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Sara Coslett

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Tax Cuts - A Simple Lesson In Economics
By Sara Coslett
Last edited: Sunday, October 28, 2007
Posted: Saturday, March 20, 2004



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Sara Coslett

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I did not write any of this. It was sent to me in an email from a former customer of mine that is now a very good friend of my husbands. He used to be the VP of a large Supermarket chain in the Southeast. I liked the way it communicated the tax cuts so I have decided to post it as an article here on AD. I like it when I get this type of information as I have always been a die hard Democrat.

I would be interested in a spirited debate on this subject. Of course debate is not possible as reviews are only one to a customer.


 

--------

 

Economics 101
You may have seen this before but it still rattles me.


Tax, tax cuts and how it all works...
Sometimes Politicians can exclaim; "It's just a tax cut for the rich!",  and  it is just accepted to be fact. But what does that really mean? Just in case you are not completely clear on this issue, we hope the following will help.  

 

Tax Cuts - A Simple Lesson In Economics



This is how the cookie crumbles. Please read it carefully.

Let's put tax cuts in terms everyone can understand. 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.

So, 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, now 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 'fair share'?

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 each 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, 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 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 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 $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 the tenth man 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 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 at the table anymore.

As noted in a review below, this was not written by:



David R. Kamerschen, Ph.D.
Distinguished Professor of Economics
536
Brooks Hall
University
of Georgia

A friend of mine pointed me to more information on this mystery at snopes.com: http://www.snopes.com/business/taxes/howtaxes.asp


 

No way of knowing who wrote this, but to the best of my knowledge the content is accurate.



 
 

f

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Reviewed by Mary Coe 9/12/2008
An excellent job on a very interesting topic.
Reviewed by Keith Rowley 9/10/2008
Excellent!
Reviewed by Reginald Johnson 1/31/2008
It is unfortunate, Mrs. Coslett, some people do not wish to be confused with the facts. In any event, thank you for this useful information. It reduces five-hundred pages of tax minutiae down to one page of easily understood words. I have found when detractors complain about our country ... they can never name one country that offers a better system or quality of life.

Warm regards ...

Reginald V. Johnson
Reviewed by W. Gibson (Reader) 10/28/2007
Dr. Kamerschen is NOT the author of this article.

http://davidk.myweb.uga.edu/
Reviewed by Elizabeth Price 9/27/2007
Well, 3 years late and all I still found this article enlightening. The metaphor really helped me understand. Thanks for sharing. Liz
Reviewed by noz urbina 4/18/2007
I would say that it's a bit of a crock in how it's presented as it's presented as a clear metaphor that represents stratification in our society due to economic boundaries and economic relationships. However, the entire metaphor is in a big way flawed, because when the HELL would the four poorest folk eat in the same restaurant with the richest one?

The four poorest are not allowed in the same restaurants, nor would the richest show up if they were. Hence, the poor do pay in other ways that are not represented here. They are hardly getting the "free ride" implied by this article!

I am a Canadian who moved to the UK 7 years go. I will quote a good friend who echoes my thoughts on the Canadian system:

"What are taxes supposed to pay for? Let's think about that. They are supposed to fund public institutions, and pay for the construction and maintenance of publicly used spaces like roads and parks, they are supposed to pay the salaries of public servants, etc. etc. In Canada, our taxes go to pay for other social safety-net things like health care and welfare, etc. These funds are not always handled carefully, and while i'll grant that, I don't believe that keeping them in private hands is a better, or more morally justifiable solution. I think that taxes get wasted mostly by people who forget what they are really for...
This feels especially fresh as the last job I worked at took huge chunks of my salary for taxes. I *felt* that money gone every paycheque. But I still strongly believe in the need for us to all chip in not just enough to make ends meet, but enough to do a good job for everyone who relies on services that taxes pay for." - Roxanne B

I too am happy to pay my taxes and always have been. Although, in the UK, I really do feel my taxes are being pissed mercilessly down a hole.

My trust in all public institutions and the whole idea of a government run for the people has been atom-bombed since moving here. When you're put in situation where your government seems to betray and rob you at every turn and claims that it is acting in the name of the under-privileged, suddenly, right-wing politics looks more tempting. I figure some Americans must feel the same.

Let's use a real-life UK example to extend this metaphor. A three stop subway journey on the now-private "public transport" system is has now hit 4 pounds (yes, that's 10 dollars CAD / 8 US for a 5-minute ride; and almost double what it was 3 years ago (2.20 - 4.00).

Privatization is supposed to encourage the 10th man to stay at the table, and let the natural beauty of "market forces" control pricing, wasted spend. I.e. the capitalist engine keeps the machinery of society lean and fit through healthy competition.

B**shit. In fact privitisation specifically, and the type of thinking represented in this article generally, provide and opportunity for the tenth man to extract this $59 BACK from the 4 poorest by fact that they can't get home from the restaurant without paying his extortionate rates for services he privately owns. He, however, can afford a place next door.

