Fascinating Tax Illustration

Discussion in 'Economy' started by Cecilie1200, May 17, 2009.

  1. Cecilie1200
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    Cecilie1200 Gold Member

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    I read this in a column, and found it quite thought-provoking. So I'm sharing it with all of you now. It comes from David Kamerschen, professor of economics at the University of Georgia, who uses it in his Econ 101 classes, via Terry Easton, who is also an economics professor and writes a political opinion column.

    Let's suppose that a group of 10 graduate students regularly go out to a pub for beer, and the tab for the 10 comes to $100 total. If they pay for their bill the way Americans pay for our taxes (based on our so-called "progressive" tax system), the breakout would be like this:

    The first 4 people (the poorest) pay nothing. They get to drink for free.
    The fifth pays $1
    The sixth pays $3
    The seventh pays $7
    The eighth pays $12
    The ninth pays $18
    The tenth person (the richest) pays $59.

    Being good friends and liberal progressives, that's what they all agree to do. It seems only fair that each person should pay what they can afford to pay, remembering the old adage they learned in school: "from each according to his ability, to each according to his need" (Karl Marx).

    Every few days, the 10 good friends would meet up in the pub and would pay up as agreed upon.

    Then one day, the proprietor gave them a deal. "Since you are such good customers, from now on", he said, "I'm going to reduce the cost of your tab by $20. You can just pay me $80!"

    Everyone wanted to continue to pay their bill just the same way as they had before. So the first four people (the poorest) are unaffected. They continue to get to drink for free.

    But what about the remaining 6 people? How should they split up the unexpected $20 savings "windfall" so that everyone would get "his fair share"? They figured that $20 shared by 6 comes out to $3.33 each. But if they simply subtracted that amount from each of the 6 paying friends, then person #5 and person #6 would actually be paid to have their beers since person #5 only paid $1 anyway and person #6 only paid $3!

    What to do?

    The pub owner came to their rescue. He suggested that each person's bill should be reduced by roughly the same amount, and he used his calculator to work out what that should be:

    Persons 1-4 continue to get to drink for free
    The fifth person, like the first four, now pays nothing and drinks for free (100% savings!)
    The sixth pays just $2 instead of the original $3 (33% savings!)
    The seventh pays just $5 instead of the original $7 (28% savings!)
    The eighth pays just $9 instead of the original $12 (25% savings!)
    The ninth pays just $15 instead of the original $18 (17% savings!)
    The tenth pays just $49 instead of the original $59 (16% savings!)

    All 6 friends were better off then before. And their first four buddies continued to drink for free, because they didn't have a lot of money.

    They all felt pretty good about it.

    After they thanked the pub owner and left to walk back to campus, they began to compare their savings under this new deal.

    The sixth person was very quiet, though. Finally he blurted out. "You know, splitting up the bill that way wasn't fair! I only got a dollar out of that $20 we all saved, and yet (he pointed to the tenth person) he got $10!"

    "Hey, you're right", shouted the seventh person. "I got cheated too. I only saved 2 dollars. It's unfair that he got back 5 times more than me!"

    "Damn it! I've been ripped off too", yelled the eighth. "Why should he get back $10 when I got back only $3. The wealthy get all the breaks!"

    "Wait a minute", screamed friends one through four. "We didn't get anything at all! The system exploits the poor!"

    The first nine people surrounded the tenth person and beat him up.

    The next day, tempers had cooled down and the nine friends showed back up at the pub. They were sorry for what they had done and they wanted to apologize to their tenth friend.

    But the tenth person didn't show up for drinks. So the nine proceeded to drink without him.

    When it came time to pay the tab, they discovered that they had a problem. They didn't have enough money among all nine of them to pay for even half of the bill!

    "And that, boys and girls, journalists and college professors, is how our tax system works", says Professor Kamershen. "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."
     
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  2. Agnapostate
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    Agnapostate BANNED

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    A rather poor analysis. The benefits of progressive taxation come through the fact that the diminishing rate of marginal utility ensures that welfare programs are available to maintain the physical efficiency of the working class while not forcing the wealthy to sacrifice anything of comparable significance. All in all, it remains effectively correct that a financial class whose only purpose is to "supply capital" is rather useless, since their assets can be expropriated and more efficiently utilized by an egalitarian distribution of ownership and control. So if they'd beaten him up anyway, why wouldn't they have taken his money?
     
