My Mom's friend sent an email along proporting to be a quick lesson from an economics professor providing a simple tale about income tax. While it's a cute tale, with Ann Rand as a clear influence, I felt the need to publicly bash it. After the jump find an income tax "lesson" winger's might try and use with you, and find a kick ass response.
This is an interesting explanation of how income taxes really work...
>
> Sometimes politicians, journalists and others 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, I
> hope the following will help. Please read it carefully.
>
> Let's put tax cuts in terms everyone can understand.
>
> Suppose that every day, ten men go out for dinner 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 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." Dinner 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 eat 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 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 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 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 anymore.
>
> David R. Kamerschen, Ph.D
> Professor of Economics
Now let's trash this garbage.
Cute, and simplistic enough to convince the masses, and simplistic enough to be quite meaningless. Yes, when you cut the percentage of tax to the top income bracket, the amount of money that person will save will be the highest. 10% of 100 is bigger than 10% of 10. Ten times bigger. Actually, my first impression of this is that this little example is so simple and full of flaws that no true Ph.d in economics could have written it. And low and behold, David R. Kamerschen is not the author of this piece of pedestrian writing. Because it has been spewed all over the Internet, Professor Kamerschen has been forced to put at the top of his University of Georgia bio that he is not the author of this diddy. You can find that out for yourself here: http://www.arches.uga.edu/...
Simply google search Professor Kamerschen and you will find that he is quite an accomplished individual, but he may be most known for his identity being hijacked for this piece of writing. No doubt that pisses him off.
The fact that the person who originally wrote this lied about it's true authorship should say enough about the piece alone. It also speaks to the integrity of the true author, and the authors true intentions. He or she is a liar, and is trying to deceive people. Apparently no one knows who really wrote this. That too speaks for itself. Moving on.
First of all, Dad, I am going to assume you are lying to me when you say you cannot figure out the logical error in this piece of writing (good god you must be, and if your not, don't ever let anyone know you fell for this nonsense, it would be harmful to your reputation as a genius) and testing my ability to "take out the garbage", so to speak. After all, you were the dean of the college of commerce and finance, so I know you are full of it when you send me this and say it makes sense to you.
There is no logical problem with the fact that a percentage of a bigger number, is a bigger number. That's simple math. As for the "lesson", it appears to be that of course the rich will get a bigger savings from tax cuts, but "[t]he 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."
So lets place our connoisseurs in the real world, in fact, let's place them in America. They were speaking English and paying in dollars, so America is a safe bet. And, let's discuss them in terms of today's world and present policy. I am not an economics professor, and I'd bet that Professor Kamerschen would be able to logically and concisely tear apart this fable in a more informed and intelligent manner than I can.
What the consumers did not get a tax cut, they got dinner for less money. Seeing our mystery author is attempting to make this an analogy to tax cuts, this would be more like the government being able to provide the same services and functions for 20% less. One way to do that would be to cut the military budget to 0, or if for some reason our creditors allowed us to no longer pay interest payments on the debt that we are gloriously left from the Reagan era. Let's pretend we don't have to make debt payments, and we get some savings by gutting military pork. The federal government can continue to pay for the military, give money to states for roads, pay medicare/medicaid, etc. but it all adds up to 20% less. Then the question would be how to distribute that savings. Sure, cut taxes by "x" percent, the rich obviously save monetarily more, but everyone is happy.
Now let's discuss what occurred in the real world. Government spending did not decrease, services did not decrease (actually, I would argue that they did decrease, but that's not important now) and the government cuts taxes. Now the federal government (read "we") are borrowing money simply to do the things that were being done already. In fact, government spending has shot up, compounding this problem. So we are borrowing massively, in amounts never seen in human history. All future budget forecasts show massive deficits, unless some huge budget expense is cut, such as social security or medicare. As Herbert Stein famously said " That which can not go on forever won't". As for what will happen to rectify this situation, I'll leave that up to the economists. The general consensus appears to be that interest rates will have to rise, and the value of the dollar in relation to other currencies will have to fall. Possibly plummet. Or we simply won't pay back the deficit, ending the current global financial system as we know it.
Before linking to Steven Roach of Morgan Stanley (I think his voice may have a little more weight than mine) and providing a washingtonpost article from last year that quotes some bigwigs, let me simply say what would happen to our ten friends if all of the big wigs are correct.
