Taxes

A Timely Reminder of How our Tax System Works

Gary Gore — Tue, 29 Jan 2008 20:27:15 -0500

With all of the attention being paid right now to the tax rebate legislation before Congress, now is as good a time as any for a reminder of how the system actually works.

An oldie, but goodie.... Enjoy!

Our Tax System Explained: 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.

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 got"

"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.

Election issues

Drew McKissick — Wed, 07 Nov 2007 14:55:50 -0500

Some results from issues that were on the ballot yesterday, via the AP:

Utah voters on Tuesday killed the nation's first statewide school voucher program that promised tax dollars for private tuition, no matter how much a family earned or whether kids were in bad schools.
In another of the most closely watched questions on state ballots Tuesday, New Jersey voters rejected the state's plan to borrow $450 million over 10 years to finance stem cell research. In Oregon, residents decided against hiking the cigarette tax to pay for health care for kids who don't have it. ...

...more...

The New Jersey measure had been one of the nation's most ambitious public efforts to fund stem cell research.
Multimillionaire Gov. Jon Corzine campaigned heavily for the measure and spent $200,000 of his own money on TV ads for it. He argued the funding would help find cures for conditions such as spinal cord injuries, Parkinson's disease, sickle cell anemia and multiple sclerosis while also luring leading scientists and research firms to the state.
But the measure was opposed by anti-abortion activists, conservatives and the Roman Catholic Church because it would pay for research that destroys human embryos and would increase state debt.
"It's a reinforcement of our values and a rebuke to the governor," said Steve Lonegan, a conservative Republican who led opposition to the question. "The taxpayers are saying enough is enough." ...

...more taxpayer common sense

Among the other measures on ballots Tuesday:
_ Oregon voters opted not to raise the cigarette tax by 84.5 cents a pack — to $2.02 — to fund health insurance for about 100,000 children now lacking coverage. Tobacco companies opposing the measure outspent supporters by a 4-1 margin, contributing nearly $12 million.
_ Texans authorized up to $3 billion in bonds over 10 years to create a cancer research center. The proposal was pushed by cycling champion and cancer survivor Lance Armstrong and opposed by some fiscal conservatives.
_ Voters in the northeast Ohio city of Streetsboro, where a 19-year-old fell short of reaching a runoff in the mayoral primary last May, raised the legal age to run for mayor or council from 18 to 23.

It says something about how secure your politicians are when they lead an effort to keep teenagers from running against them.

The Tax Cut That Won the Cold War

Drew McKissick — Thu, 31 Aug 2006 00:00:00 -0400

A few weeks ago marked the silver anniversary of one of the most pivotal events in American economic and foreign policy history. It was twenty-five years ago on August 13th that Ronald Reagan signed into law the Kemp/Roth tax cuts, also known as the Economic Recovery Act of 1981 – legislation which helped set in motion the events which shaped the world in which we live today.

The bill reduced American income tax rates by approximately one-third across the board, and unleashed the pent up power of an economy besieged by double digit inflation, double digit interest rates and double digit unemployment.

The result was an economy that grew at phenomenal rates, created tens of millions of jobs, raised personal incomes and more than doubled overall revenues to the US Treasury, (something liberals and most economists said couldn’t happen). In addition, investment and entrepreneurship blossomed, helping to foster the technology boom that has impacted just about every aspect of our lives.

It was a simple economics lesson that provided demonstrable proof that taxes have a dynamic impact on human behavior. As Larry Kudlow put it recently, "Economic behavior responds significantly to the incentive power of low tax rates that raise the after-tax return on work, investment and risk taking”. In other words, people work harder and are more productive when they can keep more of the wealth that they create.

While the economic benefits alone make the Reagan tax cuts worthy of memorializing, the resulting economic growth and strength made it possible to overwhelm the Soviet Union in the Cold War. The fact that tax revenues dramatically increased made it possible for the US to finance a military buildup that forced the Soviets to spend themselves into oblivion in a vain attempt to keep pace.

The rapid growth in technological innovations made it possible to overwhelm the Soviets with the mere potential of what we could produce and bring to bear militarily. This, as well as the funding that such technology required, effectively ended the Soviet participation in the arms race, and ultimately the Soviet Union itself.

Gorbachev realized this at the Reykjavik summit in 1987. The productivity of a newly revitalized US economy gave the Soviets pause when Reagan refused to back off of pushing forward with a missile defense program (SDI) which could negate their strategic missile advantage.

In other words, they were convinced we might be able to pull it off, and they knew that they couldn’t keep up. Shortly thereafter, their basket-case economy imploded under the weight of defense spending and subsidizing their impoverished satellite-state empire.

Arms cost money, not only to build, but to man and maintain. This explains why you don’t see too many countries with backward economies sporting aircraft carriers. The more productive a nation’s economy becomes, the more geopolitical power and influence it will have – not just economically and diplomatically, but also in terms of military potential.

Reagan once said that “an economist is someone who sees something happen in practice and then wonders if it would work in theory”. By now, it would seem that the “theory” of tax rates having a dynamic and dramatic influence on human behavior would be a little more accepted as having been proven in “practice”.

To this day however, the mainstream media, liberal politicians and assorted economists refuse to acknowledge that lower tax rates are due any credit for the strength of the American economy over the course of the past quarter century.

Reagan understood that in order for the US to effectively compete and ultimately win the Cold War, we had to have a strong and growing economy that could produce superior weapons technology and field a superior military.

The principle is just as true today as it was then. Economic strength makes military strength possible. And a quick glance at world events underlines the importance of maintaining that strength.

Next time someone pooh-poohs the effectiveness of tax cuts, just ask them to point to the Soviet Union on any current world map.