  3. garyd
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    garyd Senior Member

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    Because he doesn't carry it all with him. Marginal utility as you are trying to apply it is at best a bad joke and at worst theft.
     
  4. Agnapostate
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    Agnapostate BANNED

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    His "paper assets" are relatively useless without a state actively defending them. One figures that if the analogy represents a proletarian revolution, they'd be a tad more thorough. As for marginal utility, it's merely a basic economic principle.
     
  5. jreeves
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    jreeves Senior Member

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    Actually if your example was a true example of Obama's tax policy, people 1-4 would not only be drinking for free but they would be taking money home with them each night.

    Earned Income Credit: What is the Earned Income Tax Credit?
    Tax Credit Amounts for Year 2009
    The maximum earned income credit for 2009 is:

    * $5,028 with two or more qualifying children;
    * $3,043 with one qualifying child; and
    * $457 with no qualifying children.

    Earned Income & Investment Income Limitations
    Earned income means wages and net profits from self-employment. Wages are reported on Form W-2. Self-employment is generally reported on Schedule C or Schedule C-EZ.

    To be eligible for EIC, both earned income and adjusted gross income (AGI) must each be less than the following amounts:

    * $38,646 ($41,646 married filing jointly) with two or more qualifying children;
    * $33,995 ($36,995 married filing jointly) with one qualifying child; or
    * $12,880 ($15,880 married filing jointly) with no qualifying children.

    Investment income must be $2,950 or less for the year. Investment income includes interest, dividends, capital gains, and royalties.
     
  6. editec
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    editec Mr. Forgot-it-All

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    I so wish Atlas would Shrug and get it the hell over with.

    Only they won't just leave because they're not titians holding up our world like some of you imagine them to be.

    They're nothing but kleptocrats holding up our world though the manipulation of government and capital.

    Please, you Atlases,shrug. Run away and play libertopia with John Galt..

    Nobody will fucking miss you.
     
  7. Ravi
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    Ravi Diamond Member

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    How Taxes Really Work

    To start with . . . .
    In the US and throughout most of the rest of the world, the tenth man would have paid off a politician for $10 to get a beer subsidy of $30 per night(to create jobs for the bartender). Of this $30, $10 of course would have covered the lobbying expense, $10 would go in his own pocket, $1 would go to the bartender to keep his mouth shut, and $9 would go to the bar.
    The Bar would give him a kickback of $10 each night for bringing in his 9 buddies to make them into alcoholics, repeat customers for life.
    The Bar would then raise their prices to $130 citing inflation and higher taxes.
    The tenth richest man would then secure his finances in a Dutch Holding Company managed by a trust in Ireland which invests in Chase and Bank of America. He would then explain to his buddies that he is as poor as the rest of them and can’t afford to pay himself as he cries into his beer that night citing his latest financial report which shows him to be broke on paper so that he doesn’t have to pay taxes in the United States ever again.
    Citing his former generosity, the other nine men would agree that the tenth man can now pay nothing like the 4 poorest.
    The others would then be faced with an adjusted amount of

    • The fifth would pay $3.
    • The sixth would pay $10.
    • The seventh would pay $22.
    • The eighth would pay $38.
    • The ninth would pay $57.
    Now the group would recognize that this is not fair and so would lobby the Government for an Earned Drinking Credit for the Poorest men. The government would oblige and give the four poorest men $2 each, but they would tax the 5th - 9th men $2 each as well.