The dollar plummets, and the expenses of the restaurant shoot through the roof. How does the dollar's plummet affect the restaurant? The price of oil in dollars quadruples, increasing the cost of fertilizer for the corn, which is fed to the cow. The cost of transportation quadruples, making the meat in the 100 dollar meal now cost three times as much. The vegetables transported from California double in price, the natural gas and electricity the restaurant uses double in price. The economy has tanked causing unemployment to rise, allowing employers to not increase wages in proportion with inflation. To many other people out there want your job for you to whine about a pay raise. So the meal now costs 250 dollars, the restaurant owner long having stopped giving the 20% off courtesy. The richest guy can afford the 250 dollar meal by himself, afterall, he is making 10 million a year on interest alone. Unfortunately none of his poorer friends can afford to eat at the restaurant with him. Luckily the restaurant survives because the rich folk in the city like it, but most other restaurants have been forced to close. The richest guy stops eating with his poor friends, and soon only has other rich friends. Not seeing the plight of his other poor friends he forgets about them but is somewhat bothered by all of these poor beggars on the street. But because their are so many of them that need jobs, he hires a couple to work around the house as maids and butlers. I could go on, but this is getting boring, so let's skip to the point. Our current economic policy is designed to widen the gap between the rich and poor to the extent it was in feudal societies. Or like China or Russia today. If you want America to look like China, this is not a problem. If that is what you want, please, vote for an incumbent (or simply run with the assumption that your vote is being properly counted). If not, read the Constitution, and some alternative news sources, talk with your family and neighbors about the direction the country is headed in, and figure out what you can do to influence the world in a positive manner. Whatever you think positive is.
Now for the comments of those more accomplished than I:
There is so much information out there, I'll simply link to Steven Roach of Morgan Stanley's latest report:
http://www.morganstanley.com/...
And, a couple quotes from an old WaPost article:
While Washington plunged into a procedural fight over a pair of judicial nominees, Stuart Butler, head of domestic policy at the conservative Heritage Foundation, and Isabel Sawhill, director of the left-leaning Brookings Institution's economic studies program, sat down with Comptroller General David M. Walker to bemoan what they jointly called the budget "nightmare."
"The only thing the United States is able to do a little after 2040 is pay interest on massive and growing federal debt," Walker said. "The model blows up in the mid-2040s. What does that mean? Argentina."
"All true," Sawhill, a budget official in the Clinton administration, concurred.
"To do nothing," Butler added, "would lead to deficits of the scale we've never seen in this country or any major in industrialized country. We've seen them in Argentina. That's a chilling thought, but it would mean that."
Each of the three had a separate slide show, but the numbers and forecasts were interchangeable.
Walker put U.S. debt and obligations at $45 trillion in current dollars -- almost as much as the total net worth of all Americans, or $150,000 per person. Balancing the budget in 2040, he said, could require cutting total federal spending as much as 60 percent or raising taxes to 2 1/2 times today's levels.
Butler pointed out that without changes to Social Security and Medicare, in 25 years either a quarter of discretionary spending would need to be cut or U.S. tax rates would have to approach European levels. Putting it slightly differently, Sawhill posed a choice of 10 percent cuts in spending and much larger cuts in Social Security and Medicare, or a 40 percent increase in government spending relative to the size of the economy, and equivalent tax increases.
The unity of the bespectacled presenters was impressive -- and it made their conclusion all the more depressing. As Ron Haskins, a former Bush White House official and current Brookings scholar, said when introducing the thinkers: "If Heritage and Brookings agree on something, there must be something to it."
Yet that is not how leaders of either party talk. Former Treasury secretary Paul H. O'Neill recounted how Vice President Cheney told him that "deficits don't matter." President Bush projects deficit reductions in the coming few years but ignores projections that show them exploding after that. And Democrats, fighting Bush's call for cutting Social Security benefits through indexing changes, are suggesting that only tinkering with the program is indicated.
The congressional staffers, accustomed to sitting on opposite sides of the room in such events, seemed flummoxed by yesterday's unusual session in the Rayburn House Office Building. One questioner suggested Republicans are to blame for multiple tax cuts; another implied the problem is a Democratic appetite for spending. The bipartisan panel would not be goaded. "I'm willing to talk about taxes if you're willing to talk about entitlements," Butler offered.
Not surprisingly, the Heritage and Brookings crowds don't agree on an exact solution to the budget problem, but they seem to accept that, as Sawhill put it, "you can't do it with either spending or taxes. Eventually, you're going to need a mix of the two." Butler wants taxes, now at 17 percent of GDP, not to exceed 20 percent. Sawhill prefers 24 or 25 percent.
But such haggling seems premature when both parties still deny the problem. "I don't think we're there yet," Walker said. "The American people have to understand where we are and where we're headed."
And where is that? "No republic in the history of the world lasted more than 300 years," Walker said. "Eventually, the crunch comes."
He wasn't talking about filibusters.