Help debunking e-mail about tax proposals

[OxQQme]

I got this e-mail this morning and would like to send a response that's not angry.
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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.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

[hobbit709]

1. Snopes is your friend

http://www.snopes.com/business/taxes/howtaxes.asp

[Egalitariat]

4. But Snopes didn't debunk the content. Why not?

nm

[OneGrassRoot]

2. LOL!!!! I had that included in a smear email, too! And the kick in the ass....

is that this idiot was acusing me of "copying and pasting" from some liberal website.

Each word was my own...good, bad, right or wrong.

And then I see this guy copied and pasted his whole "argument."


:rofl:

[Ioo]

3. biggest issue in this is value... all the items had the same value. No wealth

What this does not look at is total wealth. Each thing was the same price, they choose to add or subtract value. People at the top of the tax curve make more money, have more wealth and value.. No where in the story did it say that each person got bigger beers or what... I dare say that in America the upper side would never want to trade with the lower side, because they like the wealth and value they have

This is BS

[rurallib]

5. I googled the prof's name and got this interesting explanation

http://www.viralgrapevine.com/how-tax-cuts-work-by-david-r-kamerschen-refuted-the-real-way-tax-work-removing-the-internet-garbage/
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In the US and throughout most of the rest of the world, the tenth man would have paid off a politician for $10 to get a beer subsidy of $30 per night(to create jobs for the bartender). Of this $30, $10 of course would have covered the lobbying expense, $10 would go in his own pocket, $1 would go to the bartender to keep his mouth shut, and $9 would go to the bar.

The Bar would give him a kickback of $10 each night for bringing in his 9 buddies to make them into alcoholics, repeat customers for life.

The Bar would then raise their prices to $130 citing inflation and higher taxes. (it goes much further)
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edit to add: Apparently the authorship is denied by the professor:
"Contrary to Internet folklore, Dr. Kamerschen is NOT the author of "Tax Cuts: A Simple Lesson in Economics." Additionally, he does NOT know who wrote it."
http://davidk.myweb.uga.edu/

[unpossibles]

6. well, it's not necessarily a debunking, but that parable is really not telling the full story

The first six guys work in the bar/restaurant, which is owned by the 10th guy. He pays them a dollar a year, so the savings for them is quite substantial. Furthermore, the 10th guy doesn't actually work, as he makes his living off the work of the first 7 guys. The 8th and 9th are his golf buddies who own the food distribution warehouse or something. And the top two guys actually get a load of free food delivered to their families which never even ends up on the bill in question, because they are able to creatively fudge their costs so that the amount they are charging on the bill is higher than what they actually pay. The first 4 guys all work in the kitchen, and do not make enough money to live on, so they get angry and spit in the food of the other 6.

Anyway, this parable is one of the dumber things I've seen passed around. The United States is far more complex than a bar/restaurant.

[On the Road]

7. It Is True That if the Top Tax Rate is Raised Too High

some of the richest people may leave the country. No need to deny that.

You can point out that the US had roughly a 90% top bracket for decades without losing its rich, and that certain European countries currently have a similar rate.

No one is proposing anywhere near those rates today. There is plenty of evidence of how the rich behave under different top tax brackets:

90% Eisenhower
70% Kennedy
50% Reagan (1981 tax cut)
28% Reagan (1985 tax cut )
39% Clinton
33% GWB?

Can your friend show a pattern of capital flight associated with different tax rates?

[Igel]

10. I read an analysis of tax payments for the highest tax bracket over time.

It was interesting, but I'm not going to say it was entirely accurate. Such things, written to show a partisan point, hardly ever are: What they leave out is often as important as what's included.

In any event, the claim was simple: As the highest tax rate declined, the amount of money sheltered also declined. The amount paid (I forget if it was dollars adjusted for inflation or percentage of all income taxes paid or percentage of income paid per househould) stayed remarkably the same. In years immediately after a change there was usually a change, which vanished after a couple of years as households adjusted their investment/tax-avoidance strategies.

