An economist defends tax cuts for the wealthy and seemingly hates child credits
The following metaphor is reputedly written by David Kamerschen, a professor of economics at the University of Georgia. In it, Kamerschen makes a convincing case for equal taxation, one that I generally agree with.
But those substantial tax credits (read: the distribution of wealth) that I receive every year just for having kids are really, really nice. So consider me undecided on the matter (wink, wink).
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 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 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, 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.
[Sent via email by my lovely, politically conservative mother]
3 Comments
This was an interesting analogy, but it fell prey to common problem in such comparisons by mixing absolute numbers and percentages in a way that puts the spot light only on its intended point.
To flush this out the first list should mention something like:
– The first four men (the poorest) would pay nothing. (each one has a household income of $25k per year)
– The fifth would pay $1. (household income of $30k)
– The sixth would pay $3. (has a household income of $45k)
– The seventh would pay $7. (household income of $60k)
– The eighth would pay $12. (household income of $95k)
– The ninth would pay $18. (household income of $120k)
– The tenth man (the richest) would pay $59. (household income of $3,500k)
Of course I pulled those numbers pretty much out of the air, just scaled up based on some value of “richness”.
Another problem with this story is that is supposes that the rich man is fine paying nearly 60% of the total cost at the beginning, but suddenly springs into anger when his percentage discount isn’t as high as those who are less “rich” than he is.
@Mark –
Rather vague there don’t you think? The original post seems to focus on income taxes (without coming and saying it, but the child tax credit reference seem to imply income tax), so we could assume that you’re referencing income taxes as well. In the US income taxes were officially sanctioned by the 16th Amendment to the Constitution (http://www.archives.gov/exhibits/charters/constitution_amendments_11-27.html), which was ratified in 1913:
Note: Article I, section 9, of the Constitution was modified by amendment 16.
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
I enjoy a good gripe as much as the next person, but I find it much more constructive if it contains specific/helpful/accurate details.
@ Joseph,
Sorry, it was just a rant. I’m really not that smart. But no, I wasn’t referencing income taxes specifically. It was more geared towards the economics of a general tax whether that be an income, property, or sales tax.
A raise in income tax affects us in a number of different ways.
First, we bring home less money in our paycheck.
Second, the producer of the good or service increases the price of the good to continue to make money. That increase in price is passed onto the consumer. It’s like an indirect tax.
That is what I was referencing when saying the rich (ie. business owner of some sort) were able to find loopholes. Yes, according to their books it will look like they are paying more taxes to the government, and they are, but they still pass as much of that increase onto the consumer as possible by raising prices.
As a general employee (middle class), we don’t have that luxury of passing our tax increase onto someone else.
So even if we vote (and by vote I mean electing politicians that represent us and have the power to pass tax laws) to raising taxes to only the businesses, we as consumers end up getting taxed indirectly due to higher prices of the good or service. The tax is always passed down to the middle or lower class by the rich. Why? Because they can and we can’t.
I’m not sure if any of that makes sense, I’m a little tired.
That’s how taxes all started in the first place. Taxes were voted on by the middle and lower class to only affect the rich. However, the rich left or found loop holes (ie. set up corporations for tax shelters). The problem for the government trying to enforce the tax was “how do we get our tax money now”.
The government then decided that in order to get the tax voted on by the middle and lower class, they must tax them directly because the rich found the loop holes. So a tax originally designed to only affect the rich now affects the middle and poor class. This is how all taxes have worked since forever.
If you tax the business owner too much, he raises his prices to cover the tax. He just transfers the tax onto the consumer. He is forced to do that in order to stay in business.
Every tax increase eventually makes its way down to the middle and poor. Obama says, “I won’t increase taxes on the middle and poor, only the businesses”. Well that sounds good for trying to get people to vote for you, but the truth is if the businesses get taxed, we get taxed by having higher prices. You’re a smart one Obama.
Always vote against any tax increase for anyone whether they are rich or poor. That includes the save the Zoo tax coming around this year. We need to send a message to our government that they need to learn to use our tax money more efficiently rather than just increase our taxes when they over spend.
Thanks for letting me rant.