    • 4 men receive a total of $8 and 5 men pay $10.
    The adjusted amounts would then look like this for all 10

    • First Receives $2 pays $2 | Net 0
    • Second Receives $2 pays $2 | Net 0
    • Third Receives $2 pays $2 | Net 0
    • Fourth Receives $2 pays $2 | Net 0
    • Fifth Pay $1 to bar pays $2 to tax | net paid $3
    • Sixth Pay $8 to bar; pays $2 to tax | net paid $10
    • Seventh Pay $20 to bar; pays $2 to tax | net paid $22
    • Eighth Pay $36 to bar pays $2 to tax | net paid $38
    • Ninth Pay $55 to bar; pays $2 to tax | net paid $57
    • Tenth Man: Tax Credit Received: $30 ;
      Pays $10 to politician;
      $1 to bartender;
      Receives $10 from Bar
      Net RECEIVED $29 per night and free beer
    Of course this can not go on forever as the sixth, seventh, eighth and ninth men can’t afford to pay those rates forever. So they start paying with their credit cards held by Bank of America and Chase.
    The tenth man would start demanding a higher Return on Investment from his investment managers, who would be hearing similar requests from all of their other investors. They would then expand their holdings into mortgaged back securities where a good deal more profit could be made.
    Meanwhile the Fifth through ninth men are racking up debt on their credit cards from drinking every night, their health care costs are increasing as their liver fails, and they are also spending more on gasoline as they drink and drive as they can no longer afford to cab it.
    Ultimately, they end up refinancing their credit cards into their house where they have equity. The mortgage broker promises them a 4.9% interest rate on the refinance which sounds good as their credit card interest rate is up to 21%. The broker promises them that they will not have to verify their income, provide W2’s nor copies of their tax paper work.
    Their mortgage broker doesn’t tell them, but lies about the value of their house in order to refinance their credit and help them avoid paying private mortgage insurance. At their current income levels, and without verifying their income, their mortgage would be classified as Sub Prime and the interest rate would be 10.9%
    The mortgage officer lies about their income levels as well to boost the internal credit scoring mechanism and get them financed, not at 4.9% but 5.9%, which is better than 10.9% and happens to pay the mortgage broker a higher commission than a loan at 4.9% that is not sub prime.
    The mortgage broker also promises them a payment of $900 per month, but fails to mention the balloon payment of $50,000 in the 5th year and doesn’t mention the adjustable rates in year 3.
    The men separately show up with a hangover and sun glasses on the date of their close for their new mortgages. They trust their broker and do not read the paperwork in detail flipping and signing almost as fast as they could raise a beer bottle to their lips.
    The loan closes, the mortgage broker gets a fat commission, the bank securitizes the mortgages by selling them to an Irish Hedge Fund and pockets collectively a billion dollars in profits that year.
    The hedge fund holds the investment for a year, shows a 35% gain on paper and starts selling shares to retirement funds and 401ks in the US that the Sixth through 9th men just happen to have the rest of their life savings sitting in.
    The tenth man sees the writing on the wall, literally magic marker on a stall in the restroom of the bar.
    “The end is Nigh”
    He pulls his money out of the Irish Hedge fund invested in real estate and invests in Gold at $600 a troy ounce.
    Meanwhile, he lobbies congress to tighten bankruptcy laws for credit cards which he still has a sizable investment in. Congress tightens bankruptcy laws and makes it impossible to absolve credit card debt, forcing people into chapter 13 where they must pay off the debt within 3 years or go to debtors prison where they can work it off in 7 years.
    Gas prices are still going up so the President ignores a minor terrorist threat, allows the terrorists to blow up a major building and then goes to war with the terrorists home country where there is no oil, and simultaneously with a country that sits on 10% of the worlds oil reserves that has a decimated military infrastructure.
    Oil prices shoot through the roof with Gold following close behind. The President whose family comes from oil barons make a fortune and become famous at their skull and bones country club outside of Yale.
    Meanwhile our famous 10 guys, start paying even more money at the pump. The first 4 guys end up taking second jobs working at Wal-Mart and have to give up drinking at the bar so that they can try and beat their teenage kids out of a promotion.
    The fifth and sixth guys get foreclosed upon. They were forced to stop paying their mortgage payments so that they could pay their mandatory credit card payments as required by the new bankruptcy law.
    The seventh, eighth and ninth men all previously traded up their homes for McMansions that they can not afford with interest only payments of $2300 a month. When foreclosures start happening their plans on flipping their McMansions and cashing in on the equity slips through their fingers.