The secondary claim was that tax avoidance, beyond some simple measures, is usually messy, and has a certain level of discomfort associated with it in the US. You either take a reduction in income, or you make funds less accessible, or you have to monitor them more closely. Tax payment also has a certain level of discomfort associated with it (for all the quoting of 'paying taxes is patriotic', everybody's in favor of not only tax cuts for their tax bracket, but often refundable tax credits, which tacitly gives "tax cuts" an entirely new meaning).

The inference was also simple: The two kinds of discomfort will tend to stay in equilibrium. The top tax rate doesn't much matter, after a certain point: People will adjust tax avoidance (which is different from tax evasion) so as to yield a fairly constant kind of payment; you alter the top rate, you get, at most, a 2-3 year change in the tax receipts for the upper tax bracket, and after that you're back at status quo.

While I'm not sure that the numbers they cited were correct, the prediction seems to point in the right direction: If the marginal rates are higher, there's more to be gained from the effort of avoiding taxes in future years, and the savings "pay" for additional effort. If the marginal rates are lower, there's less to be gained from the effort, so you get less effort devoted to the task.

Take my mother as an example. She'll have a lot of US savings bonds mature next year, a lot more than this year. She has a choice: She can let them mature, and claim the interest on her 2009 return. Or she can cash some in this year and average the interest between 2008 and 2009. To do this she'll have to estimate her 2009 tax return, and probably re-estimate her 2008 taxes. This means she'll probably wind up having to pay higher estimated 2008 taxes, and that might trigger a penalty of some kind. This is messy and uncomfortable. However, the marginal rate between the top two rates is fairly low, so the difference she'd pay if she waited until next year to redeem them all isn't really all that high. While it's distasteful to pay more when you're in your 80s, it's also distasteful to have to crunch through all kinds of hypoethetical numbers for next year. The result: A rough, I mean a really rough, estimate shows that her savings wouldn't exceed maybe $1000. The effort and return on the effort aren't balanced for her; she'll be "patriotic".

If you made the difference between tax rates higher, she'd average them for sure, avoiding taxes. Note her family is far from being in the top 5% of households, as well (although, like most in the top 5% or top 1%, she and her husband were in it for a year or two before dropping back down to their current percentile).

[SacredCow]

8. It's oversimplification at its finest.....

If things were really that cut and dried, there would really not be taxation problems.

Consider the question of WHY #'s 1 through 4 poor? Are they employed at all? Are they disabled? Are they caregivers for disabled family/friends? Are they actively trying to sponge off of the government? All of these things make a huge difference. Conversely, WHY is #10 wealthy? Does he run a corporation that provides employment to many others? Did he work his ass off building wealth? Or, did he inherit it?

The story is "cute" but it's only food for thought. We'll always be somewhere between capitalism and marxism- that's just the reality of it.

[Cresent City Kid]

9. At least there was a happy ending

The 10th man should be thankful that the first 4 men sent their sons the military to defend his country, and that they sacrificed their bodies in dangerous, tedious work while #10 makes 475 times what they do, which depends on those sacrifices. Plus they spend what little they have on his products.

You can't get rich in a vacuum.

Of course, real life isn't as simple as the example. The average "drinker" pays more on a weekly basis than what he owes, and has to fill out a form to get a refund for the difference. Those at the top have so many deductions and loopholes that it's hard to say if they pay their share or not.

The benefits of the tax code aren't evenly distributed like the "beer". I wish I had a better debunking for you, but all I can say is that the exapmle isn't like what we experience in real life.

[rucky]

11. Every tax scam ignores non-disgretionary income.

The money - as a percentage of income - that it takes to cover the essentials.

Somebody earning 20K a year uses almost all of that for rent/mortgage, food, utilities, healthcare, gas

Somebody earning 200K a year does not spend 90 percent of their income on these things.

Somebody earning 1.2M a year doesn't even come close.

Anybody who thinks it's fair to raise taxes on the poor is playing a shell game.