher rate. Your first $33,000 (in this rather simplistic example) is still taxed at the lower rate.

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Casey, don't these people all pay for these things, though, by paying the city of Eden Paire or Edina much higher property taxes based on the value of their homes? If you are paying what they are paying, you'd demand the same.

I won't disagree with you there Leaky. Someone had posed the question as to how certain people are using more resources than others. By paying the higher taxes they are getting more(resources) out of the government that is taxing them. I have no problem with that. If I was paying what they are paying . How do you know I am not? My location says Babbitt, for all you know I could have a place on Birch or Bear Island and be paying more in taxes or I could have a little place in Babbitt and be paying way less winkgrinlaugh You are from Ely, you know the drastic differences in property values up here depending on where you live up here. grin There are plenty of people paying as much as the folks in E.P. and Edina (maybe even more).

I know it is semantics but I didn't use the word "rich". "Rich" has developed a negative connotation. I used "wealthy" in an attempt to steer away from that. I have no problem with people making good bank. I don't do too shabby(IMO) myself(not rich but better than just being comfortable) and I definitely wouldn't turn down doing better grin.

BoxMN, I wouldn't presume to call you "rich" and didn't because I have no clue as to what (nor would I concern myself with what) your financial situation is. Hopefully if you are in Cross Lake for the holiday you are "rich" enough to hit Zorbaz for a pizza and a beer grin, I miss their pizza.

If the analogy that started this thread holds true the 5% are not paying 95% (out of the $100 bill the one guy(out of ten guys) was paying $59 so that would translate to the top 10% are paying 59% so it wouldn't be feasible for the "top" 5% to pay 95%)

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BoxMN, I wouldn't presume to call you "rich" and didn't because I have no clue as to what (nor would I concern myself with) your financial situation is. Hopefully if you are in Cross Lake for the holiday you are "rich" enough to hit Zorbaz for a pizza and a beer grin, I miss their pizza.

Hey casey, I got you, and sorry it seemed my "rich" statement was aimed directly at you. More the thread in general seems to pit wealthy ("rich") against middle class. And actually, I am unfortunately not in Crosslake this weekend, as I must stay and work (not too much), imagine that. Would certainly rather be having a pregnant burrito at Zorbaz wink Have a great weekend!

Discussion is good.

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I posted this mainly as a rebuttal against those who are constantly claiming that tax breaks are for the "rich". I get really sick of hearing that. Tax breaks usually bennefit everyone, except of course those who are not getting one because they don't pay anything in to begin with.

To be perfectly honest, I myself could care less if the rich are getting richer off of tax breaks. I personally do not want to become "poorer" because the tax cuts were recinded OR taxes were raised.

There are people in this country who recieve a refund greater than the sum total of what they paid in federal income tax. To me, it seems as if we are rewarding people to NOT work hard and try and improve their lives, but merely saying...."its ok, we'll just take some of the rich peoples money and give it to you."

Those who have not seen a tax they don't like(Reid, Pelosi, Obama, Kennedy, Kerry, Clinton, Schumer...) need to define what is "rich" before they are allowed to perpetuate this myth. Unfortunately for the rest of us middle class people thats something they won't do because they will suddenly realize they fall into the category and all those who they have been snowing for so long will see them for the hypocrites they are.

I'll get off my soapbox now.

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I personally do not want to become "poorer" because the tax cuts were recinded OR taxes were raised.

That's the million dollar question; do tax breaks to the wealthy stimulate the economy, or simply shift the burden to the middle class.

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I am not convinced the wealthy should pay that that much of a higher rate of tax on their money than we do. I mean really, they worked for and earned their's too. But on the other hand I don't think they should get any special breaks or be able to shelter or hide their money from taxes either.

I know of friend of the family who being a single mom and raising kids and working (gotta give her credit for doing what she can) gets a tax return for about 3 times what she paid in. Earned income credits? What the h!!!! is that? I can agree she probably needs a helping hand to make it work and keep her off welfare, but there has to be an better way than that.

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I know of friend of the family who being a single mom and raising kids and working (gotta give her credit for doing what she can) gets a tax return for about 3 times what she paid in. Earned income credits? What the h!!!! is that? I can agree she probably needs a helping hand to make it work and keep her off welfare, but there has to be an better way than that.

I've often wondered how that works too.

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They did define what is ''rich'' it is anything over $250,000 a year. And they want to shift that tax burden from the middle class to those who make over $250,000. If you make $250,000 a year I can understand why you would be mad, But If you make less why complain that they want to shift the taxes to those that are wealthier.

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Well, look at the uber-rich like Al Gore, whose house, after being optimized Green - uses 10% more energy than before - and probably 100% more than the average person uses. Or "Silky Pony" John Edward's house - whose sprawling castle is an energy hog.

It just irks me that those at the front of the re-distribution and global warming groups are still living like resource pigs. Walk the talk. Don't make the rest of us wear hair shirts, while you still live the over-indulgent life.

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