Tax Cuts Explained

[A friend of mine sent me this. Not sure on accuracy, but I found it interesting. Can anyone shed light?]

Because it's the election season, 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 curved ball (or is that a curved beer!). "Because 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 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 me!"

"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 man 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.
[Later that night I got this following response from a Blog Reader]
I thought you might enjoy the following site:
It is one of the few sites I have been able to find that seems truly interested in facts rather than political party line.
I thought your example of taxes was very interesting. Let me ask you a question.In your example, men 1-4 drink for free.The tenth man, the wealthiest, leaves because everyone beets him up.It's been my experience that the tenth man doesn't walk away and drink somewhere else. He buys the bar and takes his friends' money.I think currently that too much of our income goes toward useless taxes, by us I mean those of us in the ubiquitus middle classSo I can appreciate the spirit of your example.However, the moral of your story seems to be that if we don't play nice with the wealthy, they may find greener pastures to distribute their bounty.
My question is that as citizens, people who have inherently profitted from our free market society, doesn't moving that money over seas and avoidence of those taxes constitute an act of rebellion, even treason?
Don't miss-understand me, I'm not saying people who handle their money well are crooks. It just seems to me that if I have drawn the correct lesson from your example, I am supposed to act in such a way so that the wealthy among us aren't frightened into avoiding their national duty in the form of taxes, while I, not being of that august body, will be left to catch the bag.I have moral issues with this assumption since it effectively holds the wealthy to a different set of rules than the rest of us.Can you help me with this?
I'm working through some difficult decisions in this election and I would enjoy hearing what you have to say on the matter.
[And here is my response, off the cuff]
When I post things it's not so much a statement as a question.

I usually relate things to my own business. Quite simply, I think that those with means and ability will avoid paying their taxes after a certain point. As far as I can tell, our forefathers were throwing tea in the harbor over 1% taxation. I've found a few instances where the rebellion against paying taxes was over paying ANY at all.

Back to my business. My business has grown tighter. Because of the huge amount of taxes I both collect and pay to the multitude of government agencies I had to shrink the size of the studio. Ironically, a group of tax accountants took over the vacated portion. They're a great bunch of professionals, but it's a bit ironic that they grew while I shrunk. The fact is, that they don't produce anything, except fill out papers to be sure that the money from individuals and businesses flows smoothly into State coffers.

If these burdens were lifted, the money would not disappear. I could afford a better space, give my workers a raise, hire new workers and/or generally improve and expand my business.

My basic problem with "liberal" philosophy is that they seem to think that you can get something for nothing. I always snort in derision when I hear "these tax cuts are going to cost the government X dollars". That's like saying running from a mugger is going to cost him the $20 in your wallet. If I protest having my crops hauled off by force and threat, their lower lip starts to quiver, "but think about the poor." Dammit, I do think about the poor. I pay more to charity than to taxes. What I'd really like is to decide how to use my own money; how to best administrate it.
The current Republican administration is ten times as bad, since they have done even worse by printing trillions of dollars to finance their wars. I believe it is a horrific betrayal of the american people.

The supposition is that a distant politician is going to be a better, more just, more moral administrator of the crops than the person who actually planted them, harvested them, sacrificed for them. That if the government doesn't do it by force, common citizens won't do it.

I heard a clip from Hillary Clinton lamenting a single mother who just had her hours cut. I think that's funny because if there is an increase in the Payroll Tax, the absolute first thing I'm going to do is cut Sarah's hours. Fact: right now I can't afford to give my workers a raise because of the tax burden.

The other supposition of the philosophy of the left is that businesses don't like profits. If we tax the hell out of corporations they will just take it out of the profits. That's just plain silly. Every time you buy a product, like say a light bulb, part of the cost you pay is for the various taxes on the business that makes them (not to mention the lawyers and liability insurance).

In short, you can't get something for nothing. There's no such thing. The government can't spend a single dollar without first taking it from someone else. This whole business of redistribution or the printing of money creates only an illusion. The only way to create real wealth is to actually roll up your sleeves and create something.

An entrepreneur actually creates something that wasn't there before. I am a toymaker. Models arrive in pieces and leave as an improved product. I create something.

More to come.
[And here is a further response from my friend again]
Ah,That makes more sense.
Discussing money is both more simple and entirely more complicated than it first apears (particularly where taxes are concerned.)I would say, rather than stating that the left feels that they can create or get something out of/for nothing, that my issue comes more from the fact that these ideas seem to come from the idea that I am supposed to help everyone, that my money and my taxes should be used to provide for all the less fortunate and improve everyone's quality of living.
We absolutely need to make sure that certain basic needs are met, but we also need to make sure that as a country we are encouraging the less fortunate to stand up and become more fortunate. I can't tell you how angry it makes me when I see polititions aproving billion dollar programs that don't appreciably change my quality of living and yet increase my taxes simply to give someone else an increase in there's for no cost to them.
Based on what you've said I'd think Obama is your man. Not only does his program stand to cut taxes for most americans, he also is endorcing a pay-as-you-go initiative which would force congress to cut from one existing budget line if they choose to spend more money after the first budget is aproved.If I could find a phiscally responsible liberal, or a socially concious conservative, I'd vote for either of them.
The problem I'm finding is that candidates now are so tied up with party lingo and platforms that those parties define them to a large degree. I'm not even asking for a tax cut (though god knows I'd like one.) I just want someone in office who will use my money responsibly.
[My response back]
Dear M,
I think I am with you on this one. It's a sad, sad day when the democrats are starting to look like the fiscally conservative ones.
If McCain gets into office who knows what countries we'll be invading and fighting. After reading his book Faith of my Fathers it's clear he just does whatever the hell he wants.
I'm still doing a lot of reading and studying. It may not seem like it, but I may still come around to Eric's point of view. I admit that other theories might turn out to be right.
Of course, it hardly matters what they're saying now. It's all a farce. The real objective is to part the commoners from their labor (through inflation/printing of money, income tax, and lawsuits). There is a class of people who are not producing anything of value. The system is designed to protect that group.
Imagine a settlement where only barter is allowed. Let's say a complex community of 10,000 people. A man walks into the pie shop. Give me two cream pies, please, he says. The pie shop owner asks what he has in value to give in exchange. Oh, nothing, he says, I'm on my way down to the lake to relax for the day, I don't really have anything to trade.
I don't think a reasonable person would give him the pies. In fact, I think this individual would be driven out of town on a rail in short order because the deception would be readily apparent. His sloth would be on display for all to see.
The system of paper money we have currently is extremely adept at hiding this man behind layers upon layers of exchanges that we accept as fair. In fact, the entire banking system is a farce designed to make a switcheroo of valuable and tangible goods for paper. But it's paper that can be in turn switched out for other goods. It's like a game of musical chairs, but every round a commoner is dropped off into poverty. Four lawyers retire to Villas in Italy while four hundred workers are ruined.
I'm not talking about welfare moms here, or food stamps. While I believe those programs would be better administrated by private charities run on donations, I am talking about the bailouts. Those are one thousand times worse.
I was reading yesterday about the Fed "pumping 70 billion into the economy". Really? That's amazing! They left their offices for the day, rolled up their sleeves and created 70 billion worth of goods that could be used to tangibly improve the lives of their fellowmen?! Why these must be gods on earth! That's a real fish and loaves miracle.



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