My tears for you... oh tenth man! Please don't abandon the biggest economy in the world, which lets you trample human rights, environmental laws, and buy yourself enough party lobbyist to legalise murder by proxy! Please don't leave the place that considers you it's ultimate achievement and values your precious capital more than any other noun on the earth! You might have a harder time going somewhere where healthcare is on you, transport is on you, pregnant woman go off work on you, and a myriad other atrocious impositions from YOUR EMPLOYEES trying to get a fraction of the quality of life you take for granted.

- Thank you,
Reviewed by peter paton (Reader) 4/29/2004
FAO__ Sara Coslett

by peter paton (reader) at 4/26/2004 6:26:48 AM
Feelings Are So Important .

When we feel the Pain of Mankind , and feel Empowered to do something about it , then we are touched by the Divine Truth .

Really we should always care about each other , then there would be no need for Pain and Distress anymore , only Communion and Concord , or taken to its sublime Zenith , Love and Compassion .

Brother / Sister , you have to Feel your way through the Maze of Life , and if we can do someone a Kindness , do it now , for we may never meet or pass this way again !

Be Good to each other , while we can still see the Light , and leave behind you , no Trace or Track or Sight .

Just be careful where you Tread , because my Dreams and Aspirations , are barely able to be Said .

And do not Bruise or Break the Gentle Stem or Reed , but Feel the Noble Deed /

Author ppaton.btconnect.com
Reviewed by Sara Coslett 3/20/2004
Hi Franz & Leland,

Thank you for both for responding to this article.

Franz I think you are a little mistaken regarding the rich getting out of paying taxes. I pay taxes based on the highest tax bracket. True I get a lot of deductions which means I pay in the highest tax bracket on less of an income, but I pay a considerable amount of taxes.

My company is a Sub-S Corp. As such my salary is directly proportional to the profits. However, this does not mean that every penny the company makes goes into my pocket. No, if I did then my company would die very quickly. The profits are reinvested into future projects hoping to increase value through sales and assets. Those reinvestments do two things. 1) At the very least they insure that there will be the same amount of work for my current employees. 2) If we hit on the right mix of new product, at the right pricing, with the correct investment in technology, then we will have more work than previously. That means new jobs. Any money left after investment is given to the owners of the company as a dividend. We are a private corp so all dividends go to the owners. That is why we pay the highest tax bracket.

My business has been slow to steady for about 5 years. This year business has really picked up for us. Over the past few years a lot of business have either gone out of business or have been bought out. Highly diversified niche companies such as mine have been able to step right in to fill the voids. Anyway you cut it though we are looking at growth this year. We have many job openings that we are unable to fill. Because we show profits at the end of the year we can continue to grow our business and create jobs…and we do this all with the loom of China hanging over our heads. For those people who do not know me personally, I am a plastics manufacturer. My company is increasingly under extreme pressure from lower priced Chinese imports. This leads to a discussion on globalization, which I guess should be my next article.

Anyway is my current business growth influenced by the tax cuts? I don't know. But I do know this much...the rich do indeed pay taxes...and lots of it.

Sara
Reviewed by Leland Waldrip 3/20/2004
I agree with you, Sara. Some of the poorest Americans would be considered rich by standards in some other parts of the world. The only way the economic engine works for the poor is that the rich make it work for themselves and the poor. Any economic system that seeks to redistribute wealth is bound for failure. Sure, there are examples of disgusting excesses in the use of wealth, but if you want a job, I doubt that you would go to anyone on the lower third of the income spectrum. It is far more likely that a person in the upper half or two thirds will be an entrepeneur and provide work and income for those in the lower third or half.

It is my contention that if the tax writers in government weren't so intent on micro-managing the country's wealth and gerrymandering everyone's incentives, fairer ways could be devised to see that all, including the "rich" pay their fair share. How about a flat tax (or sales tax) with no loopholes so everyone would participate in supporting legitimate objectives of the government (even the poor, and even the rich) and all would pay. The rich would pay more, the poor, less, but each tax burden would be proportionate to the payer's positive economic health. I suspect that such a program would go a long way toward re-defining what some people think is "legitimate" in terms of government expenditure.

And, BTW, anyone who feels he got too much of a tax cut is free to return his part to the government. I understand there is an active program for that, but no one, not even the whiners, have responded with dollars to date.
Best regards,
Leland
Reviewed by Franz Kessler 3/20/2004
Hello Sara,



Rather than going into the complex calculation of 'who get's what and when back:' It's not the real issue. The hyperrich find ways not to pay tax anyhow, not here, not in Israel, not in Bermuda, not in Germany. I therefore look at the bottomline (excert from my blogs):



Statistics of 2003 tell this: The economy has been growing slow at best. Many jobs were lost, and the average middle class family struggled to make a living and to keep debt at bay. However, there were more billionaires than ever, and some of them increased their wealth by 20 % over the year.

Now I'm going to ask you: For whom do you believe this Government works, if only the ultrarich few seem to prosper?



(c)2004 by Franz L. Kessler

Reviewed by Tinka Boukes 3/20/2004
Thanks for sharing Sara!!

Love Tinka
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