Wednesday, January 23, 2008

Progressive Tax Explained

The following is an excellent tutorial on progressive taxes. I cannot take credit for it and it's original form appears to be best attributable to an editorial printed in the Chicago Tribune in 2001 (see this writeup by Snopes.com). Regardless of its origin, this is a provocative piece. Enjoy.

"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, ladies and gentlemen, 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."

4 comments:

  1. You are what are wrong with America. I think your little tutorial is missing some factors; like the quality of beer they are enjoying among other things. And if you had a sense of the European norm its socialism the rest of the world has been passing America with regards to socialist laws and taxes for years.

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  2. How am I what is wrong with America? Please elaborate.

    I think you're missing the point of the "tutorial." Paying for the beer is analogous to paying taxes. Thus, the "quality of the beer" is the equivalent of the "benefits" from paying taxes: infrastructure, defense, social programs, etc. All persons have equal access to those benefits and the poor can actually take advantage of many the wealthy cannot (think social programs).

    I don't live in Europe. Why would I want European socialism? I already think America is too socialist.

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  3. Your end statement saying that maybe the rich should leave and find some European nation were they will be treated better the kind of places they would have to go to find lower a lower progressive tax are places ruled by dictators and fascists. The majority of other nations have a higher progressive tax then the U.S. I find your statement about equality extremely misinformed. If you think that the rich are not exploiting every governmental loop-hole and go between possible to increase their own personal wealth then you don't know human nature. In the case a poorer person working full time some times 2 or even 3 jobs to make ends meet, do you think that person has the sort of time and assets to pursue even half of his available "beer"? I didn't think so. Also look at celebrities, if you think they are getting treated equally in regards to the law as average citizens your views are greatly skued. The bottom line is people with more money get treated better. And in America where this is supposed to be the land of equality it is very much not equal in regards to the rich and the poor.

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  4. Where does the article say Europe? It says "overseas." Just out of curiosity, were you educated in our public schools?

    Once again you miss the analogy. "Drinking overseas" is akin to outsourcing to a country where overall costs are lower than in America. Part of the overall costs are taxes. Ireland wouldn't be a half-bad European country to move to considering it has drastically reduced its corporate tax burden (and seen a corresponding jump in economic vitality). In fact, many U.S. companies have moved work to Ireland for this very reason.

    The wealthy should use loop-holes because the are taxed at a higher rate than the poor. I am not wealthy (I guess it depends on if you use the standard established by Democrats or Republicans), but I definitely use every deduction I can find to reduce how much I pay in taxes. Those deductions are well justified. Home mortgage interest payments are deductible - as they should be - because that interest shows up on the bank's books as income, which is taxable. If I pay taxes on that money and the bank pays taxes on it then it is taxed at least twice. Most of the "loop-hole" you speak of are comparable to this example (except the illegal ones which aren't really loop-holes). Estate taxes are another great example of multiple taxations and should not be reinstated when Congress votes on them again in 2010.

    I never once said, nor did the article, that all Americans are treated fairly. I agree that wealthy Americans can buy their way out of a lot of situations the rest of us can't. But that doesn't have anything to do with progressive taxes.

    Why do you think that the wealthy don't deserve what they have worked for? Most of the wealthy people I know work 16 hour days, 7 days a week. Should they then be taxed on a greater percentage of that income just because they made more than the poor person working the same schedule?

    What taxes do the truly poor pay? FICA. They don't have an income tax burden (the point of the article). If you want to argue that FICA isn't equitable then I'd agree with you...it's a terrible return on investment, but we all pay it and we're all "rewarded" according to our contributions. Perhaps you are advocating that the wealthy be taxed so we can give money to the poor? Do you really want the government in charge of charity? Do you want the wealthy to be taxed on their charitable contributions (loop-holes) just so the government can misappropriate it and never help the poor?

    Maybe we should form a communist government and make sure everyone is poor (except for the corrupt government officials, of course)? That is obviously an effective way to run a country. <--- sarcasm, in case you missed it.

    I'm interested...what do you propose?

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