    To make matters worse seven and eight get laid off from the companies they work for when their jobs get outsourced to China. The ninth man keeps his job at a law firm, but fails to notice that his 401k fund is slipping and has lost 10% in the last year. Things are looking up as his law firm seems on the edge of landing a big contract with Merrill Lynch.
    Then the real estate crash and sub prime mortgage scandal erupt. Banks start dropping like flies to be saved not by the cash strapped government that can barely afford the war for oil any longer, but by China. Oil and Gold soar, Gold hits $900 a troy ounce and Oil hits $130 a barrel (about the same amount for 10 rounds of beer prior to the crash). Beer prices hold steady for the first few months, but then start to edge up as gas prices for delivery creep into the bar owners expenses.
    Then the first four men one night remember their favorite bar. They sneak around back around 4:30 am and steal 50 empty kegs that just happen to be made of pure aluminum. Those kegs are now worth about half the value of a keg that is full in scrap metal prices or about $80.
    They are not stupid and don’t want to get caught turning the kegs in at the dump where the police are already looking for keg thieves. So they head out to the closed down manufacturing plant where they used to work. They start a big fire, and melt down the aluminum into big messy aluminum splashes on the cement.
    They turn in the aluminum for cash and get caught up on their back alimony and child support before heading back to work at Wal-mart where they now work for their teen age kids that beat them out for that promotion earlier in the month because their job skills weren’t as good as recent high school graduates. They then begin dreaming of new ways to find aluminum alimony allowances.
    Meanwhile, the banks and mortgage companies lobby congress spending about $10,000 a head in an election year to bail out the economy. Congress provides the major banks with government backed loans to refinance the bad sub prime loans so that the government can personally guarantee those bad loans. They also put $100 billion of actual cash into the hands of Americans hoping to stimulate the economy.
    Americans however, are all in debt up to their eye balls and use the extra $1200 they receive to make 2-3 credit card payments. They take the $300 for each kid and buy groceries for the month and then they start worrying about next month.
    The banks get away free as they have Chinese financing now and no bad loans as they have refinanced them over to the US Government. The US government had to print more money to pay for all of these actions and so Gold goes up to $1500 a troy ounce.
    The tenth man is now worth Billions and moves to Costa Rica to retire taking the new trophy wife that used to be the bartenders girl friend with him.
    The first four men end up going to county prison for 3 months for stealing aluminum dog crap receptacles after running out of kegs to steal.
    The fifth and sixth men end up living in an apartment and then homeless after they lose their jobs at Wal-Mart.
    [​IMG]The seventh and eighth men whom we previously left hanging in our story after they lost their jobs and ability to pay for their homes, end up losing their homes, and their kids. They and their spouses are each convicted of mortgage fraud by the FBI in a major sting operation after it is revealed that they lied on their mortgage applications. Their mortgage brokers who actually did the paper work cop a plea agreement in exchange for immunity with the Feds and rat out each of their unsuspecting customers.
    The ninth man ends up losing his entire retirement fund which took a big hit as the dollar rapidly plummeted into free fall. He ends up refinancing his own house under a government backed loan for $650,000. Unfortunately, a tornado comes through that winter in a freak coincidence and levels the home. FEMA promises to provide assistance but never shows up and the ninth man freezes to death attempting to salvage the shreds of his belongings. His home insurance policy refuses to pay as they claim that his house was over valued and then they prove it with comparables studies from his own mortgage brokers database.
    The tenth man ends up dumping his new bride a year later, moving back to the states a year after that when the US appears to have hit rock bottom and he leads up a Chinese real estate investment initiative in the states. He makes another $10 billion in ten years, but is then executed in Beijing for espionage.
    Meanwhile, the bar tender goes on to win American Idol and sleep with Paula Abdul. They are now blissfully happy, doped up on anti-psychotics, and the biggest two idiots the world has ever seen.


    "How Tax Cuts Work" by David R Kamerschen -REFUTED - The Real Way Tax Work Removing the Internet Garbage | Viral Grape Vine
     
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  8. Cecilie1200
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    Cecilie1200 Gold Member

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    Who said anything about Obama? The example is talking about progressive income tax in general. And it's supposed to be a general example, not cover every single twist and turn of modern income tax.
     
  9. Agnapostate
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    Agnapostate BANNED

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    Then why haven't you responded to anybody?
     

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